Author: admin

Interview with Vice-chairman & managing director, Bajaj Capital Investors� preferences have undergone a change after the global financial crisis and they now prefer debt to equity, says Bajaj Capital�s vice-chairman and managing director, Rajiv Bajaj. In an interview with Vrishti Beniwal, he says real estate mutual funds are going to give a boost to investments, and gold isn�t a safeguard against inflation in the long run. Edited excerpts:

You have completed 50 years this month. How do you plan to expand your business from here?

A lot of work needs to be done in converting a nation of savers into a nation of investors. Only three to four per cent of retail household money is in capital markets today. Our vision is to make crorepatis of one crore people, the crore being a symbol of wealth in India. Our core will remain the same but the method will be different. A substantial number of investors now prefer to invest online. So, our delivery model will be online and mobile application-based. We are keenly awaiting the launch of real estate mutual funds.

That would be a big game changer for financial markets in India. In the past couple of years, we have introduced real estate as a mainstream asset class for households. Then comes geographic reach. Today, 85 per cent of MF assets are in the top 15 cities but we are very confident the future growth is going to come from beyond these 15 and we are going to ramp up our presence in those places. We don�t see ourselves becoming a manufacturer of products but we could potentially be assembling products. Through a single cheque, one will be able to invest in different asset classes and schemes.

What returns have you offered?

Depending upon the financial goals of the client, our experience has been that the most conservative ones are happy with one per cent over bank deposits and the most aggressive clients get three to four per cent over bank deposits over a longer period. If you are looking to double the money in three years, we are not the player.

How has the investment mix changed in recent years?

Which asset classes are now favoured more by investors? Investors have realised they�d probably gone overboard on risk in the previous decade. They got over-exposed to equities. In the past five to six years, equity market returns have been lower than bank deposits. So, it�s an important lesson taken by households, that the core of the portfolio has to be debt. People have shifted most of the incremental money into corporate fixed deposits, bonds, debt funds. This trend is here to stay.

Are investors turning towards small savings because of this conservative approach?

It�s a two-pronged approach. One is that markets have not been kind because of the global financial meltdown, denting the confidence of investors. I would also like to confess that business models of financial services companies have been very transactional. They have not looked to build relationships with clients. We have often heard about mis-selling. To bring back growth, the markets have to start performing. It would be fair to say we are coming to the end of a down-cycle and are at the cusp of the next up-cycle � it should be six months, one year or two years from now. Second, financial services providers have to become more consumer-centric.

How do you look at gold as an asset class?

The demand is so high and it gave a lot of pain to the government, trying to control the current account deficit. In the past 10 years, gold has given equity-type returns. People have formed a misnomer that gold is a growth asset class but it is not. There are only three growth asset classes � real estate, equity markets and, in a very limited way, art. Gold is, at best, a hedge against inflation. If you see a 50-year trend of gold returns, it would not be higher than inflation. Do you recommend gold as an asset class to your clients? We do like to hedge our clients� portfolio against inflation. Depending upon their preference, we recommend them to take five to 10 per cent gold exposure.

How is art picking up as an investment?

Art is a mood investment. When you are feeling buoyant, optimistic, art picks up. Now, optimism is coming back. The new National Pension System has not picked up well. What went wrong? The remuneration has been too low. It will pick up slowly when more fee-based advisors come in the market. Instead of commissions, people will shift to a fee-based model. We are on the verge of launching a fee-based advisory. Also, there has to be a substantial tax benefit for a household to commit for long-term financial security.

>Don’t rush to buy or sell aggressively. At best, exit stocks and mutual funds performing badly if there are profits

Retail investors would be safer if they don�t get overexcited by the surge in the BSE, or Sensex last week. Not that it is easy to ignore a 800-point a-week spike in the benchmark index. The reason for the euphoria is understandable. For almost six years, many investors have been sitting on stocks � many times, even blue-chips � that have gone nowhere. As a result, they have sold stocks and mutual funds at every stage when the market has shown some promise. Is this rally any different? Says Nilesh Shah, managing director and chief executive officer, Axis Direct: �Retail investors should be careful about such rallies as there is an event (election) risk. But there will also be an opportunity to buy technology and pharma stocks cheaper, in which rotational movement is happening.�

Market experts see an opportunity to buy technology and pharma stocks because after a long time there has been some correction in these stocks. Stocks like Dr Reddy�s, Sun Pharma, Wipro and TCS have fallen five to eight per cent in the past week. They expect some more correction in these stocks. The good news, however, is somewhere else. This rally is also highlighted by rise in infrastructure, real estate and public sector banking that have been under pressure for quite some time. There is an opportunity for investors to exit stocks and mutual funds which have not been doing well. �They need not exit immediately but in the next two months, the beaten-down sectors are likely to perform better and give opportunities to investors to exit,� says a CEO of a brokerage house.

In the past week, the category average returns of infrastructure funds, suffering for the past few years, was up 6.4 per cent � the second-highest gainer. UTI Infrastructure Direct returned the best at 8.5 per cent. The category average returns of banking funds were the best at 9.33 per cent. A word of caution: Trying to deploy any fresh money aggressively or pick any stock whose fortunes seem to have turned can hurt. So, if you think the fortunes of the infrastructure sector or public sector banks have changed suddenly and want to join the party, your portfolio could suffer.

As Finance Minister P Chidambaram said last week, the non-performing assets of public sector banks are going to be higher in 2013-14 than last year. And, till a new government comes, the infrastructure sector is unlikely to get a big push despite clearances. Says Hemant Rustagi, CEO, WiseInvest: �The idea is not to get over-enthusiastic and see this as a great opportunity by putting fresh money.

In fact, there is no rush to even exit aggressively.� At best, if you are sitting on cash, deploy 5-10 per cent for short-term play. But remember that there will be a tax of 15 per cent on short-term capital gains. It�s time to play safe.

With Sebi making the transition to dematerialised form compulsory, it isn�t going to be easy. Start now to avoid problems

“Dematerialising physical shares can be a horrible experience. It can take anywhere between three months to three years,” warns Kartik Jhaveri, director, Transcend India. He should know. He is presently handling almost 15 such cases. Why should it take so long? “Companies and registrars keep on rejecting documents. The most common reason is signature mismatch. How can someone have the same signature in his 30s and 70s? Companies refuse to acknowledge that,” he says.

Given such procedural delays, many investors would not like the market regulator, Securities and Exchange Board of India�s (Sebi) latest decision to make it mandatory for everyone to own shares in the non-physical format. While the concept was introduced in 1996, it has taken the market regulator almost 20 years to enforce it and, more important, set a deadline of this year-end for dematting the shares.

According to reports, the estimate for physical shares is Rs 2.3 lakh crore. Most of it would be held by retail investors, especially due to the emotional quotient and procedural roadblocks.

Sentiment

For instance, a financial planner says: “One of my clients has accumulated 200,000 shares of Hindustan Unilever over the years.” He refuses to part with these because the first tranche of 200 shares were bought from his first salary. Forget selling; he doesn�t want to even demat these. He has rented two lockers with a public sector bank and wrapped the shares in a red cloth (traditionally important documents, books of accounts and physical shares used to be wrapped in a red cloth for auspicious reasons). His sons, along with the financial planner, are afraid the physical shares might get destroyed. However, he refuses to budge.

Procedural blocks

Sentiments apart, there are many others who genuinely want to do it but face procedural delays. Jhaveri gives an example of a person who has inherited physical shares worth Rs 5 lakh. However, these were passed on to him by his father, who inherited these from his father. Both father and grandfather are no more. Now, the company is seeking a document which declares the investor�s dead father had the letter of administration. Only then can it be proved that the father could transfer the shares in his son�s name. The question is, how does one get this letter?

THE CONVERSION PROCESS

* Submit the demat request form to a depository participant (DP) with signatures of all the shareholders
* Give an undertaking saying that demat is not a guarantee that the share can be traded, as it is dependent on liquidity

*To prevent misuse, DP will stamp the share certificates saying they cannot be sold

* The shares will be sent to the Registrar and Transfer Agent for verification of signature and shareholder�s name

* Sometimes, an affidavit may be required to provide details of name change

*  If the name of the company has changed, yet listed, a trail has to be established

* During a lock-in period like book closure, the demat process will happen only later

* Time: Between 30 and 60 days to convert physical share certificates into demat form if there are no complications

* The fees are Rs 11 per transaction

* In case of fully paid-up, demat is easier. If partly paid-up, only a percentage of the share can be demated

* If shares are stolen or misplaced, approach the company registrar directly. You will have to file a police complaint, place advertisements in at least two newspapers

G D Binani, a senior citizen from Bikaner, lost some share certificates while travelling to Mumbai. While some of the companies issued him duplicate shares on his giving an indemnity bond, the others insisted he file a police complaint and place advertisements in newspapers. It took time before he got the duplicate shares.

Binani has started converting his physical shares to demat. On why he continues to hold some in the physical format, he says: “These are shares I have purchased a long time ago and will sell only in case of an emergency. The dividends from these pay for my expenses. If I convert them, I will be tempted to sell when the markets go up. That is why I prefer to hold these in physical form.” Given the procedural delays, many investors seek the help of brokers who specialise in this business. Says Jayant Pai, financial planner: “I get letters from brokers regularly asking me to sell them physical shares at a discount.” But, these brokers might not buy shares of all companies. They prefer only the top companies. And, the discount can be hefty, even 25-30 per cent. Sometimes, such brokers can be fronting for companies which want to buy their own shares. “In such circumstances, the deal becomes easier for the seller because the discount might not be substantial,” adds Pai.

Pai dematted his first tranche of shares in 1999. He says that the process is not supposed to be too complicated. One has to open a demat account, fill the request form with all the details and send it to the company. “However, some companies say the letter should be sent to the registrar and sometimes the registrar says it should be sent to the company. This mostly happens in case of mid-cap or small-cap companies with offices in smaller towns,” adds another broker. Of course, if the company is no longer conducting any business, the physical shares are completely useless. Santanu Syam, head of operations, Angel Broking, says many of the physical shares are of shell companies or those gone out of business. Such companies don�t update the list of shareholders with the Registrar and Transfer Agents (RTA) on a regular basis. Hence, the RTA may reject the application to demat such shares. “Every day, we send 15-20 forms to RTA for demat. But if the trading volumes are poor, the company might not pay fees to the RTA to maintain the shareholders� records,�� he says.

Advantage demat

In the demat format, the biggest benefit is that even one share can be sold. In physical format, the document might represent five or 10 shares and in order to sell it, the entire lot has to be sold. Another big advantage of dematting is that the cost of a transaction goes down significantly. Also, when the company gives a bonus or goes for a rights issue, the allotted shares are immediately credited to the account of the investor. However, if your shares are in the physical format, bonus shares will only be given to you in the physical format. So, it will be sent to you by post. If you have shifted houses, you will have run around chasing the company.

In addition, there are other typical problems associated with physical shares, such as risk of damage due to fire or theft or forgery. Demat account holders also avoid stamp duty (as against the 0.5 per cent payable on physical shares) and filling of transfer deeds.

The biggest advantage of having a demat account is that you don�t have to pay for stamping, since these are electronically stored, which reduces the transaction cost. Even for companies or a broker, the communication and transaction costs are significantly reduced.

Costs of demat

Opening of an account with most brokers does not cost anything. Most of them also do not charge any fees in the first year. However, from the second year onwards, there is an annual maintainence charge of Rs 250-600. Sebi has also introduced a no-frills account called a Basic Services Demat account, in which if the value of securities in an account is less than Rs 50,000, there is no annual maintenance charge (AMC) to that investor.

So, if he has a demat account with a holding of only Rs 20,000 in the form of stocks or any other investments, there will not be any AMC charged. If the value exceeds Rs 50,000 and goes up to Rs 200,000, the charges are capped at Rs 100 annually. Once the value of investments go above Rs 200,000, you have to pay the charges, levied by the Depositary Participant.

With the Union Budget indicating there will soon be a regime in which a single demat account will have all financial products, including insurance policies, investors who have to convert their shares should start the process.

Year 2014 has been a year of revival India�s equity mutual fund investors. Most of them are back in the black after witnessing wealth erosion for nearly three years. A typical mutual fund (equity) investor has seen 61 per cent (median) rise in the value of her investment in last one year, higher than any other asset class. And the momentum continues with net assets values (NAVs) up 12 per cent in the last three months. It has boosted funds� long-term performance.

As many as 173 out of 202 schemes in our universe have given 15 per cent annualized returns in the last three-years. The analysis is based on all open-ended equity schemes with a five-year performance record. Data was sourced from Value Research Online. The secular trend in the industry is positive but there is a great variation in performance across various market capitalization categories. The biggest gains went to investors who stuck to “riskier” mid- and small-cap funds. They have nearly doubled their capital (92 per cent) in the last 12-months, nearly twice the returns bagged by investors in large-cap funds (50.2 per cent). Other classes of diversified equity schemes are in the middle. Trends in the last three months suggest that the momentum favor mid and small-cap funds. It shows in Business Standard listing of India�s top 20 equity mutual funds. Four out of the top 10 schemes exclusively invest in mid- and small-cap stocks. It includes the top rated Franklin India Smaller Companies Fund.

The only exception to this has been pharma, technology funds and those with high exposure to auto stocks. Two pharma funds feature in our top 20 list and many diversified mid-cap funds also gained from exposure to mid-cap pharma stocks. The one-way movement in mid- and small-cap stocks is now prompting many fund managers to raise allocation to large-cap stocks (stocks that are either part of Nifty or Sensex).

“Many mid-caps are now more expensive than their large-cap peers. It has tilted the reward ratio in favor of the latter at least in the short to medium term,” says Anoop Bhaskar, Head, Equities at UTI Mutual Fund. Two of his funds are among the top 15 including UTI Transportation, among top performer in the last one year. The fund house has increased its large cap allocation to 80 per cent from 60 per cent planned initially in the newly launched UTI Focused Equity Fund Series-1, a close ended equity scheme. It�s time retail investors do the same given the favorable risk-reward ratio in favor of large-caps and market volatility.

METHODOLOGY

The funds were selected in a three-stage process. We started with two-thirds of all open-ended equity schemes by size. This means dropping all schemes with AUMs of Rs 50 crore or less at the end of August 31, 2014. Then we eliminated funds whose performance record was not available for the last five years. This gave a universe of 202 equity schemes. In the first stage, all schemes were ranked according to their performance in the last three months, one year, three years and five years. Then we calculated the best performing scheme giving highest weightage (40 per cent) to their 5-year performance and 20 per cent weightage each to their short term performance. In the second stage, we picked funds that offer the best risk reward ratio by ranking them on stats ratio � Sharpe ratio (30 per cent weightage), Sortino Ratio (40 per cent) and 15 per cent each to beta and alpha. Finally the funds were ranked by assigning 30 per cent weightage each to their churn ratio and performance and 40 per cent to their rank on risk-reward parameter

Investing only through lump sum pays off over the very long term and in a consistently rising market; only SIP helps across volatile markets in the short to medium term

Sample this: If you had invested a lump sum of Rs 1.20 lakh in 2004 in an index fund mirroring the Sensex, you would be sitting on a corpus of Rs 5.87 lakh today. However, if you had invested a similar amount systematically or through a systematic investment plan (SIP), you’d be surprised to know you would have accumulated only half the corpus today. (There was no index fund in 2004.) The BSE exchange’s benchmark Sensitive Index or Sensex stood at 5,704 on November 1, 2004. And, at 27,916 on November 5, 2014, up 390 per cent.

For ease of calculation, we’ve assumed one invested Rs 1,000 a month systematically in the same index fund. This translates into a total investment of Rs 1.21 lakh between November 2004 and November 2014. This corpus would be worth around Rs 2.44 lakh today. This fails the traditional wisdom that investment through SIPs helps make more money ,as it helps buy at different index levels and lowers the average index level you bought at. Thus, giving the advantage of cost averaging. Does this mean lump sum investment is better than systematic investment? The unanimous answer is No.

Explains Vetri Subramaniam, Chief Investment Officer, Religare Invesco Mutual Fund, “Individuals are advised to invest through SIP only because they earn monthly and, hence, it makes sense to invest in the same frequency. Systematic investment evens out market volatility. It is an averaging tool, not a maximising tool. The purpose of SIP is to address our basic problem of over-investing in good times and under-investing in bad times. That is, it helps invest consistently.”

For lump sum investment, it is crucial to get the timing right. That’s why only a few get it right. Therefore, be a consistent investor even if you earn less return. SIPs are advised as a must-have part of the core portfolio. Investors with a low risk appetite may also opt for SIP, since they will need to invest as little as Rs 500 regularly over a longer duration and the risk is spread evenly across the period. Also, it is a useful tool for investors who cannot afford investing a lump sum at one go. At the same time, even those with a large investible surplus can opt for systematic investment.

Nimesh Shah, managing director of ICICI Prudential Asset Management Company, says in the case of lump sum investing, the entry and exit levels are likely to have an impact on the overall returns. Hence, only investors with the knowledge and expertise to understand market timing should take the lump sum route to investment. Experts say lump sum works when you are taking a contra or sector bet, as that involves timing the market and, hence, is meant for savvy investors. Lumpsum investing should happen when the markets are undervalued.

Alternatively, also in defensive equity products, at any point of time. In a continuously rising market, lumpsum investments tend to outperform. That’s why the difference in returns from SIP and lump sum above. You also need to consider the stock market crash of 2008 and another downturn of 2011 when you look at the returns from SIP. Also, usually the average market level one bought at is higher for lump sum investment and lower for SIP investment. Yet, this theory does not stand true in the past 10 years.
Reason:

The average purchase for lump sum will be the Sensex level of 5,704 but would be much higher for SIP investment at 15,735 (between November 2004 and November 2014), as the stock market has only been rising over the same period. If you look at investments in shorter time periods over the last ten years then also lump sum seems to have done better than SIP. An SIP of Rs 1,000 between November 1, 2004 and November 3, 2008 (total investment = Rs 48,000) would have accumulated Rs 47,574. Because the markets crashed in January 2008. A lump sum investment of Rs 48,000 on November 1, 2004 would have given profits with a corpus of Rs 86,992. Same SIP investment between November 1, 2004 and January 21, 2008 (when the markets crashed) would have almost doubled your investment. A total investment of Rs 38,000 would have become around Rs 73,164. A lump sum would have given even better corpus of Rs 1.17 lakh. When markets started doing better in 2009.

A Rs 1,000 SIP started in November 3, 2009 (total investment = Rs 60,000) would have resulted in a corpus of around Rs 89,626 on November 3, 2014. But the same amount invested as lump sum on the same day would given Rs 1.08 lakh. And a Rs 1,000 SIP started on November 3, 2008 would be sitting at Rs 1.18 lakh (as against total investment of Rs 72,000) on November 3, 2014. A lump sum investment of Rs 72,000 then would have helped you accumulate Rs 1.94 lakh on November 3, 2014. That’s why some fund managers feel investment via SIP makes a difference only in the short to medium term. Therefore, if you have an investment horizon of one to two years, SIP is a better. If one has a horizon of five years or more, they should invest a lumpsum.

They believe it does not matter whether you invest through SIP or lump sum over the very long term. Assume you bought when the Nifty stood at 4,200 and the market fell 10 per cent from there. Assume you started an SIP at the lower level of 3,800. It won’t make a difference today because the markets have moved up eight times from there. Shah seconds the thought. “As long as investors continue investing for the long term in consistently performing mutual funds, both the SIP and lump sum mode could help investors achieve their financial goals,” he says. Recalls Anup Maheshwari, executive vice-president and head of equities & corporate strategy at DSP BlackRock Investment Managers, “In 2005, our company had introduced a Super SIP scheme — an SIP and insurance policy combination.

Last year, I met a set of investors who had invested through Super SIP and they complained the returns were very low for a 8-year holding period between 2005 and 2013. But, after the market rally this year, the returns have jumped significantly in the same time period.” He further explains that an SIP investment in DSPBlackRock’s equity fund had yielded 10.15 per cent between September 2005 and October 2013; a tad better than returns from fixed deposits. Returns from the same fund stood 16.6 per cent after the market rally this year (that is, between September 2005 and October 2014).

Over the past 10 years, this strategy has worked better than investing only through SIPs. Assume you invested a lump sum of Rs 60,000 in November 2004 and made an additional investment of Rs 500 every month through SIP in the same Sensex fund mentioned above. The Rs 60,000 lump sum investment would be worth around Rs 2.93 lakh today. And, the SIP of Rs 500, that is, a total investment of Rs 60,500 via SIP, would be worth Rs 1.22 lakh today. Total corpus = Rs 4.15 lakh. If one had invested both through SIP (Rs 500 a month) and lumpsum (of Rs 30,000), between November 3, 2009 and November 3, 2014, you would be sitting on a corpus of Rs 99,083, higher than investing only through SIP.

Subramaniam feels it does make sense to have some overlay in lump sum if one has the cash to do so. But then, consider the real valuation of the market before investing, not the price. He explains that if one had invested in the market in 1994, when the Sensex stood at 4,800, and he/she looks up the point to point returns, one will realise this is lousy because the price-to-earning ratio was 30x in 1994.

Today, Sensex’s price to earning ratio stands at 19.02. It stood at 20.15 in November 1999, according to BSE. Shah agrees and adds that investors should have a core strategy of SIP investments in their portfolio, following the asset allocation model. As and when there is availability of investible surplus or windfall earnings like bonuses, monetary perquisites and so on, it can be invested as a lump sum into mutual funds. Also, those with an adequate cash buffer for short-term expenses may take the lump sum route.

Mutual funds are going all out to sell their equity-oriented tax savers to investors as the deadline for employees to submit investment proof to companies to avail the tax benefit nears.

Fund houses are doling out as much as 6% to distributors to push equity linked savings schemes (ELSS) to clients, sensing that the enhanced investment limit for saving taxes and strong performance of equity schemes would draw more investors to this product. Investments in ELSS, a close-ended equity scheme with a three-year lock-in, allow investors to avail tax exemption up to Rs 1.5 lakh. Till last year, this limit was Rs 1 lakh.

In the past three years, investors preferred traditional investment avenues such as PPF or tax-saving bank deposits due to poor returns from equities till early February. But, with the market prospects seeing a turnaround last year, distributors said investor interest in ELSS has shot up. “With the outlook for equities improving due to a new government at the Centre and expectations of a better macroeconomic environment, many investors are keen to invest in ELSS under Section 80C,” says Harshvardhan Roongta, chief financial planner, Roongta Securities.

In the past one year, average returns from the ELSS category were close to 54% against 29% gains in the Sensex. The return from PPF is fixed at 8.7% per annum. As part of their campaign to popularise ELSS, MF houses are running awareness campaigns and special contests. Distributors are pushing the product on the grounds that its lock-in is shorter than that for PPF, bank deposits and post office�s NSC. Dividend income from ELSS is tax-free.

“For first-time equity investors, ELSS ensures discipline as they are forced to take a long-term view due to the three-year lock-in which comes with this product,” says Vidya Bala, head (Research), fundsindia.com Amongst ELSS, Bala recommends Axis Long Term Equity Fund and Franklin India Taxshield. She believes rates are at the bottom of the cycle and it is a matter of time before interest rates on conventional debt products such as PPF and tax-saving fixed deposits are lowered.

If it is for a prolonged period, check its performance vis-a-vis peers� as well as benchmark and then take a call

If your mutual fund scheme is sitting on 20 per cent cash, is it an underperformer? Not necessarily. ICICI Prudential Dynamic Plan has returned 37 per cent in 2014 against its benchmark � Nifty�s � return of 31 per cent. The scheme was sitting at cash levels of 19 per cent in December 2014. Similarly, there are as many as 17 mutual fund schemes that are sitting on cash of 10 per cent in December. Of these, Quantum Long Term Equity Fund tops the list with cash levels of 32.49 per cent and two funds from Escorts had cash levels of 24 per cent.

Two dynamic funds from HSBC and ICICI Prudential had cash of 23.92 per cent and 19 per cent, respectively. Explains I V Subramaniam, director, Quantum AMC: �Holding cash doesn�t mean we are timing the market. We booked profits on stocks when we thought the value was good. If you look at the corporate results, nothing has changed significantly. When we see valuation change irrespective of the index levels, we will invest.� After the global financial meltdown in 2008, many equity funds kept a significant amount of portfolio in cash due to redemption pressure and market uncertainty. Those who did not deploy the cash sooner had a tough time recovering.

�Even some good funds took two-three years to better the benchmark and give returns above the category average,� says Dhaval Kapadia, director investment advisory at Morningstar India. According to Vidya Bala, head of mutual fund research at FundsIndia, mutual funds can hold high amount of cash in some situations. Mutual funds keep 20-25 per cent cash for a few weeks when markets are nose-diving like it happened in 2008. This helps them protect the downside risk.

�High cash holdings usually do not last over a quarter,� says Bala. Some dynamic funds have a mandate to stop investing when they think the market has turned expensive. For example, HSBC Dynamic Fund and ICICI Prudential Dynamic Fund say upfront that they will move to cash when they perceive valuations to be high. Mid- and small-cap funds follow this strategy often when the markets see a significant run-up. During a rising market, mid- and small-cap companies can become expensive and make the fund managers uncomfortable. These stocks are also not as liquid as say the 50 stocks in National Stock Exchange�s Nifty.

�Funds book profit in such scenario and deploy the cash they received slowly in a phased manner,� said Kapadia. From an investor�s perspective, it is important to see how long the scheme has held on to cash. If it is for a long time, say a year or so, there could be questions about the fund manager�s ability to pick stocks. On the other hand, if it is a tactical profit booking, then it is good for the scheme. Sometimes, the fund manager is forced to keep cash owing to redemption pressure. In such cases, compare the performance of the scheme with peers and benchmark. �If the scheme is holding 90 per cent in equities, investors really need not worry,� adds Bala.

One can differentiate good from bad, as both the traits have their own features. Likewise, an individual could make out whether he is doing good or bad in his role as an investor. Here are the five signs that could assure that you are a good investor.

Know-Your-Self (KYS): One might have heard of ’Know-your-customer’ process that banks and mutual fund conduct. But, the same applies to an individual too, who needs to assess his beliefs, his self. It is important to understand whether you have a good hold on investment related matters or not. It is not possible for everyone to be good with returns, taxes or funds but knowing the weakness within makes all the difference. A person, who identifies the weakness and takes corrective steps, is a good investor than those who shy away from such acknowledgement.
Thought of emergency: A good investor always saves for the rainy day first. So, if you have thought over it and maintain an emergency fund than no one can deny that you stand among good pack of investors.

Ad-Hoc decisions: Have you ever invested money and kept it in your mind to use it for some emergency or need then it is a bad sign. People do save, but then they also make a way to spend that saved amount. So, withdraw from such thoughts as this is not what good investors do.

Rebalancing and reviewing: Are you among those who invest and forget about it? If this is the case, then it surely contradicts with how good investors should behave. An investor should always review and rebalance his portfolio periodically as forgetting the investment is irresponsible.

Keeping an eye: Fear about investments to a certain degree is appreciable. It gives the power to an investor to find out and make informed decisions. Those, who care less about their money and prefer to rely on others, are more prone to risk than those who stay abreast with the market to keep their money secure.

Investors who are unable to handle asset allocation and rebalancing themselves and are of conservative bent may opt for multi-asset funds

It’s unsettling times in the stock market. Rattled retail investors are looking at ways to remain invested without adding on risks. Yet others are too lazy to track the market and act accordingly. Both need a safe option where asset allocation and rebalancing are taken care of by experts. The solution lies in multi-asset funds.

WHAT ARE THEY?

Multi-asset funds are all-in-one funds that give you exposure to three asset classes: equity, debt and gold. The typical fund in this category is conservative in nature with high exposure to debt (50-90%), and some exposure to equities (up to 40%) and gold (up to 30%). Some funds in this category are also equity-oriented with small exposure to debt and gold while some have nearly equal weightage to all the three categories.

WHY ARE THEY A GOOD BET?

One advantage of multi-asset funds is that they offer diversification.Since they are diversified over three asset classes–equities, debt and gold–these funds tend to be less volatile and investors enjoy a smooth ride over the long term.

Second, asset allocation and rebalancing, which lie at the very heart of financial planning, are taken care of by an expert–the fund manager.

“In a country like India, where financial literacy is low, many retail investors may not have the knowledge and discipline to carry out asset allocation and rebalancing themselves, in which case they should allow an expert to handle these tasks,“ says Lakshmi Iyer, Chief Investment Officer (Debt), Kotak Asset Management Company.

Multi-asset funds also protect you from certain costs. If while rebalancing you need to sell an asset, especially debt or gold, you become liable to taxation. Sometimes you may also have to pay an exit load. By investing in multi-asset funds, you avoid these costs.

WHAT ARE THE PITFALLS?

Since multi-asset funds are blended products, their returns will always be lower than that of the best-performing asset class of the day–a price that investors have to pay for the lower volatility in these funds.

Sometimes, multi-asset funds have a fund-of-funds structure. In that case, the mother fund will only invest in the funds belonging to the same fund house. “You are deprived of the opportunity to choose the best funds from across fund houses,“ says Vidya Bala, Head of Research, Fundsindia.com. Many of the multi-asset funds have a high exposure to gold–some going as high as 35%.

Most financial planners suggest an allocation to gold in a retail investor’s portfolio of only 5-10%. Gold is an asset class that has very long cycles: both bull and bear runs can last for as long as a decade in some cases.At present, gold is witnessing a bear run. The retur ns of multi-asset funds could suffer for a long time due to the high exposure to gold.

At present multi-asset funds in India do not give you exposure to international funds, a category to which the well-to-do retail investor should have some exposure (up to 15%).

In India multi-asset funds lack a long-term track record. Only one fund has a five-year track record. The corpus size of individual funds is also limited. Investors who are uncomfortable investing in funds with a short track record or limited corpus size may be reluctant to invest in this category currently.

WHAT SHOULD YOU DO?

When choosing a fund from the multi-asset category, go with one whose asset allocation is in sync with your risk profile and investment horizon.Conservative investors, for instance, should not invest in a fund with high equity exposure.

Your investment horizon in these funds should be at least five years.Only when you have invested across market cycles will the benefit of rebalancing be reflected in portfolio returns.

Don’t compare the retur ns of these funds with the best-performing category of the day. Compare it with the weighted average return of its benchmark indexes. “In the long run, these funds should be able to give returns in high single digit or low double digits,“ says Vishal Dhawan, Chief Financial Planner, Plan Ahead Wealth Advisors.

Check the expense ratios of all the funds in this category, as there is considerable variance here. Avoid investing in very small-sized funds.If the corpus size does not increase, there is a risk that the fund house may close down the fund.

Finally, you may perhaps be dissuaded from investing in these funds after seeing the single-digit threeyear returns of many of the funds in this category (see table). Remember that these are conservative, lowrisk products. Over the long term, owing to their composition and the better tax treatment that debt-oriented funds enjoy, these funds should outperform bank fixed deposits and Post Office Schemes.

Investors with a high risk appetite, or knowledgeable ones who can manage asset allocation and rebalancing themselves, may avoid these funds.

Inflows in child-care schemes of mutual funds this year have ground to a halt after seeing sizeable inflows in calendar year 2014. Experts believe some investors may have stopped their monthly investments as the market has been considerably volatile.

There are nine child plans in the market. Five are debt-oriented. These funds are generally conservative and have a low churn ratio, say experts. “Investors should not exit these funds just because of temporary blips in performance but keep their overall goal in mind. Also, since these are hybrid funds, one should not make the mistake of comparing returns with other diversified equity funds,” said Suresh Sadagopan, a certified financial planner. He added these funds are suitable for conservative investors and investors should stay put as long as these funds give two or three per cent higher returns than pre-tax fixed deposit returns.

Investors switching between child plans should remember they will have to pay higher taxes if their fund is debt-oriented. The gains will be added to income and taxed in line with individual slab rates if the exit is before three years. Also, these funds charge an exit load of one-three per cent for exits ranging from zero to seven years. “Switch funds only if a particular fund has consistently underperformed its peers for four-eight quarters,” said Sadagopan.

For instance, UTI CCP Balanced Fund charge an exit load of three per cent for exit before two years, two per cent for exits before four years, and one per cent for exit before five years. “Higher exit loads serve as an inbuilt deterrent, which is good for investors since the investments are meant for a longer duration,” said Sadagopan.

“Investing for children requires a systematic approach of high exposure to equity in the formative years of the child and increasing exposure to debt in the later part of the investment horizon. It is important to look at suitability in terms of investment horizon and goal,” said Nimesh Shah, managing director and CEO, ICICI Prudential MF.

However, don’t rely on only child plans to meet all your children’s goals. “If the child is less than five years, you can invest 60 per cent in equity and the rest in debt-based products such as PPF (public provident fund),” said Sadagopan. If the child is 10 years and above, Sadagopan says, one can look at a 50-50 ratio or 50-60 ratio in favour of debt. Besides mutual funds, investors can also look at child plans from insurance firms, which combine a component of savings with insurance. These plans waive off all future premia and give a fixed sum assured to the beneficiary in case of the demise of the parent.

The flip side is that annual returns are usually six to eight per cent. “Broadly speaking, MF child plans are better than those from insurers. Those buying these plans can take care of the insurance component by buying an appropriate term plan,” said Sadagopan. MF child plans have given average category returns of 15. 6 per cent, 17.7 per cent and 11.7 per cent for one-year, three-year and five-year periods, respectively. MF child plans are inferior to those offered by insurers in some respects. “These plans do not offer a nominee or second-holder facility. If the parent dies, the money may get locked in till the time the new guardian is appointed, which could take 3-6 months. This is not the case with insurance plans,” said Nagpal. MF child plans also offer guaranteed returns such as those offered by insurance firms.