Target returns fund appears to be finding favour among asset management firms. Prudential ICICI Mutual Fund launched one recently and reportedly has met with good investor response. Reliance Mutual Fund has filed a document with SEBI to offer a similar fund. The question is: Are such funds optimal investments?
This article shows how such funds help investors overcome certain behavioural biases. It also explains why such funds can be a part of the satellite portfolio if they offer tactical asset allocation (TAA) strategy with style-based mandates.
Overcoming biases
Investors find it difficult to rebalance their portfolios. Sometimes, they take profits too soon.
Other times, they cut their exposure too late, both of which could lead to regret aversion bias. This is the behavioural bias that forces investors to avoid taking any decision because they feel that their actions will prove sub-optimal on hindsight.
Such bias could lead to construction of sub-optimal portfolios.
At the extreme, investors could choose to avoid equity as an asset class for fear of sub-optimal entry into and exit out of the market.
Target returns funds help in this regard. Such funds provide pre-determined triggers to move money from equity to bond funds, thus, lowering the regret aversion bias. ICICI Target Returns Fund, for instance, allows trigger-based switch of either the gains or the entire investment to one of the four bond funds offered. The above strategy also helps investors in keeping their capital-at-risk constant.
A person who sweeps the gains into a bond fund through pre-determined trigger levels will continue to expose only the initial capital to equity price risk. This helps investors overcome yet another behavioural bias.
Investors tend to take greater risk on the money gained from capital appreciation compared with that on their initial capital.
Just as gamblers risk their winnings because the money is coming from the “house” or the casino.
That said, target returns funds should provide certain important features to make them attractive within the core-satellite portfolio framework.
Need for TAA
Target returns funds fail to address the issue as to what investors should do after they have swept the gains into a bond fund. Should they switch back to equity after asset prices decline?
This factor is important because regret aversion bias would paralyse an investor from taking further action. The upshot is that gains will continue to remain in a bond fund, perhaps, earning sub-optimal returns.
That is why asset management firms should offer pre-determined switch-back triggers as well.
A decline of 10 per cent in the benchmark index, for instance, should lead to switch-back from bond funds to equity funds. In other words, investors require funds to offer TAA strategy — a dynamic strategy that can adjust allocation among asset classes based on pre-determined trigger levels.
Besides, such funds should offer distinct investment styles so that the same can fit well within the satellite portfolio. The objective of this portfolio, within the core-satellite framework, is to enable investors to take bets on short-term trends with a view to beating the benchmark index (alpha returns).
At present, target returns funds are structured to take exposure to large-cap stocks. The problem is that large-cap exposure is best taken through an index fund, as it is difficult to generate alpha returns in the large-cap space.
Conclusion
It would be optimal if asset management firms offer style-specific non-large cap funds within the target returns universe. Till then, investors could engage in a DIY (Do-It-Yourself) target returns strategy. This involves a two-step process. The first step requires pre-defining the sweep-out and sweep-in triggers based on the investor’s risk tolerance level. The second step involves pre-selecting equity and bond funds to use as a vehicle to take the required asset exposure.
One drawback is that DIY strategy would attract an exit load if the switch happens within six months of the initial investment.
Sunday, May 31, 2009
REAL ESTATE REBOUNDING BACK ?
Nearly a year after the demand slowdown, the property market sentiments seem to be improving, according to real estate companies. Builders across the market segment are claiming that the last two months have witnessed a surge in bookings and interest, ending months of anxiety on cash flows that had led to project delays, and left customers fuming.
Adding to the cheer in the market is also the institutional interest in real estate space. A slew of realtors, including HDIL and Parsvnath Developers, are following the footsteps of Unitech and Indiabulls Real Estate to line-up QIP issues in a bid to ease the debt burden.
Difficult to generalise
Analysts watching the real estate space, however, say that with each macro market behaving differently, it is difficult to generalise the mood in the property market. While they admit that buyer interest in certain projects in specific locations seems to be back, they also believe it is too early to term it a “demand revival”.
“We will wait to see the cash flow situation of listed real estate companies at the end of the quarter before cheering the market,” they say. Also, there seems to be unanswered questions on who is really picking up residential inventory.
An industry insider pointed out that in specific cases in North India it is not unusual for brokers to drive-up the demand by cornering housing inventory at steep discounts from players. These brokers then offload the inventory to end-users. “That trend may still be there. So one has to wait and watch before declaring that the end-user demand is indeed back in the property market,” the person said.
Realtors optimistic
Realtors, however, feel that the general sentiments are lifting.
Earlier this week, two realty firms — BPTP and Jaypee Greens — said they received “overwhelming” response to their affordable housing projects in Delhi NCR. BPTP said its bookings were nearly four times more than the number of flats on offer at Faridabad where it is selling ‘BPTP Park Elite Floors’. “Launched on May 9, with an initial target of 1,000 units, booking had to be closed within 15 days due to the heavy demand. By the closing date of May 26, the company had received a booking of 3,700 units,” BPTP said.
Jaypee Greens (a real estate division of Jaiprakash Associates) too said its 3,300 apartments were booked within 24-hours of the launch of its residential project Jaypee Greens AMAN at Noida-Greater Noida Expressway.
And similar sentiments are being echoed in other parts of the country as well. For instance, in its Cosmopolis project in Bhubaneswar, Assotech says that it has signed up 100 booking in the last 45 days alone. The price tag for the project is Rs 27-46 lakh. The company said the demand for its other projects in Gwalior and Rudrapur too are looking up.
“Yes, things are improving. While it is still difficult to gauge the medium-term outlook, the elections and the clear mandate coupled with some improved buying sentiments have resulted in a flow of bookings. Customers in smaller markets, who need a house for their own requirements, are willing to take the plunge. The investors will come in at a later stage,” says Mr Sanjeev Shrivastava, CMD of Assotech Group.
‘Hype about slowdown’
A senior official of Lodha Group — a builder with presence in and around Mumbai and upcoming projects in Hyderabad and Pune — feels that the “hype” about slowdown had been overblown, and that there has been a turnaround post-December 2008.
The company claims that it has sold 2.5 million sq. ft of residential space in the last five months against a third of that level during July-December.
“The demand-supply mismatch still exists, and so there cannot be a prolonged recession in demand for rightly priced homes,” says Mr Abhishek Lodha, Director, Lodha Group.
In April, DLF said it got bookings for 1,356 apartments (2 million sq.ft) in a single day in its project Capital Greens at New Delhi. A presentation by Unitech to its investors earlier this month, put the area sold by the company between April 1 and May 15, at 2.5 million sq.ft.
The company said that the overall sale value of the properties which had been booked will add up to about Rs 850 crore. Unitech has already outlined plans to launch 40 projects across 15 cities, including Delhi NCR, Mumbai, Kolkata, Mohali/Chandigarh, Chennai and Lucknow.
Real estate companies have discovered the market sweet-spot in the affordable and mid-income housing space, and are tuning strategies accordingly, a senior Unitech official recently told Business Line. Though the claims of the real estate companies point towards some recovery in the market, analysts are waiting to see how events unfold in coming months.
At least for now, the jury is yet not out on this one.
Adding to the cheer in the market is also the institutional interest in real estate space. A slew of realtors, including HDIL and Parsvnath Developers, are following the footsteps of Unitech and Indiabulls Real Estate to line-up QIP issues in a bid to ease the debt burden.
Difficult to generalise
Analysts watching the real estate space, however, say that with each macro market behaving differently, it is difficult to generalise the mood in the property market. While they admit that buyer interest in certain projects in specific locations seems to be back, they also believe it is too early to term it a “demand revival”.
“We will wait to see the cash flow situation of listed real estate companies at the end of the quarter before cheering the market,” they say. Also, there seems to be unanswered questions on who is really picking up residential inventory.
An industry insider pointed out that in specific cases in North India it is not unusual for brokers to drive-up the demand by cornering housing inventory at steep discounts from players. These brokers then offload the inventory to end-users. “That trend may still be there. So one has to wait and watch before declaring that the end-user demand is indeed back in the property market,” the person said.
Realtors optimistic
Realtors, however, feel that the general sentiments are lifting.
Earlier this week, two realty firms — BPTP and Jaypee Greens — said they received “overwhelming” response to their affordable housing projects in Delhi NCR. BPTP said its bookings were nearly four times more than the number of flats on offer at Faridabad where it is selling ‘BPTP Park Elite Floors’. “Launched on May 9, with an initial target of 1,000 units, booking had to be closed within 15 days due to the heavy demand. By the closing date of May 26, the company had received a booking of 3,700 units,” BPTP said.
Jaypee Greens (a real estate division of Jaiprakash Associates) too said its 3,300 apartments were booked within 24-hours of the launch of its residential project Jaypee Greens AMAN at Noida-Greater Noida Expressway.
And similar sentiments are being echoed in other parts of the country as well. For instance, in its Cosmopolis project in Bhubaneswar, Assotech says that it has signed up 100 booking in the last 45 days alone. The price tag for the project is Rs 27-46 lakh. The company said the demand for its other projects in Gwalior and Rudrapur too are looking up.
“Yes, things are improving. While it is still difficult to gauge the medium-term outlook, the elections and the clear mandate coupled with some improved buying sentiments have resulted in a flow of bookings. Customers in smaller markets, who need a house for their own requirements, are willing to take the plunge. The investors will come in at a later stage,” says Mr Sanjeev Shrivastava, CMD of Assotech Group.
‘Hype about slowdown’
A senior official of Lodha Group — a builder with presence in and around Mumbai and upcoming projects in Hyderabad and Pune — feels that the “hype” about slowdown had been overblown, and that there has been a turnaround post-December 2008.
The company claims that it has sold 2.5 million sq. ft of residential space in the last five months against a third of that level during July-December.
“The demand-supply mismatch still exists, and so there cannot be a prolonged recession in demand for rightly priced homes,” says Mr Abhishek Lodha, Director, Lodha Group.
In April, DLF said it got bookings for 1,356 apartments (2 million sq.ft) in a single day in its project Capital Greens at New Delhi. A presentation by Unitech to its investors earlier this month, put the area sold by the company between April 1 and May 15, at 2.5 million sq.ft.
The company said that the overall sale value of the properties which had been booked will add up to about Rs 850 crore. Unitech has already outlined plans to launch 40 projects across 15 cities, including Delhi NCR, Mumbai, Kolkata, Mohali/Chandigarh, Chennai and Lucknow.
Real estate companies have discovered the market sweet-spot in the affordable and mid-income housing space, and are tuning strategies accordingly, a senior Unitech official recently told Business Line. Though the claims of the real estate companies point towards some recovery in the market, analysts are waiting to see how events unfold in coming months.
At least for now, the jury is yet not out on this one.
SIP VS LUMPSUM - DOES THE THEORY ALWAYS WORK READ ON
In a highly volatile market, the SIP (systematic investment plan) is considered better than lumpsum investments. Mutual funds too advocate this method to weather volatile markets. But the numbers suggest a different story. Investors who preferred lumpsum investments over SIP three years ago seem to have harvested better returns.
Business Line analysed 157 equity schemes that have at least a three-year track record. The top performers — those in top quartile in terms of returns generated from lumpsum investment — have a large-cap stock focus. Extending the period of returns to five years did not mean any significant change in inference. However, return divergence was huge in the top quartile.
While ICICI Prudential Infrastructure Fund generated a compounded annualised return of 18.4 per cent over a three-year period, Magnum Equity was at the bottom of the quartile, generating a 10.5 per cent return.
In SIP mode, though, none of these schemes achieved returns matching the lumpsum investment. Several of them trailed by 4-5 percentage points. The best among the SIPs was IDFC Premier Equity; it has clocked a 12.9 per cent return but trailed the lumpsum investment by 2.7 percentage points.
Over a three-year period, the value of a monthly investment of Rs 1,000 for 36 months between June 20, 2006 and May 20, 2009 stands at Rs 41,778 now. DWS Investment Opportunity (Regular) was at the bottom of the top quartile in terms of returns and finished with a 4.0 per cent return over the same period (Rs 36,000 — invested over 36 months — was worth Rs 38,299 as on May 26).
Most of the top quartile equity schemes fared better than the bellwether indices. The SIP return through S&P CNX Nifty for a three-year period is 6.4 per cent and the broader benchmark CNX-500 clocked 4.3 per cent.
During this highly volatile period, diversified funds performed better than thematic funds. Of the top quartile, four schemes had an infrastructure theme. SIPs are not a bad investment decision over the long run. The timing of the entry and continuity also makes a difference. Most investors start investing after a market rally but stop doing so once the market starts falling. Such a strategy, in turn, affects the overall performance.
Monday, May 25, 2009
Did you make money or create wealth?
The recent equity market rally has caught a lot of people by surprise, whether they are investors, brokers, or seasoned fund managers. In fact, many have dismissed this rally as not sustainable, while reasoning why they weren’t able to catch the trend early on. In a short span of a couple of months, markets globally have witnessed a surge of 30-50 per cent. Indian markets too have witnessed a sharp rally having risen over 40 per cent post March.
While a lot has been written about how much would have an investor gained had he/ she invested in the best performing stocks in the last two months, the question is: how prudent was the investor?
Given the global financial turmoil, would anyone have risked investing huge monies in the equity markets in the last couple of months? Leave the hindsight for a moment, just go back to the environment in March and ask yourself if it was a good time to risk a new investment? You would probably not be alone in saying you saw no rational reason in doing so.
Even, if for a moment, one were to assume that someone had the courage to invest a lump sum (not more than Rs. 10,000 – 20,000) in one shot, around early May? An investment of Rs. 10,000 in the BSE Sensex in March would have fetched 50 per cent returns, and the investment would have grown to Rs. 15,000 today.
A roller-coaster ride?
While these are spectacular returns, by any reckoning, does the corpus (of Rs 15,000 in the middle of May 2009) represent wealth? To put it bluntly, where does one go from here? It is fairly obvious that the investor may not get the same kind of run every time, and the law of averages suggests the next big move may be down rather than continue in the upward direction. So, in terms of wealth generation, are you on the course of sustained wealth creation or a roller coaster?
A savvy investor would reason that getting money into the kitty like a high tide/ low tide flow only to see it ebb is not wealth creation or accumulation. It is time to get back to basics: Wealth generation is a process of disciplined investing which focuses on the financial goal rather than the market or economic situation.
Consider this: if one had started to invest Rs. 7,500/- every month in the BSE Sensex on the 24th day of the month since October 2008, he/ she would have accumulated Rs. 68,623/- as on May 09.
Remain steadfast
It’s quite evident that for an intelligent investor, the disciplined approach of investing a small amount, on a regular basis, goes much farther than trying to time the markets.
The latter course of action is contingent on immense amount of consistent good luck, but that too will not take you very far. If you do happen to invest at the right time before a rally, the total gains may still not be substantial given the size of the principal invested.
To be sure, the Indian markets have matured immensely over the last two years. Investors have come to agree that volatility is an integral part of traded asset markets, and that it is unlikely that we will see a sustained, one-way, bull phase for some time.
The only rational way to creating sustainable wealth in choppy conditions is to remain steadfast to the purpose, and keep investing a small amount every month with rigour and conviction
While a lot has been written about how much would have an investor gained had he/ she invested in the best performing stocks in the last two months, the question is: how prudent was the investor?
Given the global financial turmoil, would anyone have risked investing huge monies in the equity markets in the last couple of months? Leave the hindsight for a moment, just go back to the environment in March and ask yourself if it was a good time to risk a new investment? You would probably not be alone in saying you saw no rational reason in doing so.
Even, if for a moment, one were to assume that someone had the courage to invest a lump sum (not more than Rs. 10,000 – 20,000) in one shot, around early May? An investment of Rs. 10,000 in the BSE Sensex in March would have fetched 50 per cent returns, and the investment would have grown to Rs. 15,000 today.
A roller-coaster ride?
While these are spectacular returns, by any reckoning, does the corpus (of Rs 15,000 in the middle of May 2009) represent wealth? To put it bluntly, where does one go from here? It is fairly obvious that the investor may not get the same kind of run every time, and the law of averages suggests the next big move may be down rather than continue in the upward direction. So, in terms of wealth generation, are you on the course of sustained wealth creation or a roller coaster?
A savvy investor would reason that getting money into the kitty like a high tide/ low tide flow only to see it ebb is not wealth creation or accumulation. It is time to get back to basics: Wealth generation is a process of disciplined investing which focuses on the financial goal rather than the market or economic situation.
Consider this: if one had started to invest Rs. 7,500/- every month in the BSE Sensex on the 24th day of the month since October 2008, he/ she would have accumulated Rs. 68,623/- as on May 09.
Remain steadfast
It’s quite evident that for an intelligent investor, the disciplined approach of investing a small amount, on a regular basis, goes much farther than trying to time the markets.
The latter course of action is contingent on immense amount of consistent good luck, but that too will not take you very far. If you do happen to invest at the right time before a rally, the total gains may still not be substantial given the size of the principal invested.
To be sure, the Indian markets have matured immensely over the last two years. Investors have come to agree that volatility is an integral part of traded asset markets, and that it is unlikely that we will see a sustained, one-way, bull phase for some time.
The only rational way to creating sustainable wealth in choppy conditions is to remain steadfast to the purpose, and keep investing a small amount every month with rigour and conviction
Real Estate - Visakhapatnam
The economic slowdown has hit the value of commercial space in Visakhapatnam. With several retail chains closing down, commercial space is cheaper by 25-30 per cent . However, even at the reduced rates, there are not many takers and it is becoming increasingly difficult for mall owners to let out shops. “To-let” boards are common sight in commercial complexes at busy junctions.
Subhiksha has closed down and the activity is sluggish even in the case of other retail stores. Thanks to their staying power, the bigger retail chains, such as Reliance and More (Aditya Birla group), seem to be able to withstand the market slump. But they are not looking at expanding their operations.
Land still pricey
“It is economically unviable now to buy land in the city and build a commercial complex, as the land rates have not gone down substantially enough in the city limits, though there has been a marked slump on the outskirts. The rents have been reduced due to the fall in demand, but even then there are no takers,” says Mr Raju, a builder.
As a result, some of the companies prefer to take on rent apartments in residential areas to cut costs. Only garment dealers, retailers, and a few others are still continuing to hire commercial space in the busy areas, as only that makes business sense.
The commercial complex owners are unable to pay back bank loans. This trend has, of course, helped the smaller kirana merchants to an extent, but they too are not immune to the slowdown.
IT sector EFFECT
The IT sector is stagnating in Visakhapatnam. Many of the companies granted sites at Rushikonda have not yet started operations, and even the few which have, are not doing so on any substantial scale. They are adopting a wait-and-watch policy and it is not clear how long it will take for these companies to get going.
Among the bigger companies, Satyam Computer is in a crisis. Wipro has completed the construction of an impressive building at the TB hospital junction in the city, but it is not known when the company will begin operations.
Companies in other sectors too are either resorting to wage-cuts or retrenchment and, therefore, the purchasing power of the people has suffered.
There is no sign of commercial property segment reviving in the near term. Many major housing projects, such as the one proposed by Jurong at Madhurawada, are not making progress and the present trend is likely to continue for some time.
Subhiksha has closed down and the activity is sluggish even in the case of other retail stores. Thanks to their staying power, the bigger retail chains, such as Reliance and More (Aditya Birla group), seem to be able to withstand the market slump. But they are not looking at expanding their operations.
Land still pricey
“It is economically unviable now to buy land in the city and build a commercial complex, as the land rates have not gone down substantially enough in the city limits, though there has been a marked slump on the outskirts. The rents have been reduced due to the fall in demand, but even then there are no takers,” says Mr Raju, a builder.
As a result, some of the companies prefer to take on rent apartments in residential areas to cut costs. Only garment dealers, retailers, and a few others are still continuing to hire commercial space in the busy areas, as only that makes business sense.
The commercial complex owners are unable to pay back bank loans. This trend has, of course, helped the smaller kirana merchants to an extent, but they too are not immune to the slowdown.
IT sector EFFECT
The IT sector is stagnating in Visakhapatnam. Many of the companies granted sites at Rushikonda have not yet started operations, and even the few which have, are not doing so on any substantial scale. They are adopting a wait-and-watch policy and it is not clear how long it will take for these companies to get going.
Among the bigger companies, Satyam Computer is in a crisis. Wipro has completed the construction of an impressive building at the TB hospital junction in the city, but it is not known when the company will begin operations.
Companies in other sectors too are either resorting to wage-cuts or retrenchment and, therefore, the purchasing power of the people has suffered.
There is no sign of commercial property segment reviving in the near term. Many major housing projects, such as the one proposed by Jurong at Madhurawada, are not making progress and the present trend is likely to continue for some time.
Invest based on fundamentals
The volatility is finally here and many may be relieved to see the twoway movement in stock prices. Ironically, the single direction in stock prices had become a bother for many investors as the market's comfort with upward movements was beginning to pose a challenge. There has been a sense of loss of not being a part of the rally for many investors and the fact that stock prices refused to cool down even after rising 50-80 percent had made matters worse.
But then, when it comes to equity markets, you also need a lot of patience. The markets are bound to test your patience both when they move up or down but you can make money only when you stick to your conviction. For instance, during last October, the mayhem made many lose patience with equity though many knew that many stocks did not deserve the hammering they received
. It was not easy for those who entered the markets in October, as many stocks languished at the same prices for the next few months. In hindsight, those who bet on equity at the October levels are laughing all the way to the bank with the markets having risen by a whopping percentage.
It is precisely for this reason that the current rally puts fear among many as two quarters are too short a time for the economy to switch into a growth phase. However, this can be a period of consolidation and hence the intermittent downtrend would be more than welcome by all. It is in this context, the current mild weakness, witnessed during the week, would please many.
If you are looking for an investment strategy, go for a combination of sectors and stocks. The relevance of stock picking is more important than earlier as it is natural for investors to chase sectors or stocks which look cheap after corrections. For fresh investors, stocks from the mid-cap range can be a better option as they look attractive in comparison to their previous highs.
Also, the turnaround in the market trend has brought back momentum to these stocks. Investors, however, will have to look beyond the PE ratios and yearly highs for their investment picks as the coming quarters are likely to be tough for the corporate sector in general and more so for inefficientlymanaged companies.
As a result, quarterly performances are a good indicator and hence you need to track the top and bottom line numbers. While a few sectors are likely to offer growth opportunities, the management of fall in growth should be the determining factor for investments.
Even in the present environment, a few sectors show promise of faster revival and companies from infrastructure and real estate have been heading the list. History has shown that a global economic recovery is led by sectors like infrastructure and construction as public spending is likely to push things.
In the current environment, technology could be another sector with most companies having the wherewithal to fight the downtrend. Many companies from this sector have the liquidity to manage the downtrend and with their cost-cutting measures in recent times, most companies could emerge out of the current crisis successfully. However, here is a word of caution.
Irrespective of the sector, stick to large-cap stocks and preferably industry leaders as they have better management capabilities to manage the downtrend. As you would have noticed, mid-cap stocks look a lot cheaper when compared to their last year levels but you would be better off investing in large-cap stocks as there are plenty of options
But then, when it comes to equity markets, you also need a lot of patience. The markets are bound to test your patience both when they move up or down but you can make money only when you stick to your conviction. For instance, during last October, the mayhem made many lose patience with equity though many knew that many stocks did not deserve the hammering they received
. It was not easy for those who entered the markets in October, as many stocks languished at the same prices for the next few months. In hindsight, those who bet on equity at the October levels are laughing all the way to the bank with the markets having risen by a whopping percentage.
It is precisely for this reason that the current rally puts fear among many as two quarters are too short a time for the economy to switch into a growth phase. However, this can be a period of consolidation and hence the intermittent downtrend would be more than welcome by all. It is in this context, the current mild weakness, witnessed during the week, would please many.
If you are looking for an investment strategy, go for a combination of sectors and stocks. The relevance of stock picking is more important than earlier as it is natural for investors to chase sectors or stocks which look cheap after corrections. For fresh investors, stocks from the mid-cap range can be a better option as they look attractive in comparison to their previous highs.
Also, the turnaround in the market trend has brought back momentum to these stocks. Investors, however, will have to look beyond the PE ratios and yearly highs for their investment picks as the coming quarters are likely to be tough for the corporate sector in general and more so for inefficientlymanaged companies.
As a result, quarterly performances are a good indicator and hence you need to track the top and bottom line numbers. While a few sectors are likely to offer growth opportunities, the management of fall in growth should be the determining factor for investments.
Even in the present environment, a few sectors show promise of faster revival and companies from infrastructure and real estate have been heading the list. History has shown that a global economic recovery is led by sectors like infrastructure and construction as public spending is likely to push things.
In the current environment, technology could be another sector with most companies having the wherewithal to fight the downtrend. Many companies from this sector have the liquidity to manage the downtrend and with their cost-cutting measures in recent times, most companies could emerge out of the current crisis successfully. However, here is a word of caution.
Irrespective of the sector, stick to large-cap stocks and preferably industry leaders as they have better management capabilities to manage the downtrend. As you would have noticed, mid-cap stocks look a lot cheaper when compared to their last year levels but you would be better off investing in large-cap stocks as there are plenty of options
How to review MF investments before redeeming units?
If your mutual fund investment is yielding a lower return than what you anticipated, you may be tempted to redeem your units and invest the money elsewhere. The rate of return of other funds may look enticing, but be careful: there are both pros and cons to the redemption of your MF units.
Let's examine the circumstances in which liquidation of your fund units would be most optimal and when it may have negative consequences.
Mutual Funds Are Not Stocks
The first thing you need to understand is mutual funds are not synonymous with stocks. So, a decline in the stock market does not necessarily mean that it is time to sell the fund. Stocks are single entities with rates of return associated with what the market will bear. Stocks are driven by the "buy low, sell high" rationale, which explains why, in a falling market, many investors panic and quickly dump all of their stock-oriented assets.
Mutual funds are not singular entities. They are portfolios of financial instruments, such as stocks and bonds, chosen by a fund manager in accordance with the fund's mandate. An advantage of this portfolio of assets is diversification. There are many types of mutual funds and their degrees of diversification vary.
Sector funds for instance, will have the least diversification, while balanced funds will have the most. Within all mutual funds, the decline of one or a few of the stocks can be offset by other assets within the portfolio that are either holding steady or increasing in value.
When Your Fund Changes
Do keep in mind that even if your fund is geared to yielding long-term rates of returns, that does not mean you have to hold onto the fund through thick and thin. The purpose of a mutual fund is to increase your investment over time, not to demonstrate your loyalty to a particular sector or group of assets or a specific fund manager.
Let's examine the circumstances in which liquidation of your fund units would be most optimal and when it may have negative consequences.
Mutual Funds Are Not Stocks
The first thing you need to understand is mutual funds are not synonymous with stocks. So, a decline in the stock market does not necessarily mean that it is time to sell the fund. Stocks are single entities with rates of return associated with what the market will bear. Stocks are driven by the "buy low, sell high" rationale, which explains why, in a falling market, many investors panic and quickly dump all of their stock-oriented assets.
Mutual funds are not singular entities. They are portfolios of financial instruments, such as stocks and bonds, chosen by a fund manager in accordance with the fund's mandate. An advantage of this portfolio of assets is diversification. There are many types of mutual funds and their degrees of diversification vary.
Sector funds for instance, will have the least diversification, while balanced funds will have the most. Within all mutual funds, the decline of one or a few of the stocks can be offset by other assets within the portfolio that are either holding steady or increasing in value.
When Your Fund Changes
Do keep in mind that even if your fund is geared to yielding long-term rates of returns, that does not mean you have to hold onto the fund through thick and thin. The purpose of a mutual fund is to increase your investment over time, not to demonstrate your loyalty to a particular sector or group of assets or a specific fund manager.
Monday, May 18, 2009
Election — Impact on your finances
The election manifestos of various political parties, no doubt, carry ambitious plans for economic development. But what do they have in store for individuals, from a personal finance angle?
No marks for guessing – most large parties promised to make available more money in the hands of people. In other words, low tax and low interest rate regime appears to be the common phrase to attract the voter’s attention.
With the need to keep consumption intact taking centre stage in the ongoing slowdown, Government policies are bound to continue to favour a low-tax regime.
Increasing income levels for individuals combined with the depreciating value of money (as a result of inflation) has ensured that almost any party that comes to power hikes the slab once or even twice during their regime. The UPA too increased the income-tax exemption limit from Rs 1,10,000 to Rs 1,50,000 in February 2008.
Though the Congress manifesto makes no specific promises on tax sops to individuals, it wouldn’t be unreasonable to expect continuity on tax policy – a gradual increase in the exempted tax slab for the salaried class, continuation of newly imposed taxes such as Fringe Benefit Tax, a widening service tax net and a capital gains taxation policy that favours equity investments over debt.
The New Pension Scheme, a unique retirement plan implemented in the UPA regime, may also get a new lease of life with the UPA back in the driving seat.
The scheme seeks to invest a part of the Government’s employee’s savings (the scheme is now available to the public as well) in equity index funds apart from investment avenues such as corporate and Government debt instruments. This may have come under rough weather in any Government with a key role for the CPI(M). The latter has stated that there would be no diversion of provident funds and pension funds to the stock markets, if it had a say in policy.
Tax sops to the salaried class may have been higher under a BJP-led Government, given its focus on the urban middle class. The BJP manifesto vowed to exempt individual income up to Rs 3,00,000 from income-tax, twice the limit of Rs 1,50,000 available at present.
The party’s coming to power would also have meant additional tax relief of Rs 50,000 a year to women and senior citizens. Now, the exemption for women stands at Rs 180,000 while it is Rs 2,25,000 for senior citizens.
The BJP agenda also proposed to exempt income of senior citizens derived by way of pension from income-tax and removing taxes on interest from bank deposits. However, there is nothing that prevents the UPA Government from implementing such measures.
The CPI(M), in its manifesto, also sought to provide income-tax relief for salaried employees, pensioners and senior citizens, although it has not quantified the same.
Going by their election promises, it is the CPI(M) that appears to have had the least stock-market-friendly agenda. The party planned to restore long-term capital gains tax on equities and also hike the securities transaction tax. At present, if a stock has suffered securities transaction tax and is held for over a year, the gain on sale of the security does not suffer capital gains tax. Such an exemption, made effective by the UPA Government in October 2004, was meant to be an incentive for long-term investors looking at capital appreciation.
The CPI(M)’s ascension to power may also have had negative implications for HNIs, given its agenda of increasing wealth tax for the super-rich. The party also had plans to introduce inheritance tax, a levy that has not been in existence so far.
No marks for guessing – most large parties promised to make available more money in the hands of people. In other words, low tax and low interest rate regime appears to be the common phrase to attract the voter’s attention.
With the need to keep consumption intact taking centre stage in the ongoing slowdown, Government policies are bound to continue to favour a low-tax regime.
Increasing income levels for individuals combined with the depreciating value of money (as a result of inflation) has ensured that almost any party that comes to power hikes the slab once or even twice during their regime. The UPA too increased the income-tax exemption limit from Rs 1,10,000 to Rs 1,50,000 in February 2008.
Though the Congress manifesto makes no specific promises on tax sops to individuals, it wouldn’t be unreasonable to expect continuity on tax policy – a gradual increase in the exempted tax slab for the salaried class, continuation of newly imposed taxes such as Fringe Benefit Tax, a widening service tax net and a capital gains taxation policy that favours equity investments over debt.
The New Pension Scheme, a unique retirement plan implemented in the UPA regime, may also get a new lease of life with the UPA back in the driving seat.
The scheme seeks to invest a part of the Government’s employee’s savings (the scheme is now available to the public as well) in equity index funds apart from investment avenues such as corporate and Government debt instruments. This may have come under rough weather in any Government with a key role for the CPI(M). The latter has stated that there would be no diversion of provident funds and pension funds to the stock markets, if it had a say in policy.
Tax sops to the salaried class may have been higher under a BJP-led Government, given its focus on the urban middle class. The BJP manifesto vowed to exempt individual income up to Rs 3,00,000 from income-tax, twice the limit of Rs 1,50,000 available at present.
The party’s coming to power would also have meant additional tax relief of Rs 50,000 a year to women and senior citizens. Now, the exemption for women stands at Rs 180,000 while it is Rs 2,25,000 for senior citizens.
The BJP agenda also proposed to exempt income of senior citizens derived by way of pension from income-tax and removing taxes on interest from bank deposits. However, there is nothing that prevents the UPA Government from implementing such measures.
The CPI(M), in its manifesto, also sought to provide income-tax relief for salaried employees, pensioners and senior citizens, although it has not quantified the same.
Going by their election promises, it is the CPI(M) that appears to have had the least stock-market-friendly agenda. The party planned to restore long-term capital gains tax on equities and also hike the securities transaction tax. At present, if a stock has suffered securities transaction tax and is held for over a year, the gain on sale of the security does not suffer capital gains tax. Such an exemption, made effective by the UPA Government in October 2004, was meant to be an incentive for long-term investors looking at capital appreciation.
The CPI(M)’s ascension to power may also have had negative implications for HNIs, given its agenda of increasing wealth tax for the super-rich. The party also had plans to introduce inheritance tax, a levy that has not been in existence so far.
Asset location: Constructing tax-efficient portfolios
Investors are nervous when it comes to paying taxes. Small wonder then that tax-advantaged investments are in high demand during March every year. A question that an investor has to consider for constructing a tax-efficient portfolio is whether stocks should form part of the tax-advantaged sleeve.
This article discusses this issue in the context of tax-efficient portfolios. It then shows why bonds (fixed-income investments) are optimal for the tax-advantaged sleeve and equity for the taxable sleeve. It also explains how the New Pension System (NPS) could offer an additional tax-efficient avenue for investors.
Asset location
Traditionally, portfolio construction has consisted of allocating assets among various asset classes.
Asset location refers to locating these assets inside the tax-advantaged sleeve and taxable sleeve, while retaining the target asset allocation.
To understand the relevance of tax-efficient investments, consider an investor who invests Rs 2 lakhs, 50 per cent each in stocks and bonds. Assume that equity returns 12 per cent per annum and bonds, 8 per cent per annum.
The investor can choose from three portfolio sets. Portfolio A has Rs 50,000 each in stocks and bonds in the tax-advantaged sleeve and the same exposure in the taxable sleeve.
Portfolio B has Rs 1 lakh in equity in the tax-advantaged sleeve and Rs 1 lakh in bonds in the taxable sleeve.
Portfolio C flips the asset location - it has Rs 1 lakh in bonds inside the tax-advantaged sleeve and Rs 1 lakh in equity in the taxable sleeve.
The tax-efficiency of these portfolios would depend on the tax treatment of income generated by the assets in the taxable sleeve.
That is, the asset location decision would be driven by the difference between tax on fixed-income returns and tax on equity returns. Which then is the tax-efficient portfolio?
Taxable-equity advantage
Consider the current tax structure. The interest on fixed-income securities is taxed at the marginal rate. The long-term capital gains are taxed at 10 per cent on a non-index basis, if equity investment is held for more than 12 months.
Simple calculation shows that Portfolio C is tax-efficient, as it generates the highest after-tax cash flows.
This factor is relevant, as it is only after-tax cash flows that buy goods and services for the investor at the horizon.
The asset-location decision to have equity in the taxable sleeve will be optimal as long as the tax on interest income is significantly higher than that on capital gains.
That is why the asset location makes economic sense within the core-satellite portfolio framework, where the core has low-cost market exposure (beta exposure) and the satellite, above-market-returns strategies (alpha exposure).
A typical core-satellite portfolio would have equity index funds as the passive core.
And the long-term capital-gains on such funds are tax-exempt.
This means that the tax-spread between taxable fixed-income returns and equity returns is higher, making it optimal to locate fixed-income within the tax-advantaged sleeve.
Besides, there is an advantage for self-directed equity investments.
It is obvious that equity is more risky than debt. Locating equity in the taxable sleeve, hence, leads to the government sharing a proportion of the risk.
This is because capital losses can be offset with capital gains, thus, lowering the effective tax rate for the investor.
Conclusion
The New Pension System (NPS) enables investors to take low-cost beta exposure with a longer lock-in period. Investors can take a maximum of 50 per cent exposure to index funds through select asset management firms. The problem is that the gains from the investment will be taxed at the time of withdrawal.
But the withdrawal could well be tax-exempt if the Pension Fund Regulatory and Development Authority has its way.
And that could make NPS an important investment avenue for constructing tax-efficient portfolios. Investors wanting to necessarily locate equity inside the tax-advantaged sleeve within the core-satellite framework would be benefited
This article discusses this issue in the context of tax-efficient portfolios. It then shows why bonds (fixed-income investments) are optimal for the tax-advantaged sleeve and equity for the taxable sleeve. It also explains how the New Pension System (NPS) could offer an additional tax-efficient avenue for investors.
Asset location
Traditionally, portfolio construction has consisted of allocating assets among various asset classes.
Asset location refers to locating these assets inside the tax-advantaged sleeve and taxable sleeve, while retaining the target asset allocation.
To understand the relevance of tax-efficient investments, consider an investor who invests Rs 2 lakhs, 50 per cent each in stocks and bonds. Assume that equity returns 12 per cent per annum and bonds, 8 per cent per annum.
The investor can choose from three portfolio sets. Portfolio A has Rs 50,000 each in stocks and bonds in the tax-advantaged sleeve and the same exposure in the taxable sleeve.
Portfolio B has Rs 1 lakh in equity in the tax-advantaged sleeve and Rs 1 lakh in bonds in the taxable sleeve.
Portfolio C flips the asset location - it has Rs 1 lakh in bonds inside the tax-advantaged sleeve and Rs 1 lakh in equity in the taxable sleeve.
The tax-efficiency of these portfolios would depend on the tax treatment of income generated by the assets in the taxable sleeve.
That is, the asset location decision would be driven by the difference between tax on fixed-income returns and tax on equity returns. Which then is the tax-efficient portfolio?
Taxable-equity advantage
Consider the current tax structure. The interest on fixed-income securities is taxed at the marginal rate. The long-term capital gains are taxed at 10 per cent on a non-index basis, if equity investment is held for more than 12 months.
Simple calculation shows that Portfolio C is tax-efficient, as it generates the highest after-tax cash flows.
This factor is relevant, as it is only after-tax cash flows that buy goods and services for the investor at the horizon.
The asset-location decision to have equity in the taxable sleeve will be optimal as long as the tax on interest income is significantly higher than that on capital gains.
That is why the asset location makes economic sense within the core-satellite portfolio framework, where the core has low-cost market exposure (beta exposure) and the satellite, above-market-returns strategies (alpha exposure).
A typical core-satellite portfolio would have equity index funds as the passive core.
And the long-term capital-gains on such funds are tax-exempt.
This means that the tax-spread between taxable fixed-income returns and equity returns is higher, making it optimal to locate fixed-income within the tax-advantaged sleeve.
Besides, there is an advantage for self-directed equity investments.
It is obvious that equity is more risky than debt. Locating equity in the taxable sleeve, hence, leads to the government sharing a proportion of the risk.
This is because capital losses can be offset with capital gains, thus, lowering the effective tax rate for the investor.
Conclusion
The New Pension System (NPS) enables investors to take low-cost beta exposure with a longer lock-in period. Investors can take a maximum of 50 per cent exposure to index funds through select asset management firms. The problem is that the gains from the investment will be taxed at the time of withdrawal.
But the withdrawal could well be tax-exempt if the Pension Fund Regulatory and Development Authority has its way.
And that could make NPS an important investment avenue for constructing tax-efficient portfolios. Investors wanting to necessarily locate equity inside the tax-advantaged sleeve within the core-satellite framework would be benefited
Equity fund myth shattered
As we pause to take stock after the astounding 50 per cent rise in the Sensex, are there any lessons from this rally for mutual fund investors? You bet there are. Whether it’s a bear market rally or the beginning of a new bull phase, the unexpectedly strong rally in stocks over the past couple of months still has several cues to offer on how investors should construct their long-term portfolio. Here are some myths about equity funds which this upsurge has shattered:
Cash is king: Cash may be king when equity funds hold it in a choppy and directionless market. But when the tide turns, cash can effectively curtail your ability to reap the benefits of equity investing. Take the current stock price rally. As the Sensex rallied nearly 50 per cent from its March lows, only a small fraction of actively managed funds have managed to keep pace.
That only 12 of the 175 diversified equity funds matched or bettered the Sensex in this rally clearly tells the tale. After the many false alarms of last year and the strong conviction that recovery was a long way off, an unprecedented number of Indian fund managers have taken cash calls on their portfolios over the past year. That has clearly caused the majority of funds to miss the bus.
Funds which have remained more or less fully invested from houses such as Franklin Templeton, Fidelity and HDFC have delivered much better participation in the rally than funds which were high on cash.
We can spot a recovery: Is this a bear market rally or a new bull phase? Even as fund managers are still engaged in this furious debate, the market is already up 50 per cent and quite a few individual stocks (even the fundamentally sound ones) have doubled in value.
This rally proves that even in a real recovery (just assuming this isn’t one), by the time there is sufficient hard evidence to convince the naysayers, the markets may well reach levels that are too high to provide any comfort for new investors. That suggests that equity fund managers are probably no better placed to “spot” a recovery and move back into stocks ahead of it, than individual investors.
That, in turn, means that the only way to reap the full rewards of equity investing is to stay invested through difficult periods and to put in fresh money when things appear bleak. Waiting for confirmation of a recovery may actually expose you to more, and not less, risk of value erosion.
Mid-caps will underperform large-caps: During the bear phase, large-cap stocks were expected to be a safer investment proposition as they were likely to be the first to recover, with mid-caps expected to catch up only slowly. The speed and momentum of this particular rally has proved that it doesn’t take all that long for mid-cap stocks to catch up.
Therefore, investors with a long term horizon need not worry too much about focussing only on large cap oriented funds. Looking for funds with both large and mid cap exposures may in fact be a good idea.
Expect a 12-15 per cent return from equity funds: Should I take equity-related risks just for 12-15 per cent return? Why shouldn’t I stick just to bank deposits? Well, breathtaking gains made by individual stocks and the even market itself in this rally provides a convincing answer.
Even investors who stuck only to index stocks have made impressive returns over the past couple of months, with the Sensex gaining 50 per cent in a couple of months. That proves that equity markets continue to have the ability to reward investors handsomely for risks taken. And the returns tend to be the highest when the markets “revert to mean” from a period of extreme pessimism. This suggests that the case still remains strong for young investors to allocate a portion of their long term portfolio to equities.
All this suggests that three key approaches on equity fund investing. Don’t move in and out of equity funds, based on the outlook for the markets or the economy. Don’t be afraid to take allocations to mid-cap oriented funds. And finally, have some index funds in your portfolio to ensure participation during an unexpected rally.
Cash is king: Cash may be king when equity funds hold it in a choppy and directionless market. But when the tide turns, cash can effectively curtail your ability to reap the benefits of equity investing. Take the current stock price rally. As the Sensex rallied nearly 50 per cent from its March lows, only a small fraction of actively managed funds have managed to keep pace.
That only 12 of the 175 diversified equity funds matched or bettered the Sensex in this rally clearly tells the tale. After the many false alarms of last year and the strong conviction that recovery was a long way off, an unprecedented number of Indian fund managers have taken cash calls on their portfolios over the past year. That has clearly caused the majority of funds to miss the bus.
Funds which have remained more or less fully invested from houses such as Franklin Templeton, Fidelity and HDFC have delivered much better participation in the rally than funds which were high on cash.
We can spot a recovery: Is this a bear market rally or a new bull phase? Even as fund managers are still engaged in this furious debate, the market is already up 50 per cent and quite a few individual stocks (even the fundamentally sound ones) have doubled in value.
This rally proves that even in a real recovery (just assuming this isn’t one), by the time there is sufficient hard evidence to convince the naysayers, the markets may well reach levels that are too high to provide any comfort for new investors. That suggests that equity fund managers are probably no better placed to “spot” a recovery and move back into stocks ahead of it, than individual investors.
That, in turn, means that the only way to reap the full rewards of equity investing is to stay invested through difficult periods and to put in fresh money when things appear bleak. Waiting for confirmation of a recovery may actually expose you to more, and not less, risk of value erosion.
Mid-caps will underperform large-caps: During the bear phase, large-cap stocks were expected to be a safer investment proposition as they were likely to be the first to recover, with mid-caps expected to catch up only slowly. The speed and momentum of this particular rally has proved that it doesn’t take all that long for mid-cap stocks to catch up.
Therefore, investors with a long term horizon need not worry too much about focussing only on large cap oriented funds. Looking for funds with both large and mid cap exposures may in fact be a good idea.
Expect a 12-15 per cent return from equity funds: Should I take equity-related risks just for 12-15 per cent return? Why shouldn’t I stick just to bank deposits? Well, breathtaking gains made by individual stocks and the even market itself in this rally provides a convincing answer.
Even investors who stuck only to index stocks have made impressive returns over the past couple of months, with the Sensex gaining 50 per cent in a couple of months. That proves that equity markets continue to have the ability to reward investors handsomely for risks taken. And the returns tend to be the highest when the markets “revert to mean” from a period of extreme pessimism. This suggests that the case still remains strong for young investors to allocate a portion of their long term portfolio to equities.
All this suggests that three key approaches on equity fund investing. Don’t move in and out of equity funds, based on the outlook for the markets or the economy. Don’t be afraid to take allocations to mid-cap oriented funds. And finally, have some index funds in your portfolio to ensure participation during an unexpected rally.
When to sell your stock
Good investment decisions involve not only buying at the right price, but also selling at the right moment. Here are some guidelines to help you.
Consider a situation where you have to buy a stock at, say, Rs 100. See it climb to Rs 200 and then plunge back to may be Rs 80 in no time.
Then it takes months or may be years for that stock to reach Rs 200. You rue your decision not to sell when the stock had touched Rs 200.
Investor behaviour is motivated by greed. That makes us think that a rising stock will climb further. But until you sell, the capital appreciation is only on paper and, therefore, likely to vanish if prices start tumbling.
Yet, the right time to unload shares is one of the toughest calls an investor has to make. Even investment analysts and fund managers admit it can be difficult. Here are a few guidelines you can follow while making the decision:
Targeted return: Whenever you buy a stock maintain a target price at which you will sell the stock partially or fully. When the target price of your stocks has been reached, taking a selling decision is easy.
The targeted return could be 25 per cent or 40 per cent, based on your risk appetite or it could be based on what you think is the fair value for the stock. This discipline of booking profits will stand you in good stead as you will accrue profits, without giving in to greed during a rising trend.
Stop-loss trigger: By having a stop loss trigger you sell a stock, not to book profits, but to minimise your losses. A stop-loss sell order is a contingent order that will get triggered only if the stock does fall to a particular price.
For instance, the stock you have decided to sell is quoting at Rs 100. You have reason to believe that the stock will go up but you need to protect your profits.
So you may place a stop-loss order for the stock at Rs 80 as trigger i.e. in case it goes below Rs 80 you will compulsorily sell it.
Stipulated time or event: It may happen that you are targeting a specific sum for a particular event like a child’s education, marriage or vacation. In case you have an opportunity to realise this sum before the time period is over, you can do so and park it in a safer avenue such as fixed deposits, bonds.
By doing this, you may avoid exposing your investments to the volatility in the stock market closer to your goal.
Asset allocation: Sometimes, because of a relentless rise in a particular stock or stocks, the weight of that stock or stocks in your portfolio could rise substantially, making your portfolio lopsided.
Prudence demands that you reduce exposure to the stock to rebalance your portfolio. The change in asset allocation could also be due to change in preference with growing age.
As you grow older, try to increase the percentage of fixed income instruments in your investment portfolio.
Changes in fundamentals of the stock: There could be fundamental reasons why you should think of selling the stock that you have long owned. It could be a sudden about turn in the company’s financials or prospects — the loss of market share, declining margins, or liquidity problems that peg up the risk of holding the stock. By selling out now, you may get a chance to buy later at a lower price.
Mismanagement: In case you come across any mismanagement in the company or issues of corporate misgovernance then it is better to get rid of the stock at the earliest opportunity.
The Satyam Computer stock has been the sole stock not to participate in the recent market rally. A lesson that companies which lack in corporate governance may not benefit you in the long run.
New investment avenue: Another reason to sell your stock could be the opening up of a new investment avenue that can deliver better returns than your existing investment. While evaluating returns it is also necessary to evaluate risk, an investment that delivers a 12 per cent return with no risk may be superior to one which delivers 15 per cent with risk to your capital.
The above are some of the triggers for selling. There can be a few more which may be relevant to individual investors.
Whether it is a bull phase or a bear market rally, there will always be stocks in your portfolio that merit selling or replacing with other options.
Long term wealth creation requires you to be, not a passive investor, but an investment strategist who aims to maximise gains.
Booking of profits is not a bad idea at all; after all, it leaves you with liquidity, which can be handy when there is an opportunity to buy.
Consider a situation where you have to buy a stock at, say, Rs 100. See it climb to Rs 200 and then plunge back to may be Rs 80 in no time.
Then it takes months or may be years for that stock to reach Rs 200. You rue your decision not to sell when the stock had touched Rs 200.
Investor behaviour is motivated by greed. That makes us think that a rising stock will climb further. But until you sell, the capital appreciation is only on paper and, therefore, likely to vanish if prices start tumbling.
Yet, the right time to unload shares is one of the toughest calls an investor has to make. Even investment analysts and fund managers admit it can be difficult. Here are a few guidelines you can follow while making the decision:
Targeted return: Whenever you buy a stock maintain a target price at which you will sell the stock partially or fully. When the target price of your stocks has been reached, taking a selling decision is easy.
The targeted return could be 25 per cent or 40 per cent, based on your risk appetite or it could be based on what you think is the fair value for the stock. This discipline of booking profits will stand you in good stead as you will accrue profits, without giving in to greed during a rising trend.
Stop-loss trigger: By having a stop loss trigger you sell a stock, not to book profits, but to minimise your losses. A stop-loss sell order is a contingent order that will get triggered only if the stock does fall to a particular price.
For instance, the stock you have decided to sell is quoting at Rs 100. You have reason to believe that the stock will go up but you need to protect your profits.
So you may place a stop-loss order for the stock at Rs 80 as trigger i.e. in case it goes below Rs 80 you will compulsorily sell it.
Stipulated time or event: It may happen that you are targeting a specific sum for a particular event like a child’s education, marriage or vacation. In case you have an opportunity to realise this sum before the time period is over, you can do so and park it in a safer avenue such as fixed deposits, bonds.
By doing this, you may avoid exposing your investments to the volatility in the stock market closer to your goal.
Asset allocation: Sometimes, because of a relentless rise in a particular stock or stocks, the weight of that stock or stocks in your portfolio could rise substantially, making your portfolio lopsided.
Prudence demands that you reduce exposure to the stock to rebalance your portfolio. The change in asset allocation could also be due to change in preference with growing age.
As you grow older, try to increase the percentage of fixed income instruments in your investment portfolio.
Changes in fundamentals of the stock: There could be fundamental reasons why you should think of selling the stock that you have long owned. It could be a sudden about turn in the company’s financials or prospects — the loss of market share, declining margins, or liquidity problems that peg up the risk of holding the stock. By selling out now, you may get a chance to buy later at a lower price.
Mismanagement: In case you come across any mismanagement in the company or issues of corporate misgovernance then it is better to get rid of the stock at the earliest opportunity.
The Satyam Computer stock has been the sole stock not to participate in the recent market rally. A lesson that companies which lack in corporate governance may not benefit you in the long run.
New investment avenue: Another reason to sell your stock could be the opening up of a new investment avenue that can deliver better returns than your existing investment. While evaluating returns it is also necessary to evaluate risk, an investment that delivers a 12 per cent return with no risk may be superior to one which delivers 15 per cent with risk to your capital.
The above are some of the triggers for selling. There can be a few more which may be relevant to individual investors.
Whether it is a bull phase or a bear market rally, there will always be stocks in your portfolio that merit selling or replacing with other options.
Long term wealth creation requires you to be, not a passive investor, but an investment strategist who aims to maximise gains.
Booking of profits is not a bad idea at all; after all, it leaves you with liquidity, which can be handy when there is an opportunity to buy.
Friday, May 8, 2009
60 Stock Tips For Investment Success
60 Stock Tips For Investment Success
Contribution by James Burkik who visits this blog regularly. Thanks James
I just finished up William O’Neil’s book, 24 Essential Lessons for Investment Success (purchase),
and found it to be a great resource of stock tips for beginners. There are tons of great tips
which were highlighted at the end of each chapter, and to summarize the book this post will
mention 60 of them.
The best thing about the book in my opinion was the simplicity behind the material. Will O’Neil
always seems to do a good job of making the read easy and understandable by all investors
(something this blog works at achieving on a daily basis), and it really broke down his
CANSLIM style which is one of the most famous if not most widely followed and used investor
strategy in existence today.
60 Stock Tips For Investment Success:
As a new investor, be prepared to take some small losses.
Always cut your losses at 8% below your purchase price.
Persistence is key when learning to invest. Don’t get discouraged.
Learning to invest doesn’t happen overnight. It takes time and effort to become successful at
it.
When getting started, it is important that you pick the right full service or discount brokerage.
If you use a broker, make sure he or she has a good track record.
As a beginner, set up a cash account, not a margin account.
It only takesRs. 2000 to Rs.40000 to get started. Experience is a great teacher.
Avoid more volatile types of investments, such as futures, options, and foreign stocks.
Concentrate on a few, high-quality stocks. There’s no need to own twenty or more stocks.
Don’t get emotionally involved with your stocks. Follow a set of buying and selling
rules, and don’t let your emotions change your mind (read my post on 50 Ways You
Know You Are An Emotional Investor to see if you are an emotional investor)
Don’t buy a stock under $15 a share. The best companies that are leaders in their fields
simply do not come at $5 or $10 per share.
Learning from the best stock market winners can guide you to tomorrow’s leaders.
Always do a post-analysis of your stock market trades so that you can learn from your
successes and mistakes.
A combination of fundamental and technical investment styles is essential to picking winning
stocks.
Fundamental analysis looks at a company’s earnings, earnings growth, sales, profit margins, and
return on equity among other things. It helps narrow down your choices so that you are only
dealing with quality stocks.
Technical analysis involves learning to read a stock’s price and volume chart and timing
your decisions properly.
To make big money, you have got to buy the very best companies at the right time.
Strong sales and earnings are amongst the most important characteristics of winning stocks.
Buying a stock as it is coming out of a price consolidation area or base is crucial to making large
gains.
Always pick stocks from the leading industry groups or sectors. The majority of past market
leaders were in the top industry groups and sectors.
Many big winning stocks come from sectors such as drugs and medical, computers, communications
technology, software, specialty retail, and leisure and entertainment.
Volume is the actual number of shares traded by a stock (Find out how to read volume on stock
charts).
Stocks never go up by accident. There must be large buying, typically from big investors
such as mutual funds and pension funds.
In studying the greatest stock market winners over the past 45 years, bases formed just before the
stock broke out into new high ground in price and then went on to make their biggest gains.
The most common pattern is a “cup with handle” names so because it resembles a coffee cup
when viewed from the side.
The optimal buying point of any stock is the “pivot point”.
On the day a stock breaks out, volume should increase by 50% or more above its average.
A decrease in price on decreased volume indicates no significant selling.
Replace the old adage, “buy low and sell high” with “buy high and sell a lot higher.”
You want to buy a stock at its pivot point. Don’t chase a stock up more than 5% past its pivot.
Chart price and volume action frequently can help you recognize when a stock has reached its top
and should be sold.
History always repeats itself in the stock market.
Most big stock market leaders breaking out of a sound base will go up 20% in eight weeks or less
from the pivot point. Never sell a stock that does this in four weeks or less, you may have a
big winner.
The general market is represented by leading market indices like the S&P500, Dow Jones Industrials,
and the NASDAQ Composite. Tracking the general market is key because most stocks
follow the trend of the general market.
Ignore personal opinions about the market.
A typical bear market will decline 20% to 25% from tis peak price. A negative political or economic
environment could cause a more severe decline.
Knowing when to both buy a sell a stock is key for success.
three out of four stocks , regardless of how “good’ will eventually follow the trend of the overall
market.
After four or five days of distribution within a two to three week period, the general market will
normally trend downwards.
Bear markets create fear and uncertainty. When stocks hit bottom and turn up to begin the next
bull market loaded with opportunities, most people simply don’t believe it.
At some point on the way down, the indices will attempt to rebound or rally. A rally is an attempt
by a stock or the general market to turn up and advance in price after a period of decline.
Most technical market indicators are of little value. Psychological indicators like the Put-Call
ratio can help confirm changes in the market’s direction.
Once you determine you are operating in an uptrending general market, you need to pick superior
stocks.
Potential winners will have strong earnings and sales growth, increasing profit margins and high
return on equity (17% or more). They should also be in a leading industry group.
Using a chart service can help you determine if the timing is right to buy a stock (I covered the
best free stock charts and subscription based charting services previously on this blog).
There are two basic types of investors: growth stock investors and value investors.
Growth investors seek companies with strong earnings and sals growth, superior profit margins,
and a return on equity of over 17%.
Value investors search for stocks that are undervalued and have low P/E ratios.
When starting to invest, keep it simple. Only invest in domestic stocks or mutual funds (I
disagree with this, loads are a scam and fund management fees can be bloated, invest in ETFs
instead).
You get what you pay for in the market. Low-priced stocks are usually cheap for a good reason.
Options are risky because investors do not only have to be right about the direction of the stock
but also about the time frame in which they believe the price will go up or down.
Futures, due to their highly speculative nature, should be attempted only be people with several
years of successful investment experience.
Wide diversification and asset allocation are not necessary. Concentrate your eggs in fewer
basket, know them well and watch them carefully.
If you have less than $5,000 to invest, only own one or two stocks. If you have $10,000-two
or three stocks; $25,000-three or four stocks; $50,000-four or five stocks; and, $100,000
or more-own no more than six stocks.
If you already own the maximum number of stocks buy want to add a new stock to your portfolio,
force yourself to sell the least profitable stock to get money for the new name.
When purchasing a stock, only buy half of your desired position at the initial buy point. Buy a
small amount more if the price rises 2% or 3% above your first buy. Average up in price,
never down.
Don’t let yourself lose money you had a reasonable profit in.
40% of stocks will pull back to their initial buy point-sometimes on big volume- for one or two
days. Don’t let this shake you out of your stock.
Sell a stock if its earnings per share shows a major deceleration in growth for two quarters in a
row.
Contribution by James Burkik who visits this blog regularly. Thanks James
I just finished up William O’Neil’s book, 24 Essential Lessons for Investment Success (purchase),
and found it to be a great resource of stock tips for beginners. There are tons of great tips
which were highlighted at the end of each chapter, and to summarize the book this post will
mention 60 of them.
The best thing about the book in my opinion was the simplicity behind the material. Will O’Neil
always seems to do a good job of making the read easy and understandable by all investors
(something this blog works at achieving on a daily basis), and it really broke down his
CANSLIM style which is one of the most famous if not most widely followed and used investor
strategy in existence today.
60 Stock Tips For Investment Success:
As a new investor, be prepared to take some small losses.
Always cut your losses at 8% below your purchase price.
Persistence is key when learning to invest. Don’t get discouraged.
Learning to invest doesn’t happen overnight. It takes time and effort to become successful at
it.
When getting started, it is important that you pick the right full service or discount brokerage.
If you use a broker, make sure he or she has a good track record.
As a beginner, set up a cash account, not a margin account.
It only takesRs. 2000 to Rs.40000 to get started. Experience is a great teacher.
Avoid more volatile types of investments, such as futures, options, and foreign stocks.
Concentrate on a few, high-quality stocks. There’s no need to own twenty or more stocks.
Don’t get emotionally involved with your stocks. Follow a set of buying and selling
rules, and don’t let your emotions change your mind (read my post on 50 Ways You
Know You Are An Emotional Investor to see if you are an emotional investor)
Don’t buy a stock under $15 a share. The best companies that are leaders in their fields
simply do not come at $5 or $10 per share.
Learning from the best stock market winners can guide you to tomorrow’s leaders.
Always do a post-analysis of your stock market trades so that you can learn from your
successes and mistakes.
A combination of fundamental and technical investment styles is essential to picking winning
stocks.
Fundamental analysis looks at a company’s earnings, earnings growth, sales, profit margins, and
return on equity among other things. It helps narrow down your choices so that you are only
dealing with quality stocks.
Technical analysis involves learning to read a stock’s price and volume chart and timing
your decisions properly.
To make big money, you have got to buy the very best companies at the right time.
Strong sales and earnings are amongst the most important characteristics of winning stocks.
Buying a stock as it is coming out of a price consolidation area or base is crucial to making large
gains.
Always pick stocks from the leading industry groups or sectors. The majority of past market
leaders were in the top industry groups and sectors.
Many big winning stocks come from sectors such as drugs and medical, computers, communications
technology, software, specialty retail, and leisure and entertainment.
Volume is the actual number of shares traded by a stock (Find out how to read volume on stock
charts).
Stocks never go up by accident. There must be large buying, typically from big investors
such as mutual funds and pension funds.
In studying the greatest stock market winners over the past 45 years, bases formed just before the
stock broke out into new high ground in price and then went on to make their biggest gains.
The most common pattern is a “cup with handle” names so because it resembles a coffee cup
when viewed from the side.
The optimal buying point of any stock is the “pivot point”.
On the day a stock breaks out, volume should increase by 50% or more above its average.
A decrease in price on decreased volume indicates no significant selling.
Replace the old adage, “buy low and sell high” with “buy high and sell a lot higher.”
You want to buy a stock at its pivot point. Don’t chase a stock up more than 5% past its pivot.
Chart price and volume action frequently can help you recognize when a stock has reached its top
and should be sold.
History always repeats itself in the stock market.
Most big stock market leaders breaking out of a sound base will go up 20% in eight weeks or less
from the pivot point. Never sell a stock that does this in four weeks or less, you may have a
big winner.
The general market is represented by leading market indices like the S&P500, Dow Jones Industrials,
and the NASDAQ Composite. Tracking the general market is key because most stocks
follow the trend of the general market.
Ignore personal opinions about the market.
A typical bear market will decline 20% to 25% from tis peak price. A negative political or economic
environment could cause a more severe decline.
Knowing when to both buy a sell a stock is key for success.
three out of four stocks , regardless of how “good’ will eventually follow the trend of the overall
market.
After four or five days of distribution within a two to three week period, the general market will
normally trend downwards.
Bear markets create fear and uncertainty. When stocks hit bottom and turn up to begin the next
bull market loaded with opportunities, most people simply don’t believe it.
At some point on the way down, the indices will attempt to rebound or rally. A rally is an attempt
by a stock or the general market to turn up and advance in price after a period of decline.
Most technical market indicators are of little value. Psychological indicators like the Put-Call
ratio can help confirm changes in the market’s direction.
Once you determine you are operating in an uptrending general market, you need to pick superior
stocks.
Potential winners will have strong earnings and sales growth, increasing profit margins and high
return on equity (17% or more). They should also be in a leading industry group.
Using a chart service can help you determine if the timing is right to buy a stock (I covered the
best free stock charts and subscription based charting services previously on this blog).
There are two basic types of investors: growth stock investors and value investors.
Growth investors seek companies with strong earnings and sals growth, superior profit margins,
and a return on equity of over 17%.
Value investors search for stocks that are undervalued and have low P/E ratios.
When starting to invest, keep it simple. Only invest in domestic stocks or mutual funds (I
disagree with this, loads are a scam and fund management fees can be bloated, invest in ETFs
instead).
You get what you pay for in the market. Low-priced stocks are usually cheap for a good reason.
Options are risky because investors do not only have to be right about the direction of the stock
but also about the time frame in which they believe the price will go up or down.
Futures, due to their highly speculative nature, should be attempted only be people with several
years of successful investment experience.
Wide diversification and asset allocation are not necessary. Concentrate your eggs in fewer
basket, know them well and watch them carefully.
If you have less than $5,000 to invest, only own one or two stocks. If you have $10,000-two
or three stocks; $25,000-three or four stocks; $50,000-four or five stocks; and, $100,000
or more-own no more than six stocks.
If you already own the maximum number of stocks buy want to add a new stock to your portfolio,
force yourself to sell the least profitable stock to get money for the new name.
When purchasing a stock, only buy half of your desired position at the initial buy point. Buy a
small amount more if the price rises 2% or 3% above your first buy. Average up in price,
never down.
Don’t let yourself lose money you had a reasonable profit in.
40% of stocks will pull back to their initial buy point-sometimes on big volume- for one or two
days. Don’t let this shake you out of your stock.
Sell a stock if its earnings per share shows a major deceleration in growth for two quarters in a
row.
Sunday, May 3, 2009
SBI MF cuts minimum investment limit to Rs100 in 4 funds
State Bank of India‘s (SBI) mutual fund unit on Wednesday lowered the minimum monthly investment limit in select funds to Rs100, joining the likes of UTI Mutual Fund and ICICI Prudential Asset Management.
The funds are Magnum Balance, MMPS-93, MSFU Contra fund and SBI Blue Chip fund.
SBI Mutual Fund hopes to attract about 250,000 investors in the first year with this initiative, SBI chairman O.P. Bhatt said.
Typically, the minimum investment into Indian mutual funds is Rs500, but an increasing number of money managers are lowering the investment threshold, in a bid to attract small investors from tier II and tier III cities.
An invester N.Balaji comments on this move made by SBI as follows :
By lowering the investment amount, one may be attracting new investors, but is that really the right thing to do? People should come into Mutual Funds because they understand and are willing to accept the risk attached to these insrtuments. Not because it is cheap to enter. The people buying funds at Rs. 100 are inevitably going to be the lower income group who may lose their principle if not advised correctly. I see agents using this Rs. 100 as a major misselling point.
The funds are Magnum Balance, MMPS-93, MSFU Contra fund and SBI Blue Chip fund.
SBI Mutual Fund hopes to attract about 250,000 investors in the first year with this initiative, SBI chairman O.P. Bhatt said.
Typically, the minimum investment into Indian mutual funds is Rs500, but an increasing number of money managers are lowering the investment threshold, in a bid to attract small investors from tier II and tier III cities.
An invester N.Balaji comments on this move made by SBI as follows :
By lowering the investment amount, one may be attracting new investors, but is that really the right thing to do? People should come into Mutual Funds because they understand and are willing to accept the risk attached to these insrtuments. Not because it is cheap to enter. The people buying funds at Rs. 100 are inevitably going to be the lower income group who may lose their principle if not advised correctly. I see agents using this Rs. 100 as a major misselling point.
REAL ESTATE GURGOAN - DLF IN TROUBLE
In another instance of customers wanting to exit from a realty development, several buyers at a mid-range housing development of DLF Ltd in Gurgaon on Delhi’s outskirts want to exit their bookings.
A recent poll among some 600 buyers at the New Town Heights project at Gurgaon, banded together in an online group, showed that 70% of them want DLF—India’s biggest realty firm by market value—to refund payments, of up to Rs31 lakh in some cases, because the firm has not begun construction on the project and real estate prices have crashed in the past six months.
People are not satisfied with the value proposition,” a member of the buyer group, who asked not to be identified. “There has been a huge drop in prices of all the raw materials used for construction... Moreover, the price cut announced by DLF for its Chennai and Bangalore projects is much more than what they are offering us.”
DLF, which has reduced prices of apartments in Bangalore, Hyderabad and Chennai, already faces exits by as many 560 customers in a Chennai project.
New Town Heights, a residential project of DLF in sectors 90, 91 and 86 of Gurgaon, was launched in March last year as mid-range housing project with apartments selling in the Rs45-75 lakh range. The project has around 3,000 apartments, of which around 85% have been sold, according to the company.
DLF on 25 March announced a price cut of 20% for apartments in the New Town Heights project, for both existing as well as new customers. But the discount is structured in a complicated fashion and comes with conditions that do not allow customers to exit at a future date.
A recent poll among some 600 buyers at the New Town Heights project at Gurgaon, banded together in an online group, showed that 70% of them want DLF—India’s biggest realty firm by market value—to refund payments, of up to Rs31 lakh in some cases, because the firm has not begun construction on the project and real estate prices have crashed in the past six months.
People are not satisfied with the value proposition,” a member of the buyer group, who asked not to be identified. “There has been a huge drop in prices of all the raw materials used for construction... Moreover, the price cut announced by DLF for its Chennai and Bangalore projects is much more than what they are offering us.”
DLF, which has reduced prices of apartments in Bangalore, Hyderabad and Chennai, already faces exits by as many 560 customers in a Chennai project.
New Town Heights, a residential project of DLF in sectors 90, 91 and 86 of Gurgaon, was launched in March last year as mid-range housing project with apartments selling in the Rs45-75 lakh range. The project has around 3,000 apartments, of which around 85% have been sold, according to the company.
DLF on 25 March announced a price cut of 20% for apartments in the New Town Heights project, for both existing as well as new customers. But the discount is structured in a complicated fashion and comes with conditions that do not allow customers to exit at a future date.
FD'S RATE CUT BY SBI : WILL OTHERS FOLLOW SUIT
State Bank of India has decided to pare interest rates on fixed deposits by 25 basis points across the board with effect from May 4, 2009. Post the interest rate revision, a fresh one-year fixed deposit (FD) with the bank will fetch 6.75 per cent and a 1,000-day deposit will earn 8 per cent interest.
The new interest rate on the ultra short-term FD (15 days to 45 days maturity) and the ultra long-term FD (8 years and up to 10 years) would be 3.75 per cent (4 per cent now) and 8.25 per cent (8.50 per cent) respectively, according to a bank statement.
A fresh deposit in the 46 days to 90 days maturity bucket will earn 4.75 per cent interest; 91 days to 180 days: 6 per cent; 181 days to less than a year: 6.75 per cent; 1 year to less than 2 years: 7.50 per cent; 2 years to less than 1,000 days: 7.75 per cent.
While the bank is offering 8 per cent interest on a 1,000-day FD, the interest rate on FDs beyond 1,000 days and up to 5 years will be 7.75 per cent.
Following the downward revision in interest rates on the liabilities side, the bank is expected to take a similar action on the assets side by cutting its benchmark prime lending rate, which currently stands at 12.25 per cent.
Earlier this week, IDBI Bank had announced its decision to cut interest rates on fixed deposits in seven maturity buckets by 25 basis points even as it upped the interest rate on the long-term deposit (over 5 years to 10 years duration) by 50 basis points. The bank said that the revised deposit rates will be effective from May 4, 2009.
SBT pares rates
Our Thiruvananthapuram Bureau reports: State Bank of Travancore has revised the interest rates for FCNR and NRE term deposits with effect from May 3, 2009.
As per the revision, the interest rate for NRE deposits will be 3.64 per cent a year for a period of one year to less than two years; 3.24 per cent for two years to less than three years; and 3.64 per cent for three years and above to five years, according to a release from SBT.
The new interest rate for FCNR deposits in dollars will be 2.89 per cent for a period of one year to less than two years; 2.49 per cent for two years to less than three years.
For three years to less than four years, the interest rate is 2.89 per cent; 3.23 per cent for four years to less than five years; and 3.49 per cent for five years.
For deposits in pound sterling, the rates for corresponding periods will be 2.92 per cent, 3.12 per cent, 3.59 per cent, 3.89 per cent and 4.12 per cent, respectively, while the rates for deposits in euro for similar periods will be 2.73 per cent, 2.83 per cent, 3.20 per cent, 3.47 per cent and 3.72 per cent, respectively.
The new interest rate on the ultra short-term FD (15 days to 45 days maturity) and the ultra long-term FD (8 years and up to 10 years) would be 3.75 per cent (4 per cent now) and 8.25 per cent (8.50 per cent) respectively, according to a bank statement.
A fresh deposit in the 46 days to 90 days maturity bucket will earn 4.75 per cent interest; 91 days to 180 days: 6 per cent; 181 days to less than a year: 6.75 per cent; 1 year to less than 2 years: 7.50 per cent; 2 years to less than 1,000 days: 7.75 per cent.
While the bank is offering 8 per cent interest on a 1,000-day FD, the interest rate on FDs beyond 1,000 days and up to 5 years will be 7.75 per cent.
Following the downward revision in interest rates on the liabilities side, the bank is expected to take a similar action on the assets side by cutting its benchmark prime lending rate, which currently stands at 12.25 per cent.
Earlier this week, IDBI Bank had announced its decision to cut interest rates on fixed deposits in seven maturity buckets by 25 basis points even as it upped the interest rate on the long-term deposit (over 5 years to 10 years duration) by 50 basis points. The bank said that the revised deposit rates will be effective from May 4, 2009.
SBT pares rates
Our Thiruvananthapuram Bureau reports: State Bank of Travancore has revised the interest rates for FCNR and NRE term deposits with effect from May 3, 2009.
As per the revision, the interest rate for NRE deposits will be 3.64 per cent a year for a period of one year to less than two years; 3.24 per cent for two years to less than three years; and 3.64 per cent for three years and above to five years, according to a release from SBT.
The new interest rate for FCNR deposits in dollars will be 2.89 per cent for a period of one year to less than two years; 2.49 per cent for two years to less than three years.
For three years to less than four years, the interest rate is 2.89 per cent; 3.23 per cent for four years to less than five years; and 3.49 per cent for five years.
For deposits in pound sterling, the rates for corresponding periods will be 2.92 per cent, 3.12 per cent, 3.59 per cent, 3.89 per cent and 4.12 per cent, respectively, while the rates for deposits in euro for similar periods will be 2.73 per cent, 2.83 per cent, 3.20 per cent, 3.47 per cent and 3.72 per cent, respectively.
Buyers still wait for prices to dip - Real Estate Mumbai
Yawn !! Yet another property expo in Mumbai was organised by the 400-strong Maharashtra Chamber of Housing Industry in the second week of April.
An overwhelming response satiated the organisers, who said 77,752 visitors flocked to the exhibition this year as against 66,784 in October 2008. On the surface it did appear that many buyers preferred to merely touch base to know what the current offerings were rather than take a purchase call. However, MCHI president, Mr Pravin Doshi, felt it was thumbs up from home buyers, especially from the first time home-seeker who appeared convinced it was the right time to buy, after waiting it out for long.
However, experts and analysts appear a little less convinced, though they do agree that developers have seen some numbers on their sales charts in the last four months.
Researchers at Centrum feel prices in Mumbai still remain unaffordable. Compared to the NCR, Bangalore and Chennai markets which have seen prices drop 30-40 per cent, property prices in Mumbai had fallen only by 15-20 per cent, they contend, while pointing to concerns over completion of projects.
They say about 75 per cent of the projects on offer at the exhibition were the same that were showcased at the October 2008 Property Expo, which points to little or no off-take in residential volumes in Mumbai between October 2008 and March 2009.
With 57 per cent projects on display slotted for completion after March 2010, apprehensions on delivery hamper conversion of enquiries to actual transactions.
Buyer poll
A buyer poll conducted by Centrum indicates that a majority of buyers were for a further 20 per cent cut in prices and would take a call only after six months, keeping in mind fears of job losses and salary cuts.
Mr Kumar Gera, Chairman, Confederation of Real Estate Developers Association of India, says the term affordable is a misnomer and cannot be used merely to identify projects without frills. Projects that do not have swimming pools, landscaping and club houses should not be categorised as affordable on the price count alone.
Affordability is what a buyer can afford, which should be estimated at about 50 per cent of his combined family income. It varies from buyer to buyer and city to city. A Rs 20-lakh apartment in Mumbai and a Rs 20-lakh home in a tier III city are not the same, he says.
There are early signs of recovery though the going is slow. A full scale turnaround in real estate could happen only when the economy revives and there was little chance of prices going up till then. In the meanwhile, demand was expected to accumulate as supplies dwindle due to the lull in the market.
Mr Gera says prices have come down significantly and buyers could take the plunge now. A 5-10 per cent drop could happen in some pockets, but then real estate investment should be looked over a 10-year horizon, when considerable appreciation can be netted.
VISIBLE TRENDS
Motilal Oswal researchers too feel buyers are holding back, awaiting a further correction in prices, despite many developers across Mumbai reducing prices by 10-30 per cent and being open to price negotiations during the last 4-5 months.
The researchers say they expect most developers to increasingly focus on the affordable housing going forward.
Visible trends at the expo they felt were a huge pent-up demand for affordable housing as also a higher interest in city-centric properties.
Suburban Thane has seen several launches in the last three months, with developers such as Dosti, Hiranandani, Kalpataru, Lodha and Acme in the lead with a fair degree of success
An overwhelming response satiated the organisers, who said 77,752 visitors flocked to the exhibition this year as against 66,784 in October 2008. On the surface it did appear that many buyers preferred to merely touch base to know what the current offerings were rather than take a purchase call. However, MCHI president, Mr Pravin Doshi, felt it was thumbs up from home buyers, especially from the first time home-seeker who appeared convinced it was the right time to buy, after waiting it out for long.
However, experts and analysts appear a little less convinced, though they do agree that developers have seen some numbers on their sales charts in the last four months.
Researchers at Centrum feel prices in Mumbai still remain unaffordable. Compared to the NCR, Bangalore and Chennai markets which have seen prices drop 30-40 per cent, property prices in Mumbai had fallen only by 15-20 per cent, they contend, while pointing to concerns over completion of projects.
They say about 75 per cent of the projects on offer at the exhibition were the same that were showcased at the October 2008 Property Expo, which points to little or no off-take in residential volumes in Mumbai between October 2008 and March 2009.
With 57 per cent projects on display slotted for completion after March 2010, apprehensions on delivery hamper conversion of enquiries to actual transactions.
Buyer poll
A buyer poll conducted by Centrum indicates that a majority of buyers were for a further 20 per cent cut in prices and would take a call only after six months, keeping in mind fears of job losses and salary cuts.
Mr Kumar Gera, Chairman, Confederation of Real Estate Developers Association of India, says the term affordable is a misnomer and cannot be used merely to identify projects without frills. Projects that do not have swimming pools, landscaping and club houses should not be categorised as affordable on the price count alone.
Affordability is what a buyer can afford, which should be estimated at about 50 per cent of his combined family income. It varies from buyer to buyer and city to city. A Rs 20-lakh apartment in Mumbai and a Rs 20-lakh home in a tier III city are not the same, he says.
There are early signs of recovery though the going is slow. A full scale turnaround in real estate could happen only when the economy revives and there was little chance of prices going up till then. In the meanwhile, demand was expected to accumulate as supplies dwindle due to the lull in the market.
Mr Gera says prices have come down significantly and buyers could take the plunge now. A 5-10 per cent drop could happen in some pockets, but then real estate investment should be looked over a 10-year horizon, when considerable appreciation can be netted.
VISIBLE TRENDS
Motilal Oswal researchers too feel buyers are holding back, awaiting a further correction in prices, despite many developers across Mumbai reducing prices by 10-30 per cent and being open to price negotiations during the last 4-5 months.
The researchers say they expect most developers to increasingly focus on the affordable housing going forward.
Visible trends at the expo they felt were a huge pent-up demand for affordable housing as also a higher interest in city-centric properties.
Suburban Thane has seen several launches in the last three months, with developers such as Dosti, Hiranandani, Kalpataru, Lodha and Acme in the lead with a fair degree of success
Making sense of dividends
Making sense of dividends
It’s that time of the year when India Inc announces its annual results and rewards its shareholders with dividends. From 100 per cent to 1000 per cent, the rates of dividend do look attractive.
But don’t get carried away. Companies declare dividends as a percentage of the face value of their shares, which may range from Re 1 to Rs 10. So a 100 per cent dividend on a Re 1 share is only worth Rs 10 a share.
Not all companies give away a chunk of their hard-earned profits to its investors.
Some plough it back into business, to generate greater returns from business in the future. But even after having attained scale capabilities, some capex intensive companies are not known to reward shareholders.
For instance, telecom major Bharti Airtel, in spite of being in existence for several years, has only now declared its first dividend.
In these cases, the capital appreciation from the stock price movement has been rewarding that it did not necessitate dividend declaration. In India, consumer non-durables companies, gas, oil marketing companies, and public sector banks are known to declare attractive dividends.
Dividends are seen as a harbinger of corporate prosperity, as it is the most popular route taken to reward investors.
However, this does not imply that all companies that declare dividends may be on a sound business footing. You may need to run a few litmus tests to find out whether such dividends stand to gloss up your portfolio returns.
Dividend Yield
Calculated as the ratio of the annual dividend amount announced and the prevailing market price of the company’s share, the dividend yield ratio shows what investors stand to earn on their shares.
For example, information technology majors Infosys Technologies and Wipro recently declared their annual dividends, of 270 per cent and 200 per cent respectively. But do not go by the mere percentage of dividend announcement since dividends are paid at face value of the stock.
That is, for Infosys (face value of Rs 5) the dividend per share is Rs 13.50, whereas for Wipro (face value Rs 2) it is Rs 4.
However, the dividend yield will be higher for Wipro (1.2 per cent) as its current market price is lower than that of Infosys (0.8 per cent).
While sifting through high dividend stocks, you will also notice that the companies with high promoter holding declare dividends periodically. Apart from public sector companies, others such as Tata Consultancy Services, Sterlite Industries, Reliance Industries, Wipro and HCL, where promoter holdings are 49-75 per cent, declare dividends regularly.
Dividend Coverage
This ratio measures the extent to which a company’s earnings support its dividend payments.
For companies such as Maruti Suzuki and UltraTech Cements, which recently made public their final dividends for the year, the dividend coverage stands at 12-15 times.
This means that these companies’ profits are 12-15 times the amount of dividends declared.
A higher dividend ratio indicates that the company is not straining itself to give away dividends .
Companies such as Hero Honda, Nestle India, Colgate Palmolive and Indraprastha Gas which have minimal debt on their balance-sheets also give away substantial sums as dividends. Final dividends are also a function of the future cash requirements of the company.
Implication for the company
Note that dividends are paid after the board recommendation is accepted by shareholders. So dividend payouts have direct effect on the cash balance of the company.
While it is not mandated by the law to sustain dividend payouts, many companies make it a regular process to retain their value among the investor community.
It’s that time of the year when India Inc announces its annual results and rewards its shareholders with dividends. From 100 per cent to 1000 per cent, the rates of dividend do look attractive.
But don’t get carried away. Companies declare dividends as a percentage of the face value of their shares, which may range from Re 1 to Rs 10. So a 100 per cent dividend on a Re 1 share is only worth Rs 10 a share.
Not all companies give away a chunk of their hard-earned profits to its investors.
Some plough it back into business, to generate greater returns from business in the future. But even after having attained scale capabilities, some capex intensive companies are not known to reward shareholders.
For instance, telecom major Bharti Airtel, in spite of being in existence for several years, has only now declared its first dividend.
In these cases, the capital appreciation from the stock price movement has been rewarding that it did not necessitate dividend declaration. In India, consumer non-durables companies, gas, oil marketing companies, and public sector banks are known to declare attractive dividends.
Dividends are seen as a harbinger of corporate prosperity, as it is the most popular route taken to reward investors.
However, this does not imply that all companies that declare dividends may be on a sound business footing. You may need to run a few litmus tests to find out whether such dividends stand to gloss up your portfolio returns.
Dividend Yield
Calculated as the ratio of the annual dividend amount announced and the prevailing market price of the company’s share, the dividend yield ratio shows what investors stand to earn on their shares.
For example, information technology majors Infosys Technologies and Wipro recently declared their annual dividends, of 270 per cent and 200 per cent respectively. But do not go by the mere percentage of dividend announcement since dividends are paid at face value of the stock.
That is, for Infosys (face value of Rs 5) the dividend per share is Rs 13.50, whereas for Wipro (face value Rs 2) it is Rs 4.
However, the dividend yield will be higher for Wipro (1.2 per cent) as its current market price is lower than that of Infosys (0.8 per cent).
While sifting through high dividend stocks, you will also notice that the companies with high promoter holding declare dividends periodically. Apart from public sector companies, others such as Tata Consultancy Services, Sterlite Industries, Reliance Industries, Wipro and HCL, where promoter holdings are 49-75 per cent, declare dividends regularly.
Dividend Coverage
This ratio measures the extent to which a company’s earnings support its dividend payments.
For companies such as Maruti Suzuki and UltraTech Cements, which recently made public their final dividends for the year, the dividend coverage stands at 12-15 times.
This means that these companies’ profits are 12-15 times the amount of dividends declared.
A higher dividend ratio indicates that the company is not straining itself to give away dividends .
Companies such as Hero Honda, Nestle India, Colgate Palmolive and Indraprastha Gas which have minimal debt on their balance-sheets also give away substantial sums as dividends. Final dividends are also a function of the future cash requirements of the company.
Implication for the company
Note that dividends are paid after the board recommendation is accepted by shareholders. So dividend payouts have direct effect on the cash balance of the company.
While it is not mandated by the law to sustain dividend payouts, many companies make it a regular process to retain their value among the investor community.
Emotions in investing
Decision making is more often than not done on the basis of feelings, not clear thought. Here are some prejudices investors need to look out for.
Arthanaam aarjane dukham
Arjitanaam tu rakshanam
Aye dukham vyaye dukham
Tasmaat jagruta jagruta!
— Adi Sankara
Meaning:
“Earning wealth brings regret
Even if earned, saving it is regretful
Be it receipt of wealth, be it spending, it is regretful
Hence beware”
Everyone would like to think that we are logical and rational in decision making. We do not realise that emotional decision making is the default option for most of us. A wide variety of human errors stems from perpetual illusions, overconfidence and over-reliance on rules of thumb to do our daily chores. The same applies to investing too.
Here are some common emotional biases that affect our investing:
Bias towards short term
We are hardwired to think of the short-term gains while taking decisions. We feel confident and stimulated about short-term gains and perhaps miss out the long-term view. For instance, when offered a choice between Rs 10,000 today and Rs 11,000 tomorrow, many people choose the immediate option – Rs 10,000 today. However, when asked to choose between Rs 10,000 in a year and Rs 11,000 after a year and a day, many people who chose the immediate option in the first instance will choose the second option.
Investment based on genuine long-term expectation is so difficult today as to be scarcely practicable. We have to take a long-term view on investing and not get carried away only by developments in the short term,
Herd mentality provides the comfort of conventionality and is habitual to many of us. This is not restricted to individuals. We also find fund managers chasing a few stocks and falling prey to this bias. There are many instances of fund houses launching fund after another that they feel are the flavour of the season.
This results from over optimism and overconfidence. The great obstacle to discovery is not ignorance. It is illusion of knowledge. We feel that with loads of data we are equipped to take the correct decision on what to buy and where to invest. We forget that what is important is not the quantity but quality of data that we have.
Bias of Overreaction
Every piece of information can be judged along two dimensions: Strength and weight. You read an article glorifying the performance of a fund. Sadly, the article is not objective. The strength is represented by high level of glowing traits talked about, but the weight you need to assign to the information is low as it is a biased source. High strength and low weight will generate overreaction whereas low strength and high weight will generate under reaction.
We have a very bad habit of looking into information that agrees with our pre-set notions. The thirst for agreement rather than refutation is called confirmatory bias. When it comes to investing, we often tend to form an opinion and then look all day for information that makes our opinion appear correct.
We have made an investment decision. We would not like any opinion that proves it wrong. If we are presented with such opinion we tend to dismiss it as biased.
Self attribution bias is the tendency to attribute good outcomes to skill. But when it comes to a bad outcome, we tend to attribute it to bad luck or blame the financial planner or the advisor who has recommended the investment. When a fund performs well, we boast of good fund-picking skills. But when it starts performing badly, we tend to blame the fund manager or financial planner who had suggested the said investment.
Hindsight Bias
If everyone thinks that they can predict the past, they are likely to be far too sure about predicting the future. After the market crashes, we tend to believe that we knew that it would crash before the event. Incorrect or inaccurate predictions tend not to be remembered as well as vaguely correct predictions, reinforcing the idea in someone’s mind that his or her predictive skills are better than they really are. Hindsight bias generates overconfidence.
We tend to extrapolate and generalise. Similar named schemes of mutual fund tend to garner more money. During the technology stock bubble, many companies were launched with names resembling tech companies, exploiting the representative bias of investors.
People tend to rely on their own experiences in preference to hard statistics or the experience of others. Direct experience is more weighted than general experience. If we have a bad experience, may be isolated, we tend to attach more weight to it.
Direct experience triggers emotional reactions which vicarious information doesn’t. Investors look for big trigger events, missing the cumulative impact of small news. A bad investment decision in stock or a fund will ensure that he does not invest again, in spite of the said stock or fund improving its returns or performance.
Bias of Frame Dependence
By framing question in different ways, you get different answers. Investors do not redeem their investments if they have to make a loss. However, the advisor overcomes this by advising them to switch over to another stock or fund, thereby shifting the frame of dependence of the investor. Now, the profit or loss is calculated from the value of new investment and not the original one.
Status Quo Bias
A loss isn’t a loss until I take it. Status quo bias. Endowment effect. Once you own something you tend to place a higher value. We sell a winning position retaining a losing position. This forces us to sell the stars and retain the dogs.
Emotions determine the tolerance for risk and tolerance for risk plays a key role in portfolio selection. Investors experience a variety of emotions as they ponder their investment alternatives, make decisions about how much risk to bear.
It is imperative for an investor to understand his emotions and the biases that are inherent in him as these have a direct relationship to investment decisions.
Arthanaam aarjane dukham
Arjitanaam tu rakshanam
Aye dukham vyaye dukham
Tasmaat jagruta jagruta!
— Adi Sankara
Meaning:
“Earning wealth brings regret
Even if earned, saving it is regretful
Be it receipt of wealth, be it spending, it is regretful
Hence beware”
Everyone would like to think that we are logical and rational in decision making. We do not realise that emotional decision making is the default option for most of us. A wide variety of human errors stems from perpetual illusions, overconfidence and over-reliance on rules of thumb to do our daily chores. The same applies to investing too.
Here are some common emotional biases that affect our investing:
Bias towards short term
We are hardwired to think of the short-term gains while taking decisions. We feel confident and stimulated about short-term gains and perhaps miss out the long-term view. For instance, when offered a choice between Rs 10,000 today and Rs 11,000 tomorrow, many people choose the immediate option – Rs 10,000 today. However, when asked to choose between Rs 10,000 in a year and Rs 11,000 after a year and a day, many people who chose the immediate option in the first instance will choose the second option.
Investment based on genuine long-term expectation is so difficult today as to be scarcely practicable. We have to take a long-term view on investing and not get carried away only by developments in the short term,
Herd mentality provides the comfort of conventionality and is habitual to many of us. This is not restricted to individuals. We also find fund managers chasing a few stocks and falling prey to this bias. There are many instances of fund houses launching fund after another that they feel are the flavour of the season.
This results from over optimism and overconfidence. The great obstacle to discovery is not ignorance. It is illusion of knowledge. We feel that with loads of data we are equipped to take the correct decision on what to buy and where to invest. We forget that what is important is not the quantity but quality of data that we have.
Bias of Overreaction
Every piece of information can be judged along two dimensions: Strength and weight. You read an article glorifying the performance of a fund. Sadly, the article is not objective. The strength is represented by high level of glowing traits talked about, but the weight you need to assign to the information is low as it is a biased source. High strength and low weight will generate overreaction whereas low strength and high weight will generate under reaction.
We have a very bad habit of looking into information that agrees with our pre-set notions. The thirst for agreement rather than refutation is called confirmatory bias. When it comes to investing, we often tend to form an opinion and then look all day for information that makes our opinion appear correct.
We have made an investment decision. We would not like any opinion that proves it wrong. If we are presented with such opinion we tend to dismiss it as biased.
Self attribution bias is the tendency to attribute good outcomes to skill. But when it comes to a bad outcome, we tend to attribute it to bad luck or blame the financial planner or the advisor who has recommended the investment. When a fund performs well, we boast of good fund-picking skills. But when it starts performing badly, we tend to blame the fund manager or financial planner who had suggested the said investment.
Hindsight Bias
If everyone thinks that they can predict the past, they are likely to be far too sure about predicting the future. After the market crashes, we tend to believe that we knew that it would crash before the event. Incorrect or inaccurate predictions tend not to be remembered as well as vaguely correct predictions, reinforcing the idea in someone’s mind that his or her predictive skills are better than they really are. Hindsight bias generates overconfidence.
We tend to extrapolate and generalise. Similar named schemes of mutual fund tend to garner more money. During the technology stock bubble, many companies were launched with names resembling tech companies, exploiting the representative bias of investors.
People tend to rely on their own experiences in preference to hard statistics or the experience of others. Direct experience is more weighted than general experience. If we have a bad experience, may be isolated, we tend to attach more weight to it.
Direct experience triggers emotional reactions which vicarious information doesn’t. Investors look for big trigger events, missing the cumulative impact of small news. A bad investment decision in stock or a fund will ensure that he does not invest again, in spite of the said stock or fund improving its returns or performance.
Bias of Frame Dependence
By framing question in different ways, you get different answers. Investors do not redeem their investments if they have to make a loss. However, the advisor overcomes this by advising them to switch over to another stock or fund, thereby shifting the frame of dependence of the investor. Now, the profit or loss is calculated from the value of new investment and not the original one.
Status Quo Bias
A loss isn’t a loss until I take it. Status quo bias. Endowment effect. Once you own something you tend to place a higher value. We sell a winning position retaining a losing position. This forces us to sell the stars and retain the dogs.
Emotions determine the tolerance for risk and tolerance for risk plays a key role in portfolio selection. Investors experience a variety of emotions as they ponder their investment alternatives, make decisions about how much risk to bear.
It is imperative for an investor to understand his emotions and the biases that are inherent in him as these have a direct relationship to investment decisions.
New pension system to shield the aged
Citizens of India will now have an option of securing their post-retirement life with the New Pension Scheme established by the Government under the Pension Fund Regulatory and Development Authority (PFRDA).
The scheme has come in to effect from May 1, 2009. The unique feature of the scheme is the flexibility offered for investors to choose their asset allocation as well as their fund managers.
This scheme has already been made mandatory for Central Government employees from 2004 and is said to have earned a weighted average return of about 14.5 per cent (according to PFRDA) over the last one year.
How it works
Two types of accounts are available under the NPS.
Tier-I account: Individuals can contribute their savings for retirement into this non-withdrawal account.
Tier II account: Under this saving facility, individuals are free to withdraw their savings whenever they require.
Tier I account is available for contribution from May 1, 2009. The commencement of the Tier II account will be notified shortly by PFRDA.
Who can be member?
A citizen of India, whether resident or non resident aged between 18-55 years on the date of submission of the application can open this account.. Investors can open these accounts in 22 entities prescribed by PFRDA. These include LIC, State Bank of India, ICICI Bank and UTI Asset Management.
Who are not eligible?
Individual who are not granted an order of discharge by a court (un-discharged insolvent), individuals of unsound mind and pre-existing account holders under NPS.
Minimum contribution per instalment is Rs 500 and minimum contribution per year is Rs 6000. There should be a minimum of 4 contributions made each year. Over and above the mandated limit of a minimum of four contributions, account holders can decide on the frequency and extent of the contribution across the year as per their convenience.
Withdrawal
On attaining normal retirement age (NRA) of 60 years account holders will be required to compulsorily withdraw at least 40 per cent of their pension wealth and the remaining 60 per cent can be withdrawn as a lump sum or in a phased manner.
A minimum of 10 per cent every year will be allowed under phased withdrawal.
If an account holder makes a withdrawal any time before 60 years of age he has to compulsorily annuitise 80 per cent of his accumulated pension wealth; such sum should be used to purchase annuity from any Insurance Regulatory and Development Authority regulated life insurance company.
The remaining 20 per cent can be withdrawn as a lump sum.
In the unfortunate event of death of the account holder at any time, the nominee will have an option receive 100 per cent of NPS pension wealth in lump sum.
If the nominee wishes to continue with New Pension System, he or she will have to subscribe to NPS individually.
Investment choice
The NPS offers you two options to invest your money. Active choice: Individual funds (Asset class E, asset class C and asset class G). Auto Choice: Lifecycle fund (see table).
Option one, called active choice, will allow investors to choose the proportion of money going in to equity (E), credit risk bearing income instruments (C) and government security (G).
Investors can also choose their fund managers out of a basket of six fund houses.
However, investment in equity would be restricted to index funds tracking the BSE Sensex and S&P CNX Nifty and subject to a maximum of 50 per cent of investor’s money.
In case the participant is unable to make a choice regarding asset allocation then contributions would be invested in “Auto Choice”. In auto choice the investment would be determined by a predefined portfolio.
The scheme has come in to effect from May 1, 2009. The unique feature of the scheme is the flexibility offered for investors to choose their asset allocation as well as their fund managers.
This scheme has already been made mandatory for Central Government employees from 2004 and is said to have earned a weighted average return of about 14.5 per cent (according to PFRDA) over the last one year.
How it works
Two types of accounts are available under the NPS.
Tier-I account: Individuals can contribute their savings for retirement into this non-withdrawal account.
Tier II account: Under this saving facility, individuals are free to withdraw their savings whenever they require.
Tier I account is available for contribution from May 1, 2009. The commencement of the Tier II account will be notified shortly by PFRDA.
Who can be member?
A citizen of India, whether resident or non resident aged between 18-55 years on the date of submission of the application can open this account.. Investors can open these accounts in 22 entities prescribed by PFRDA. These include LIC, State Bank of India, ICICI Bank and UTI Asset Management.
Who are not eligible?
Individual who are not granted an order of discharge by a court (un-discharged insolvent), individuals of unsound mind and pre-existing account holders under NPS.
Minimum contribution per instalment is Rs 500 and minimum contribution per year is Rs 6000. There should be a minimum of 4 contributions made each year. Over and above the mandated limit of a minimum of four contributions, account holders can decide on the frequency and extent of the contribution across the year as per their convenience.
Withdrawal
On attaining normal retirement age (NRA) of 60 years account holders will be required to compulsorily withdraw at least 40 per cent of their pension wealth and the remaining 60 per cent can be withdrawn as a lump sum or in a phased manner.
A minimum of 10 per cent every year will be allowed under phased withdrawal.
If an account holder makes a withdrawal any time before 60 years of age he has to compulsorily annuitise 80 per cent of his accumulated pension wealth; such sum should be used to purchase annuity from any Insurance Regulatory and Development Authority regulated life insurance company.
The remaining 20 per cent can be withdrawn as a lump sum.
In the unfortunate event of death of the account holder at any time, the nominee will have an option receive 100 per cent of NPS pension wealth in lump sum.
If the nominee wishes to continue with New Pension System, he or she will have to subscribe to NPS individually.
Investment choice
The NPS offers you two options to invest your money. Active choice: Individual funds (Asset class E, asset class C and asset class G). Auto Choice: Lifecycle fund (see table).
Option one, called active choice, will allow investors to choose the proportion of money going in to equity (E), credit risk bearing income instruments (C) and government security (G).
Investors can also choose their fund managers out of a basket of six fund houses.
However, investment in equity would be restricted to index funds tracking the BSE Sensex and S&P CNX Nifty and subject to a maximum of 50 per cent of investor’s money.
In case the participant is unable to make a choice regarding asset allocation then contributions would be invested in “Auto Choice”. In auto choice the investment would be determined by a predefined portfolio.
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