RAMAKANTH
18-11-2007, 07:18 AM
Investors with acumen can directly tap the market. For the rest, sticking to mutual funds would be a better idea.
Which is a better investing route? Investing directly in stocks or via mutual funds?
You need to first figure out what kind of investor you are and the degree of risk you are willing to undertake. If you are an aware and educated investor who can make time for assessing a company before investing in it, then you can definitely look at creating a diversified portfolio of such stocks. While this in itself should not be very difficult, it is a time consuming exercise. Moreover constant monitoring of stocks and related company news is imperative.
On the other hand, mutual funds offer many benefits that would be difficult for an individual investor to replicate. Access to relevant information, a research team, low cost of fund management, are some of the benefits which are not accessible to retail investors. For instance mutual funds do not pay capital gains tax, whereas individuals do incur a short-term capital gains tax amounting to 10 per cent. Further, the degree of diversification that an individual can attain is limited, which in turn translates into higher risk undertaken by an individual relative to a portfolio of mutual funds. For instance it is not unusual to find a mutual fund holding 60 odd stocks. An extensive exposure across sectors and monitoring such a large number of holdings would be difficult for an individual to achieve.
Investors, who have the acumen and time, should look at maintaining a portion of their portfolio in direct stocks. For the rest, sticking to mutual funds would be a better idea.
Please explain the benefits of SIP
In a Systematic Investment Plan (SIP), a fixed amount is invested in mutual funds every month or quarter. It is a simple and disciplined way to invest.
SIP’s most important characteristic is that it does away with the need or effort to time the market. When the market is falling, you may feel that it may decline further and you should wait a while. Often stock markets make a recovery before you notice and the opportunity is lost. When markets are rising, you prefer waiting for a correction to make an investment. But if the correction doesn’t come about, then even this opportunity is missed. And if markets are going nowhere, then what is the point in investing at all? By investing regularly the net effect is that you end up accumulating units at a much lower average cost and benefit from every movement in the market. This, in turn, reduces your downside risk. As against a lump sum investment where in you will benefit only if the markets move upwards. In case of an SIP too, a rise in markets will be beneficial since you purchased units at a discount to current levels. But the real clincher is that even if markets decline you still benefit as this would effectually reduce the cost of your total investment.
When I redeem my SIP units, do I have to specify which ones go first?
Mutual funds follow a simple principle of first in first out. This means the earliest units will be redeemed first and then the older ones follow. If the units have been maintained under the same folio number then you need not worry about specifying which ones should be redeemed first. If some units were purchased under different folio numbers, then you will have to specify either the number of units or the amount to be redeemed for each different folio number.
I want to invest some money in the markets but I think they are already at a very high level. Should it fall, I may lose my capital. But should they continue to rise, I will gain. I am planning to invest in the equity fund as and when the market corrects 200 points. Please advise.
What you are doing is trying to time the market. Here’s our advice to everyone waiting for a correction. There may not be one. The laws of physics do not apply to stock markets; therefore what goes up need not come down. At least not in the near future. Stick to a simple principle of investing regularly. If you have a lump sum amount, invest it in an ultra short term debt fund and institute a Systematic Transfer Plan into an equity fund. Else stick to a plain vanilla SIP. After doing this, all you need to do is monitor your fund for slackness in performance. It’s really as simple as that.
Does the size of a mutual fund matter? Should one invest in funds with a big or small corpus?
Size of a fund definitely has a role to play, but not when it comes to deciding which one to buy or sell.
If we look at size in the context of equity funds, smaller funds have the capability of being more agile. This is especially true for mid- and small-cap funds. These funds can exit and enter stocks of a smaller market cap without affecting the price of the stock too much. But, if we look at the performance of large mid-cap offerings such as Reliance Growth and Sundaram BNP Paribas Select Midcap, this theory is disproved.
In the case of index funds, size may be an asset. Any inflow can be easily invested without giving rise to significant tracking error. In the case of a small index fund, the same inflow may look substantial and it may not be easy to allocate it without causing a tracking error.
Where debt funds are concerned, size is critical because it has a direct impact on the expense ratio. Larger funds can distribute fixed expenses over a number of investors and bring down the expense ratio. They can also negotiate better rates with issuers of debt papers.
On a closing note, there will be exceptions to all the above observations. Though theoretically there are specific kinds of funds which are better off either as large or small funds, there is no clear-cut trend to prove that a larger fund will do better than a smaller fund or vice versa.
Terms such as annualised and absolute returns are very confusing. What is the difference?
The difference between absolute and annualised returns can be explained with an example.
Suppose an investment of Rs 1,000 made five years ago has grown to Rs 1,300 today, then the absolute gain would be Rs 300 (a 30 per cent growth). This 30 per cent is the absolute return. Now, if you want to know how much the same investment has grown on a yearly basis, you will have to take a look at the annualised returns. This will tell you the return the fund turned in each of the years on an average basis during this five-year period, provided the gains were re-invested every year. In this case, the annualised return works out to 5.38 per cent.
A 30 per cent return on investment would normally qualify as good but for the fact that it was realised over five years.
I often find that my fund management company boasts of a particular return. But my investments have not grown as much. How can this be?
We encountered such questions by investors who invested in the tech meltdown of 2000-01. In such cases, it is apparent that the asset management company would use a convenient date from which it takes the starting point to calculate returns. Or, it could even be the difference in methodology. The fund house could have quoted absolute returns instead of annualised returns.
Apart from this, many investors do not take into account the dividend received by them in calculating returns and hence come across this mismatch. Other reasons could be that you have not received dividends.
BS
Which is a better investing route? Investing directly in stocks or via mutual funds?
You need to first figure out what kind of investor you are and the degree of risk you are willing to undertake. If you are an aware and educated investor who can make time for assessing a company before investing in it, then you can definitely look at creating a diversified portfolio of such stocks. While this in itself should not be very difficult, it is a time consuming exercise. Moreover constant monitoring of stocks and related company news is imperative.
On the other hand, mutual funds offer many benefits that would be difficult for an individual investor to replicate. Access to relevant information, a research team, low cost of fund management, are some of the benefits which are not accessible to retail investors. For instance mutual funds do not pay capital gains tax, whereas individuals do incur a short-term capital gains tax amounting to 10 per cent. Further, the degree of diversification that an individual can attain is limited, which in turn translates into higher risk undertaken by an individual relative to a portfolio of mutual funds. For instance it is not unusual to find a mutual fund holding 60 odd stocks. An extensive exposure across sectors and monitoring such a large number of holdings would be difficult for an individual to achieve.
Investors, who have the acumen and time, should look at maintaining a portion of their portfolio in direct stocks. For the rest, sticking to mutual funds would be a better idea.
Please explain the benefits of SIP
In a Systematic Investment Plan (SIP), a fixed amount is invested in mutual funds every month or quarter. It is a simple and disciplined way to invest.
SIP’s most important characteristic is that it does away with the need or effort to time the market. When the market is falling, you may feel that it may decline further and you should wait a while. Often stock markets make a recovery before you notice and the opportunity is lost. When markets are rising, you prefer waiting for a correction to make an investment. But if the correction doesn’t come about, then even this opportunity is missed. And if markets are going nowhere, then what is the point in investing at all? By investing regularly the net effect is that you end up accumulating units at a much lower average cost and benefit from every movement in the market. This, in turn, reduces your downside risk. As against a lump sum investment where in you will benefit only if the markets move upwards. In case of an SIP too, a rise in markets will be beneficial since you purchased units at a discount to current levels. But the real clincher is that even if markets decline you still benefit as this would effectually reduce the cost of your total investment.
When I redeem my SIP units, do I have to specify which ones go first?
Mutual funds follow a simple principle of first in first out. This means the earliest units will be redeemed first and then the older ones follow. If the units have been maintained under the same folio number then you need not worry about specifying which ones should be redeemed first. If some units were purchased under different folio numbers, then you will have to specify either the number of units or the amount to be redeemed for each different folio number.
I want to invest some money in the markets but I think they are already at a very high level. Should it fall, I may lose my capital. But should they continue to rise, I will gain. I am planning to invest in the equity fund as and when the market corrects 200 points. Please advise.
What you are doing is trying to time the market. Here’s our advice to everyone waiting for a correction. There may not be one. The laws of physics do not apply to stock markets; therefore what goes up need not come down. At least not in the near future. Stick to a simple principle of investing regularly. If you have a lump sum amount, invest it in an ultra short term debt fund and institute a Systematic Transfer Plan into an equity fund. Else stick to a plain vanilla SIP. After doing this, all you need to do is monitor your fund for slackness in performance. It’s really as simple as that.
Does the size of a mutual fund matter? Should one invest in funds with a big or small corpus?
Size of a fund definitely has a role to play, but not when it comes to deciding which one to buy or sell.
If we look at size in the context of equity funds, smaller funds have the capability of being more agile. This is especially true for mid- and small-cap funds. These funds can exit and enter stocks of a smaller market cap without affecting the price of the stock too much. But, if we look at the performance of large mid-cap offerings such as Reliance Growth and Sundaram BNP Paribas Select Midcap, this theory is disproved.
In the case of index funds, size may be an asset. Any inflow can be easily invested without giving rise to significant tracking error. In the case of a small index fund, the same inflow may look substantial and it may not be easy to allocate it without causing a tracking error.
Where debt funds are concerned, size is critical because it has a direct impact on the expense ratio. Larger funds can distribute fixed expenses over a number of investors and bring down the expense ratio. They can also negotiate better rates with issuers of debt papers.
On a closing note, there will be exceptions to all the above observations. Though theoretically there are specific kinds of funds which are better off either as large or small funds, there is no clear-cut trend to prove that a larger fund will do better than a smaller fund or vice versa.
Terms such as annualised and absolute returns are very confusing. What is the difference?
The difference between absolute and annualised returns can be explained with an example.
Suppose an investment of Rs 1,000 made five years ago has grown to Rs 1,300 today, then the absolute gain would be Rs 300 (a 30 per cent growth). This 30 per cent is the absolute return. Now, if you want to know how much the same investment has grown on a yearly basis, you will have to take a look at the annualised returns. This will tell you the return the fund turned in each of the years on an average basis during this five-year period, provided the gains were re-invested every year. In this case, the annualised return works out to 5.38 per cent.
A 30 per cent return on investment would normally qualify as good but for the fact that it was realised over five years.
I often find that my fund management company boasts of a particular return. But my investments have not grown as much. How can this be?
We encountered such questions by investors who invested in the tech meltdown of 2000-01. In such cases, it is apparent that the asset management company would use a convenient date from which it takes the starting point to calculate returns. Or, it could even be the difference in methodology. The fund house could have quoted absolute returns instead of annualised returns.
Apart from this, many investors do not take into account the dividend received by them in calculating returns and hence come across this mismatch. Other reasons could be that you have not received dividends.
BS