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What are Mutual Funds and how are they useful to investors?

Investing is no joke even for wealthy because it has the power to not only grow wealth but to destroy it as well if not dealt with care. Another point to be noticed is that amount of funds available is very much relevant. Possibly one may think how does the amount matter. If you observe the stock prices, you would notice there are a wide range of prices you can choose from. Invariably, most of the bluechip stocks would be priced on the higher side. In such a case, even if the investor buys one share, he has to throw a high price on it. This may not be affordable to all categories of investors as some would have small amounts of money. Above all, investing is an art requiring time. One needs to patiently draw up a plan most suited for himself/ herself. Clearly, the three important essentials that one needs to possess are:
 

• Funds : Affordability of price is critical here in this context and not just availability
• Financial awareness (Competence/Expertise) : Ability to understand or comprehend the dynamics of the investments
• Time for planning and implementation

The above mentioned points would be sufficiently capable of giving you a better understanding of what Mutual funds are.

Knowing the three essentials, it is time now for assessing which of these three do we possess as investor. This would lead to the realisation that definitely the one essential that all the investors would possess is Funds (surplus). Here again the question arises whether they can afford to pick up their investment choices and whether the prices of their choices fall within their affordability criteria.

 

Talking about Financial awareness, one may or may not be competent in planning and implementing a strategy of investment for themselves. Even if one is competent, there is another factor that has a bearing on the whole issue of financial planning which is nothing else than the third essential point that has been mentioned above.

 

Yes , need for time to plan your investment cannot be overlooked. A large part of investors are engaged in their professional pursuits and the money that they earn is where the funds come from. They would find time insufficient for involving themselves in planning, implementing and constant monitoring of their own investment portfolios.

 

Mutual Fund is a professionally managed pool of numerous small investments which add up to a large sum of money. The Fund managers have the responsibility of the planning, implementing and monitoring the investment portfolio. Fund managers are full time dedicated on managing the fund and receive remuneration for the same from the sponsoring team of the Fund. Apart from this, they are highly qualified professionals in the field of finance and therefore are well versed with the way a fund is to be managed. Another unique aspect of the fund is that the entire fund is divided into small affordable units thereby enabling the small investor to participate even in highly priced bluechip stocks by the ways of investing in Mutual Fund units. A fee is charged collectively to the investors to meet the expenses of operating the fund which includes the remuneration of fund managers and other employees. With these characteristics, Mutual funds provide in totality all the three essentials of Affordability, competence / financial awareness and time.

Discipline and Regularity leads to a stable Growth of wealth

Let us try and understand what constitutes Regularity and Discipline in Investments. It will more easily be understood when seen from the point of an investor who lacks huge lump sum for investment. The simple reason for this is that, contrary to investing huge lump sums, setting aside small sums of money at regular intervals is a more organised way of investing. 

When you have a lump sum in your hand, you would most obviously like to invest it for further growth. However with the investment climate and market scenario turning its face towards uncertainty, it is a tough task to time the market (For buying low and selling high) and pick up suitable avenues for investing the lump sum. This would entail a huge risk even if it is debt instrument due to inflation eating up into your investment growth. 

A very stable and moderately conservative approach would be to invest small amounts of money that is left out after meeting the running expenses of a household from the monthly income. A fixed amount invested every period (monthly/quarterly etc) will eliminate the drawbacks involved in lump sum investments. Good timing of market is nothing but a coincidence. It may be relevant to a trader who is willing to take the risk of financial insecurity and is speculating rather than investing. But for the individuals who are investing money for personal financial security, it would be wise not to follow the footsteps of such speculators.

Illustration : if there are two options – to invest ` 60000 as a lump sum annually OR to invest ` 5000 monthly totalling to ` 60000 in an year. Let us assume the price of a Stock X to be ` 25 at the beginning of the year. Lumpsum investment will give 60000/25 units = 2400 units. After an year, the value may be less or more than 25. If the value is more than 25 then the investor stands to gain and if the value is less than 25 he would lose on his investments. In the second option, since the investor in making equal and regular small investment of ` 5000, he would obtain varying number of units every month depending on the increase or decrease in price of the Stock X. If the price of stock X increases, the investor would receive lesser number of units and if the price of the stock decreases, the investor would receive more number of units.

This variability in number of units held by the investor depending on the increase or decrease in stock prices will render market timing redundant thereby eliminating to an extent the risks involved due to fluctuating market prices! So keep away from timing the market. Invest regularly and stick to the discipline – this will definately reap decent growth in your investments!

EGOM hikes prices of petroleum products.

The EGOM (empowered group of ministers) today increased the prices of diesel by Rs 3 per liter, while the prices of LPG cylinder are increased by Rs 50 per cylinder. Also the rates of kerosene are increased by Rs 2 per liter.

The rise in the prices of the petroleum products only suggests an increase in the inflation levels in the coming months. The inflation level of 9% reported for the month of May is now likely to cross 9.5% thus challenging the economic growth. This in our view is likely to have an adverse impact on the overall performance of corporate India as well.

A rising inflation level also signals that apart from the muted performance of the corporates, this would also impact the common man in a big way. The prices of essential commodities is likely to rise accordingly thus leaving a low disposable income in the hands of the common man. Based on the above we feel the Indian stock markets will continue to remain under pressure and the over hang of high inflation levels could continue to over weigh the sentiments of the investors. Having said this we might see a temporary upside in the markets, primarily due to the positive global cues i.e. the positive development on the Greek debt crisis. This may continue for some time in the near future and investors may use this as an opportunity to exit and then re-enter at around 16000-16500 levels on the sensex in the next few months.

RBI Review Meet - an Update

Hi all.

The recent 25 bps hike in the rates by the RBI was very much expected by the markets and the impact of the same was fully built in the price of various asset classes. However the RBI has left open a door to take another hike rate in its next review meeting.

Till than the cloud of uncertainty would hover over the markets be it equity or debt. This leads me to review the performance of the arbitrage funds and multicap funds. In our scanner the Birla Arbitrage fund seems to be a good avenue to invest in as the return profile suggests a consistent performance by the scheme. Along with this some other offerings from the Birla stable like the Birla Sunlife Dividend Yield plus and the Birla Sunlife Monthly Income Plan too have registered decent returns over a period of time and should be looked upon while taking an investment decision.

Hence we think that current situation warrants a focus on mutual funds with a specific theme / objective. in our view we think that the above mutual funds could be considered as options for investing.

Understanding Basic Investment Classifications: Debt and Equity

We often hear a number of terms or Jargons associated with investments. With Growing importance of investments, the awareness about these terms or Jargons is also catching up gradually. One would probably feel as an odd one out if he is unable to understand these commonly used terms. The purpose of this article is to reach out to those people who are interested in knowing the terms – Debt & Equity, what they mean and finally how are these two different from each other as an avenue of investment.

Even before we try to understand what these terms mean, it is important for us to understand that any investment made by any investor would fall into either Debt or Equity or a combination of both. With complex investment products overcrowding the investment zone, there have been many products which are neither purely equity nor purely debt. To add to the trouble, Insurance (which is not an investment but a risk hedging mechanism) also has been clubbed in various forms such as Market linked policies and ULIPS etc. This makes it difficult for a layman to get clarity on what their investment comprises of – Debt/ Equity/ Combination/ Insurance/ Commodity and the list is endless with innovation of newer ideas and products.

What is Debt?

Debt is a borrowing by a corporate or a government to meet the fund requirements for its different projects. When the government/ corporate needs funds, it will borrow from individuals/ Institutions. These individuals and institutions are the investors who lend their money to the governments/ corporate to earn an income in the form of interest from the money lent to the borrowers. As and when the time period for which money has been borrowed comes to an end, the principal amount is returned to the lender along with dues in the form of Interest. The interest may be payable at once at the maturity or as a regular payment throughout the time period for which investment has been made but here we are not concerned with those aspects. We stick to understanding of the concept of Debt. It is clear from this process, What is borrowing for the government/ Corporate is investment for the individual/ institutional lenders. So whenever we talk of debt being raised, it means that there are two entities namely lender and borrower and the company raising debt is the borrower and the investor is the lender. Debt investments are characterized by regular and fair income. Debt entails a lower level of risk as these are secured loans and the borrower has to pay off the debt before paying other liabilities. Thus there is a low level of risk for the lender (Investor)

What is Equity?

Equity refers to ownership. The words Share/ Stock/ Scrips/ Equity are interchangeably used quite often in the investment community. So you need not be confused on hearing these terms. These terms are more or less synonymous. Equity as an investment means ownership of a share or a number of shares of a company. When there is an individual or institution who invests money in the equity shares of a company, he actually buys out a part of the company equivalent to the proportion of shares held by him. He has a right to vote in the Annual General Meetings and has a share in the earnings of the business to the extent of shares held by him. This can be compared to a venture wherein a person has funds to be invested but does not actively manage the business. Rather he provides funds to a capable entrepreneur.

Comparison : Debt & Equity

Point of Comparison	Debt	Equity
Risk	Low	High
Return Volatility	Stable	Highly Volatile
Form of Income	Interest	Dividend
Investor’s Position	Lender to the firm	Owner of share of the firm

Real estate companies are unlikely to see a better fiscal 2012 despite announcement of asset sales and aggressive launches. CNBC-TV18’s Priyanka Ghosh unravels the tough road ahead for some of the realty companies.

After failing to meet guidance in fiscal 2011, real estate companies have lined up extensive asset sale programmes, aggressive launches to tide over the huge interest burden and debt repayment they are staring at. Realty major DLF was quick to revise its asset - sale target to Rs 10,000 crore after missing its debt reduction and sales guidance for FY 11.
 

the above is a news item appearing on money control, which is to a certain extent my opinion as well. based on this I think we should think twice before investing in any instrument related to real estate.