Many ways to invest in Gold - Which is best option?

In recent years gold has delivered exceptional returns. In a span of about 6 years — from 2006 to 2011 — gold has given an average return of an “incredible” 29% per annum. Therefore, it is but natural to be attracted towards gold. But let’s not forget history. In 1980, gold prices jumped from 300 $/oz to 600 $/oz due to Gulf crisis. But soon thereafter fell to about 450 $/oz in 1981 and then NEVER crossed the $450 mark until 2006. In other words, gold gave ZERO returns over a period of nearly 25 years. The question, therefore, arises — are we going to witness something similar once this worldwide financial crisis is over? Is this a bubble that will burst? The answer, unfortunately, will be known in the future only.
Therefore, caution is advised, if you intend to invest in gold — especially now when it is trading at historic levels of 1600-1800 $/oz. However, from the asset allocation point of view, some portion of one’s portfolio should be in gold. Accordingly, let us explore the different avenues available today to invest in gold.
a) Physical gold from jewellers/banksBuying physical gold from jewellers has been the traditional way since centuries. And within physical gold, jewellery has been the most common form of purchase. The balance, in relatively small quantities, has been the gold coins and bars.
Recently, banks too have started selling gold coins/bars.
b) Gold ETFsGold ETFs are mutual fund schemes that invest only in gold. Thus it is as good as holding gold; except that it is held electronically. Generally 1 unit of Gold ETF is roughly equivalent to 1 gram of gold and hence its price is also roughly equal to price of 1 gram of gold. You can buy a minimum of 1 unit of Gold ETF.
Recently, a fund-of-fund (FoF) type of scheme has been launched that invests in Gold ETFs. There is no difference per se, except that these funds do not require a demat account and also enable an investor to do systematic investment planning (SIP), which is not possible with ETFs.
c) Equity-based Gold FundsThese are mutual fund schemes that — instead of investing directly in gold — buy the equities of companies engaged in mining, extraction, processing and marketing of gold.
d) e-GoldLaunched recently by the National Spot Exchange, e-gold is also an electronic form of holding gold — except that herein you are directly the owner of gold whereas in Gold ETF the Asset Management Company is holding the gold (of course, on your behalf).
Unlike Gold ETF, e-Gold also offers the facility of physical delivery. However, given the additional costs involved viz. delivery charges, VAT and octroi, it may be better not to opt for physical delivery.
e) Gold FuturesThis is just a short term product useful mainly for ‘trading’ in gold and not ‘investing’ in gold. Hence, it is kept out of the purview of this article.
Which option to choose
Given this wide variety of options, it is but natural to ask — which amongst these is the best alternative to buy gold?
If you intend to buy gold as jewellery for personal use, then of course, there is no option but to go to a jeweller. However, it may be noted that heavy making charges involved in jewellery will eat into the returns, if you use it as an investment.
And if bars and coins are desired, jewellers would comparatively be a better option as (a) their charges are generally lower than banks and (b) as on date banks can only sell gold — they cannot buy it back.
But if gold is being bought for investment purposes, holding it electronically has many advantages over physical holding.
• Low cost : To buy Gold ETF or e-Gold, you have to pay only the brokerage charges, which are usually around 0.5%. Vis-à-vis this, you may have to shell out anything between 10 to 20% as premium and/or making charges if you buy physical gold.
Of course, for ETFs you will have to incur the fund management charges (about 0.5-1%) every year, whereas e-gold and gold kept at home with no insurance could mean zero holding cost.
• Transparent pricing: For ETFs and e-Gold, the rates are linked to the international prices. But price of physical gold invariably varies even across various jewellers and banks within the same city. Thus, there are chances of paying more than the international price if you are buying gold from your local jeweller or banker. Moreover, even at the time of selling, you may have to take a large cut, especially if you sell to a different jeweller.
• Purity: Gold ETF and e-Gold are of the highest purity and duly certified. But for jewellery, you have to trust your jeweller.
• Convenience: To buy Gold ETF or e-Gold, just a phone call to your broker or the click of the mouse is sufficient. You don’t have to personally visit the jeweller/bank.
• Security: No one can steal your Gold ETF/e-Gold units. Physical gold, however, carries high risk of theft.
• Capital Gains Tax: In case of physical gold, the long-term capital gains tax becomes applicable only when the holding period exceeds 3 years. This limit is just 1 year in case of Gold ETFs. However, e-Gold is treated as a long term asset only after 3 years.
• Wealth Tax: Physical gold attracts Wealth Tax but Gold ETF is exempt. However, E-Gold attracts Wealth Tax.
So there is a trade-off between Gold ETF and e-Gold. Though e-Gold works out cheaper than Gold ETF as there are no fund management charges (and, depending on your broker, possibly lower brokerage charges also), it is taxable under Wealth Tax and it becomes Long Term Capital Asset after 3 years.
Accordingly, whether Gold ETF is good for you or e-Gold, will be determined by your investment amount, time-frame and applicability of Wealth Tax.
As regards the other options:
 Fund-of-Fund schemes in Gold ETFs are slightly expensive as, apart from the annual fund management charges of the ETFs, you also have to bear the annual fund management charges of the FoF scheme. Therefore, if feasible, it is better to invest directly into Gold ETF rather than take the Fund-of-Fund route.
 Equity-based gold funds are riskier than gold ETFs/e-gold as there is an added element of equity risk in such funds. Moreover, there are no listed companies in India associated with gold. Hence, these funds have to invest in the international market. Therefore, these funds are essentially global funds; susceptible to currency-risk apart from equity-risk and gold-price risk. Given the substantially higher risk element, such funds ideally suit investors with high risk appetite. For the vast majority, however, buying Gold ETFs/e-Gold would be a more prudent option.
Concluding, therefore, Gold ETF and e-Gold would be the most preferred options amongst the various alternatives.

Manage your home loan in smart ways!

Moving into one's own home is a joy, which is to be felt not explained. It is utopia what with the poojas, house warming functions, searching for just the right furniture and fittings, praises you get for having taken care of the finer parts in construction and decorating the house and the pride in having acquired a physical symbol of success.

After the festivities are over, and with the dawn of a new month, a new realization comes home. For the fortunate few, it is the reminder to fund your bank account, as the loan EMI is due after a week. For others the money simply flew out of the bank account.

It is time for us to act like the fund manager of a mutual fund or investment fund. Taking informed decisions to manage the asset that we call home and the liability that we call housing loan. By being prudent, you can get high "returns" in the form of saving on interest outflow.

Fund Management When Carrying a Home Loan

As a fund manager of the house, one has to find ways to maximize the benefits of the cash flows. Make a list of all the loans and savings/investments that you have made. Do you find places where the savings/investment is giving lesser returns than the loan rates? This can typically be seen with your endowment insurance plans, your EPF and PPF, the postal deposits, sometimes-even ULIPs. Why should you be invested in something when you are paying higher interest to somebody else? It is better to close all or most of these lesser returns savings/investments and divert the funds to close the home loan.

Care should however be taken to replace an endowment insurance plan with a term plan of higher cover. Your employer and your EPF officer will allow withdrawal of funds from the EPF account for buying and closing the loan of a house. The PPF is not so flexible with letting go of your money. ULIPs and the postal deposits can be closed only after the stipulated 3 years of lock-in.

Ways to repay your debt quickly:

There are ways to come out of the EMIs and make your loan tenure shorter:

1. Partial pre-payment

2. Switching to a lower rate

3. Increasing the EMI

Now let us look at the options in more detail. The best part is that, the options do not in any way add to your existing budget.

Partial Pre-Payment

This is the easiest way to close a housing loan faster. The method is to make use of any one-time income like a bonus, salary arrears, gifts from friends/relatives, any wind fall gains from shares, property sold, deposits closed, tax saving investments maturing, closure of savings that are giving you lesser returns than the housing loan, etc to partially close the housing loan.

The effect is that the one-time payments help to reduce the principal balance in the loan. And when the EMIs continue, they have lesser of the principal to cover. So the same EMIs need a lesser time to close the loan. More earlier and more frequently the partial pre-payments happen the faster the loans close.

Banks generally allow partial pre-payment starting from Rs.10,000/-. There are no charges for partial pre-payment of housing loans.

Switching To a Lower Rate

The interest rates current are in a rising trend. There are times when the interest rates start going down too. Based on the interest rate reset period, different banks will reduce their rates at different times. If the reset interest band of your lender is a wider band, you may be at a higher interest rate for a long time after other banks have started to reduce their rates.

Switching to a lower interest rate will shave off a few years from your housing loan. Care however has to be taken about not jumping too many times or with low interest rate differences. This is because there is a charge for switching loans, i.e. prepayment penalty, which the RBI has been stressing, should be removed from the system. While some banks have already done away with it, some still charge if you do not pay from your own sources. However, it could just be a matter of time till it is totally removed from the system easing the cost burden for the loan borrower further!

Do remember that property verification and other legal paperwork will have to be done afresh in the case of a loan transfer. Also, for a loan transfer to be effective you should have a clear track of having cleared all the EMIs on time, every time.

Increasing the EMI

This is another option to close the loan faster. If you can spare a portion of an increment to increase the EMI, considerable saving could be made. For example a Rs.30,00,000/- loan for 20 years will need an EMI of Rs.28,950/-. If you can spare an additional Rs.2,300/- per month, the loan can be closed in 15 years itself.

The EMI can also be increased by making use of money that was going into an endowment insurance plan or a recurring deposit in a post office.

Increasing the EMI can be done at any point during the tenure of the loan. There are generally no charges for increasing the EMI.

Summary

Only after closing the home loan does one really become the owner of the house. Closing the loan as soon as possible not only relieves the mental strain of carrying a debt but also releases more money into the family budget.

Are you selecting your mutual fund advisor wisely?

Information on anything, yes almost anything is available at our fingertips. We investors are blessed to witness this jet age of information technology. And interestingly, to add further icing to the cake, all this information is available absolutely free.

In the domain of providing financial services and advisory too, the situation is no different. There are host of website hogging to provide information.

While many of you may consider that as a valuable service, have you ever wondered whether that's helping you to add wisdom or it's just pure "information overload"?

In our opinion it is vital that you investors' recognise that wisdom stands at the pinnacle, whereas information is positioned much below (see chart above). And for you to make wise decisions what matters is wisdom.

While investing all of you have relevant questions to ask such as - Where to invest? How much to invest? What should be the investment horizon? etc.; but in order to take a wise investment decision it is vital to assess which resources you tap. This assessment is relevant because for you to take wise investment decisions, you need to tap that resource which provides wisdom rather than just pure information overload, which still keeps you hanging on what to do with your investments.

Today with several investment instruments available, the task of doing prudent investment planning is furthermore difficult, because you are surrounded with host of information around several investment instruments such as stocks, mutual funds, bank FDs, NCDs, corporate bonds, Public Provident Funds (PPF), National Savings Certificate (NSC), etc., but at the end of it you are still wondering whether you have made the right investment decision. Why? - Because there are several people who have been influencing your investment decision, right from your family members, friends, websites, mutual fund distributors, agents, brokers etc - and mind you everyone has their own view, which often adds to confusion.

In order for you to remove this anarchy caused by "information overload", what is required is capturing the pinnacle of wisdom through an investment advisor who provides independent and unbiased financial advice, keeping his vested interests (of commissions) at bay. Never mind if he charges you a separate advisory fee, as long as he can help you capture that pinnacle of wisdom which would assist you to do prudent investment planning.

We are sure that many of you investors in the past have had horrendous experiences with your investments. Let discuss of mutual funds in detail. In the year 2006 and 2007 when the equity markets were on an upswing, there were several New Fund Offers (NFOs) lined up by various mutual fund houses. Several cities were painted with attractive ad campaigns enticing you to invest. Mutual fund distributors / agents / relationship managers too tempted many of you investors to invest in equity mutual funds, giving a favourable picture. But suddenly all these schemes promoted in great gusto lost their charm during the downturn of the equity markets of 2008 and eroded wealth for you investors in a manner that you almost lost confidence of investing even in those mutual funds which have a consistent track record, and those which follow strong investment processes and systems.

Please recognise that with 4000 schemes floating around in the market the task of selecting winning mutual funds is rather complex not only for you, but even your mutual fund distributor / agent / relationship managers. And mind you the exercise of selecting winning mutual funds is much more than just assessing past performance. It is also only exhaustive research which can help you in selecting winning mutual funds -create wealth for you, and not the excitement created by some mutual fund distributors / agents / relationship managers or even the business channels.

While all the mutual fund distributors' / agents / relationship managers claim that they subscribe to research habits, you need to ensure that they consider the following research aspects, and provide independent and an unbiased advice.

• Performance:The past performance of a mutual fund scheme is important to broadly assess which mutual fund schemes should form a part of your portfolio. But mind you it is not "the most" important factor to select the right mutual fund schemes for your portfolio, because we believe that past performance is not everything, and it may or may not be sustained in the future.
  
  
While analysing past performance what's needed is assessment of "performance across market cycles" which can help you recognise how a fund has performed during times of equity market turbulence as well as a boom. Moreover, you need to consider the following points while selecting winning mutual funds:


1. Peer comparison: A fund analysed in isolation does not indicate anything. Hence, its performance must be compared to its benchmark index and peer group in order to construe its supremacy in the category. Again, one must be careful while selecting the peers for comparison. For instance, it doesn't make sense comparing the performance of a mid-cap fund to that of a large-cap.
   
   Remember: Don't compare apples with oranges.
   
   
2. Time period: The key to wealth creation is long term investing. Thus while selecting mutual funds (especially the equity oriented ones) for your portfolio; you need to judge the long-term performance. Besides, it is equally important to evaluate how a fund has performed over different market cycles (especially during the downturn). During a rally it is easy for a fund to deliver above-average returns; but the true measure of its performance is when it posts higher returns than its benchmark and peers during the downturn.
   
   Remember: Choose a fund with consistent and robust track record across time frames.
   
   
3. Returns: Returns are obviously an important parameter to evaluate a fund's performance. But wait a second; it is not the only parameter which needs to be looked upon as the deciding factor. Many investors invest in mutual funds just because the fund has delivered higher returns. But it is noteworthy that such a method of selecting mutual funds may be futile as it may erode wealth rather than create it in the long term. In addition to the returns, you need to look into the volatility, which explain how much risk the fund has taken to clock higher returns.
   
   
4. Risk: The risk is normally measured by the Standard Deviation (SD) of the fund. SD signifies the degree of risk the fund has exposed its investors to. Studying this parameter helps in matching the risk profile of the fund with that of yours. For example, if two funds have delivered similar returns, then it would be prudent to invest in a fund which has taken less risk as denoted by its low SD.
   
   
5. Risk-adjusted returns: This parameter is normally measured by the Sharpe Ratio (SR). It signifies how much return a fund has delivered vis-à-vis the risk taken. Higher the Sharpe Ratio better is the fund's performance. Thus, it makes sense in choosing a fund which has a higher SR over the one which has a lower SR. In fact, this ratio enables you in assessing whether the high returns of a fund are attributed to good investment decisions, or to higher risk.
   
   
6. Portfolio Concentration: Funds which are skewed or concentrated towards certain sectors or stocks tend to be very risky or volatile. This is because if the stock bets or sectoral bets taken by the fund manager go wrong, it would harm the fund's overall performance. Hence, ideally while selecting mutual funds for your portfolio you should look at funds which have fairly a diversified portfolio, wherein top-10 stocks do not exceed more than 40% of its total assets. Also it is vital that you do not have a high exposure to particular fund house while selecting various types of mutual funds.
   
   Remember: Make sure your fund does not put all its eggs in one basket.
   
   
7. Portfolio Turnover: The portfolio turnover indicates how frequently stocks are bought and sold by the fund manager of a mutual fund. A fund manager who aggressively churns his portfolio in a move to deliver high returns simply engages in momentum playing rather than investing, which may off-course be risky, but may also balloon the expense ratio of the fund.
   
   Remember: Prefer a fund with low portfolio turnover ratio as this reduces the risk for you, and also curtails the expense ratio of the fund, as the fund manager engages in Investing and not trading.


• Fund Management:The performance of fund largely depends on the fund manager and his team. Hence it is very important the fund management team has considerable experience in steering the fund in times of extreme market volatility. Also, you as investors' you should avoid funds that owe their performance to a "star fund manager". Simply because the fund manager present today, might quit tomorrow thus jeopardising your choice. Therefore, the focus should be on the fund houses that are strong in their investment systems and processes.
  
  Remember: Fund houses should be process-driven and not 'star' fund-manager driven.

Costs: One also needs to assess the cost incurred by mutual fund scheme. If two funds are similar in most contexts, it might not be worth buying the one with a high cost if it is only marginally better than the other. The two main costs which are incurred during investments in mutual funds are:

1. Expense Ratio: Annual expenses involved in running the mutual fund include administrative costs, management salary, overheads etc. Expense Ratio is the percentage of assets that go towards these expenses. Every time the fund manager churns his portfolio, he pays a brokerage fee, which is ultimately borne by you in the form of an Expense Ratio.
   
   Remember: Higher churning not only leads to higher risk, but also higher cost to you investors.
   
   
2. Exit load: After SEBI's ban on entry loads, you investors now have only exit loads to worry about. An exit load is charged to you investors only when you sell or switch units of a mutual fund within a particular tenure; most funds charge if the units are sold or switched out within a year from date of purchase. As exit load is a fraction of the NAV, it eats into your investment value.
   
   Remember: Invest in a fund with a low expense ratio and stay invested in it for a longer duration.

Also apart from the above research aspects / parameters, you need to evaluate the following points while selecting a prudent, independent and unbiased mutual fund advisor:

• Attitudes/Rationalisation: Yes, the attitude and the rationalisations of the agent / distributor / relationship managers do play a very vital role, which in a way exhibits what investment products he advises. So, if he thinks of his objective of being richer, he may sell you inappropriate products not suiting your investment objectives or financial goals, and earn a handsome sum through the commissions. Hence it is important that you understand their attitude or philosophy, by having numerous meetings with them before signing a cheque for your investments.
  
  
• Advisors qualification: It is imperative to understand your mutual fund advisors qualifications. The Association of Mutual Funds in India (AMFI) makes it mandatory for individuals engaging into service of mutual fund advisory to have an advisors certification issued by the National Institute of Securities Management (NISM). But merely relying on the certification too isn't enough as one needs to delve a little deeper into the philosophy (attitude and rationalisation) and research process which he adopts while advising clients. Moreover, you need to ensure that the advisor is not an individual who peddles investments as "on the side" activity. Remember, acting on the advice offered by a mutual fund advisor who doesn't hold the requisite knowledge, could spell disaster for your mutual fund portfolio.
  
  
• Infrastructure and value add services: Apart from assessing his attitude and qualifications you also need to judge whether he has the right infrastructure set up, in order for you to receive a prudent advise on a continuous basis. Remember entering an investment is merely the starting point; your investments need to be monitored and tracked on a regular basis. Hence, as value addition your mutual fund advisor should ideally provide you various tools and calculators for online tracking of your investments. Moreover, he should persistently advise you on your portfolio in accordance to the change in markets conditions and financial goals.
  
  
• After sales support: As mentioned earlier that entering into an investment is just the starting point, you also need to judge whether prudent and reliable after sales support can be provided by your mutual fund advisor. Liquidity is often a driving factor for mutual fund for many of you investors, and hence the advisor should be able to service redemptions, transfers etc. An advisor who is easily accessible would generally make sense.
  
  
• Track record of the advice: Well, if he can offer you this you would be able to gauge quality of the advice. You can cross verify the data provided by him with some of his clients as reference check. This exercise may not only help you understand his performance track record, but also help you recognise whether does he (advisor) provide prompt and reliable after sales service, or is he merely a bluff master.

So if we recognise the facets to be looked into while selecting a prudent, independent and unbiased mutual fund advisor; you’ll understand that selecting a good mutual fund advisor is quite similar to selecting a good wife in many ways – who can stand by you through health and sickness.

By PersonalFN: PersonalFN has been providing independent and unbiased research on Mutual funds, Insurance, Fixed Income instruments in India and Gold since 1999. It provides premium mutual fund research and financial planning solutions to individual.

Senorita

Senorita - Zindagi Na Milegi Dobara Lyrics

Vocal(s) : Farhan Akhtar, Hrithik Roshan & Abhay Deol
Spanish Vocal : Maria Del Mar Fernandez
Song : Senorita
Movie : Zindagi Na Milegi Dobara

-----------------------------------------------------------------------
quien eres tu? (Who are you?)
donde has astado? (where have you been?)
he removido cielo y tierra y no te encontre
(i've moved the heaven and the earth but i coudn't find you

Y llegas hoy, (but you arrive today,)
tan de repente, (so suddenly,)
y das sentido a toda mi vida con tu querer
(and you give meaning to my whole life with your love)


na main samjha...na main jaana...jo bhi tum ne mujhse kaha hai Senorita
magar phir bhi...na jaane kyun...mujhe sunke accha laga hai Senorita

no desvies la mirada (don't look away)
quedate cerca de mi (stay close to me)

mujhko baahon mein tum ghero, samjheen na Senorita

chaahat ke do pal bhi mil paayein
duniya mein yeh bhi kam hai kya
do pal ko to aao kho jaayein
bhoolein hum hota ghum hai kya
Senorita, suno suno, Senorita kehte hain hum kya


jamas podre (i will never)
interpretar (understand)
el sentido de las palabras que me dedicas
(the meaning of the words you dedicate to me)

pero el calor (but the warmth)
de tu mirar (of your gaze)
me hace sentir como la mas bella senorita
(makes me like the most beautiful senorita

nigahon ne nigahon se kahi armaanon ki daastaan hai Senorita
ke chaahat ki, mohabbat ki saari duniya mein ek hi zubaan hai Senorita
mujhse ab nazar na phero, aao paas tum mere
mujhko baahon mein tum ghero, samjheen na Senorita

chaahat ke do pal bhi mil paayein
duniya mein yeh bhi kam hai kya
do pal ko to aao kho jaayein
bhoolein hum hota ghum hai kya
Senorita, suno suno, Senorita kehte hain hum kya


jo bhi pal beeta hey Senorita
har pal tumne hai dil jeeta bas itni si to baat hai

no desvies la mirada (don't look away)
quedate cerca de mi (stay close to me)

mujhko baahon mein tum ghero, samjheen na Senorita

chaahat ke do pal bhi mil paayein
duniya mein yeh bhi kam hai kya
do pal ko to aao kho jaayein
bhoolein hum hota ghum hai kya

chaahat ke do pal bhi mil paayein
duniya mein yeh bhi kam hai kya
do pal ko to aao kho jaayein
bhoolein hum hota ghum hai kya
------------------------------------------------------------------------

Lyrics in "( )" is the translation of spanish lyric of this song

'SIP'ping into the right mutual funds

Well, to start with this piece of education, please keep in mind that there are no special or dedicated mutual fund schemes for Systematic Investment Plans (SIP). SIP as you know is just a mode of investing in mutual funds to provide you the benefits of the rupee cost averaging and the power of compounding for your hard earned savings.

But understand one thing; selecting an appropriate mutual fund scheme for your SIPs is very crucial. A lot of time and effort is required in selecting the right mutual fund scheme based on various parameters (quantitative and qualitative). Just going by the “Star Fund Ratings” won’t fetch you consistent performing mutual funds, as they take into account only few quantitative parameters (such as returns, risk, average AUM (Assets Under Management) etc., thereby ignoring the qualitative parameters.

Also, given the fact there are host of mutual fund schemes available in the markets, you just cannot ignore the skill of selecting the wealth creating mutual fund schemes. Hence, you must take into account the following points while ‘SIP’ping into mutual funds in order for you to have the right ones in your portfolio:

• Performance
  
  The past performance of a fund is important in analysing a mutual fund scheme. But just going by the past performance would not be the right way to go about selecting a mutual fund scheme.
  
  Along with the past performance you should also check out the performance of the fund across different market cycles so as to find out the fund’s ability to clock returns across market conditions. And, if the fund has a well-established track record, the likelihood of it performing well in the future is higher than a fund which has not performed well.
  
  However, in order to holistically analyse the term performance you must consider the following aspects carefully:
  
  
  1. Comparison: A fund’s performance in isolation does not indicate anything. Hence, it is crucial to compare the fund with its benchmark index and its peers, so as to construe a meaningful conclusion. Again, one must be careful while selecting the peers for comparison. For instance, it doesn’t make sense comparing the performance of a mid-cap fund to that of a large-cap.
     
     Remember: Don’t compare apples with oranges.
     
     
  2. Time period: It’s very important that you have a long-term horizon if you are looking at investing in equity oriented mutual funds. So, it becomes important for you to evaluate the long term performance of the funds. However this does not imply that the short term performance should be ignored. Besides, it is equally important to evaluate how a fund has performed over different market cycles (especially during the downturn). During a rally it is easy for a fund to deliver above-average returns; but the true measure of its performance is when it posts higher returns than its benchmark and peers during the downturn.
     
     Remember: Choose a fund like you choose a spouse – one that will stand by you in sickness and in health.
     
     
  3. Returns: Returns are obviously one of the important parameters that one must look at while evaluating a fund. But remember, although it is one of the most important, it is not the only parameter. Many of us simply invest in a mutual fund because it has given higher returns. In our opinion, such an approach for making investments is incomplete and incorrect. In addition to the returns, one should also look at the risk parameters, which explain how much risk the fund has taken to clock the returns.
     
     
  4. Risk: The term risk simply refers to the possibility of the outcome being different than the expected one. When the outcome is different from the one expected, it is referred to as a deviation. Risk in a mutual fund scheme is measured through the statistical measure called “Standard Deviation” (SD or STDEV).
     
     It is very vital to evaluate a fund on risk parameter because it will help to check whether the fund’s risk profile is in line with your risk profile or not (is it suiting your willingness to take risk). For example, if two funds have delivered similar returns, then by sheer prudence, you should invest in the fund which has taken less risk i.e. the fund which has a lower SD.
     
     
  5. Risk-adjusted return: This parameter measures the returns generated by the fund for the risk taken, and is evaluated through a statistical measure called Sharpe Ratio (SR). It signifies how much return a fund has delivered vis-à-vis the risk taken. Higher the SR better is the fund’s performance. For evaluating mutual funds, it is important to take this parameter, because it reveals whether a fund is justifying the risk taken.
     
     
  6. Portfolio Concentration: This parameter reveals the over-exposure of a mutual fund to a particular company or a sector. By over-exposing a fund to a specific stock or a sector, the fortune of the fund will be closely linked to the stock and / or sectoral bets taken by the fund.
     
     Funds that have a high concentration in particular stocks or sectors tend to be very risky and volatile. Hence, one should invest in those funds where the top 10 stocks do not exceed 50% of the fund’s assets.
     
     
  7. Portfolio turnover: This parameter measures the frequency with which stocks are bought and sold. Higher the turnover rate, higher is the volatility. It is noteworthy that the fund might not be able to compensate the investors adequately for the higher risk taken. So, by judging this, you can come to know how frequently the fund manager changes his stock bets.
     
     You should ideally invest in a fund, with a lower portfolio turnover ratio, as this exposes you to lower volatility.
     
     
• Fund Management
  
  This is one of the qualitative parameter, while selecting funds for wealth creation. The performance of a mutual fund is largely linked to the fund manager and his team. He’s the guy who’s managing your money invested in mutual funds, so knowing his experience in fund management will be valuable. It’s vital that the team managing your fund should have considerable experience in the field of fund management and equity research, in order to deal with market ups and downs.
  
  You should not go by “star” fund manager. Simply because the fund manager who is employed with an AMC today, might quit tomorrow; and hence the fund will be unable to deliver its “star” performance without its “star” fund manager. Hence, your focus should be on the fund houses that are strong in their systems and processes.
  
  Remember: Fund houses should be process-driven and not “star” fund-manager driven.
  
  
  1. No. of schemes to fund manager ratio: Many mutual fund houses frequently launch too many similar products, so that they could gather more Assets Under Management (AUM). This eventually leads to the fund manger being over-burdened in managing these multiple mutual fund schemes, which can result in lower efficiency of the fund manager on focusing on the need of his investors.
     
     Hence, it becomes imperative to select a mutual fund house where, the fund manager is not over-burdened; otherwise this might just take a toll on the fund’s performance.
  
  
  
• Costs
  
  If two funds are similar in most contexts, it might not be worth buying the high cost fund if it is only marginally better than the other. The two main costs incurred are:
  
  
  1. Expense Ratio: Annual expenses involved in running a mutual fund include administrative costs, management salary, overheads etc. Expense Ratio is the percentage of assets that go towards these expenses. Every time the fund manager churns his portfolio, he pays a brokerage fee, which is ultimately borne by you as investors in the form of an Expense Ratio.
     
     Hence, a higher churning not only leads to higher risk, but also higher cost to the investor.
     
     
  2. Exit Load: Well, that’s the price which you pay while exiting from your funds, within a particular tenure; most funds charge if the units are sold within a year from date of purchase. As exit load is a fraction of the NAV, it eats into your investment value. Hence, one should invest in a fund with a low expense ratio and stay invested in it for a longer duration.

So, the next time you plan to invest in a mutual fund scheme, be smart and adopt the SIP route for investments but taking into consideration the aforementioned points. Always remember educating yourself pays a lot in the long term.

10 Things I Hate About You

I hate the way you talk to me
and the way you cut your hair.
I hate the way you drive my car;
I hate it when you stare.
I hate your big dumb combat boots
and the way you read my mind.
I hate you so much it makes me sick.
It even makes me rhyme.

I hate it -- I hate the way you're always right;
I hate it when you lie.
I hate it when you make me laugh;
even worse when you make me cry.

I hate it when you're not around
and the fact that you didn't call.

But mostly I hate the way I don't hate you --

not even close, not even a little bit, not even at all.

What every investor must understand about risk

Many a wise person has shared their wisdom to the effect that "if you want to achieve lofty goals, you have to take some risk." Usually, the goal is compelling and rewarding enough for us to willingly take on the risk. However, we think of ways of mitigating the risk through some kind of damage control so that we don't end up suffering if the risks were to materialize.

For instance, lets say our team is batting second in a one-day cricket match where the opponents have set us a very demanding target of scoring 400 runs in our allotted overs. If our team just scores singles and doubles, it might be safe, but we will fall dramatically short of achieving our target. By taking no risk, we might conserve wickets, but we are almost sure to lose. To achieve this lofty goal of scoring 400 runs, our team will have to take risks. We will have to swing for the fences. Only then can we have some hope of reaching our target. In summary, scoring 400 runs (or earning a high return) while taking no risks is going to be almost impossible.

The same is true for investing. Earning a high return but while taking on very low risk is not possible. It's a balance that even world-class investors struggle to achieve. Investment history has shown that you just cannot have it both ways - you generally get high returns only when you take higher than usual risk.

Take calculated risks - reward must be compelling

Exposing oneself to risk is not something one should do blindly. It must be done in the context of what the expected pay-off might be. If the reward is compelling enough, then it probably makes sense to take on the risk. Otherwise, it is not worth it.

Let's take an example from everyday life. Wearing a seat-belt while driving is compulsory. Yet, many of us choose to drive without fastening our seatbelt. This exposes us to numerous risks. However, taking on these kind of risks has very little upside or payoff, but clearly disastrous consequences if the worst were to happen. This kind of a risk, which has no upside, is not worth taking.

Contrast this with the batsman chasing 400 runs who tries to hit every other ball to the boundary, with a degree of power and placement. Sure, there is a risk of getting caught but this risk is probably one that is worth taking because the payoff of scoring a six and chasing down the target is rewarding enough.

The big takeaway here for all of us here is that risks should only be taken when there is an upside and the expected payoff is rewarding enough. This is a lesson we must remember when investing our money.

Risk across the investment spectrum

Let's take a look at common investment options and their risk reward trade-offs. The following will help illustrate how we as investors expect higher returns as the risk associated with the investment increases.

Let's say I have Rs. 10,000 to invest into a fixed income instrument, an instrument that will give me a fixed return that is pre-set at the time of making the investment. I am considering 3 options: investing in a fixed income security issued by the government or a government backed entity, investing in an FD issued by a bank, or investing in an FD issued by a company.

The government security will pay the least amount of return (the reward) because it is least risky. It is backed by the government, and all things being equal the government ought to be a safe party to loan money to.

The bank FD will pay a slightly higher return because the government guarantees only part of the deposit so there is the risk of the bank failing, even if it is a very small risk. However, the company FD will pay the highest return because the risk perceived in lending to the company is the highest, so we expect a slightly higher reward for it.

What I am trying to demonstrate is that as the riskiness of the investment increases, so does our expectation of return. As a corollary, if we set out to earn a high return, please recognize that this will come at the cost of taking on a higher risk.

As one moves from holding cash in a bank savings account that earns only 3.5% return towards equities that are expected to earn up to 12% in the long-term, the riskiness of these different types of investments increases.

No pain, no gain

For those who frequently go to gyms, the idiom "no pain, no gain" is probably a familiar one. In the investment world as well, if we want gains, it's going to be possible only when one takes some risks. Almost every investment option involves taking on some risks. Taking risks, albeit in a calculated manner, is something that is advisable, depending upon one's personal situation. Just like not every one has the capacity to lift weights of up to 40 kilos in the gym, not every one has the capacity to take on high risks. You must take on risks according to what your risk appetite allows you to do, and what you feel you comfortable about.

So next time you are looking to invest money, do keep in mind that there will be "no gain without pain". Be realistic and don't expect to get high returns unless you take on some risk.