Author: admin

Iwould like to thank my father for giving me the right financial lessons that led me to become financially independent. Way back in the early 90s, there was no internet banking and one had to physically go to the bank for depositing cheques, withdrawing cash, and making demand drafts. Since my college was close to the bank, all the bank work was my duty. Even at that time, when I was 16 years old, the last thing I wanted to do was go to the bank, especially since I did not know where to deposit the cheque or procedure to get a draft made. For all the entrance exams too, my father was very clear—if you want to write the test, you need to do the groundwork yourself to apply for the same. While I was really annoyed with my father at the time for making me do all this, when I look back, I would say these were among the best things he made me learn independently. When I got my first salary, he was the one who guided me to invest it into Public Provident Fund. Of course, at that time, parents didn’t have to tell children to save. It was ingrained in us. From my side, more than material presents, the gift of financial knowledge is what I gave my dad. Of course, I could do this because I am a financial adviser. But you too can do this and should do this.

A majority of our father’s generation are risk-averse investors. But with the falling interest rates and traditional investments like endowment products giving sub-optimal returns, it has become necessary for the older generation to have some market-linked instruments in their portfolio.

I routinely meet people at sessions who tell me about how their father advises them against investing in mutual funds because of non-guaranteed returns. This is mainly because of lack of knowledge of the working of such instruments, which is not surprising given that the avenues to invest during our father’s working years came with fixed returns and most of them lost money dabbling in stocks. A good way to get them to experience the markets could be through an SIP in a balanced fund. If they are adamant against doing this, you could start an SIP with your money but in their name.

Having financial conversations with your parents is important. I have come across older people investing in company fixed deposits or falling prey to chit funds, for high yields on these products. Caution them against ponzi schemes like multi-level marketing schemes, and bitcoin-related schemes.

Some of the older people still depend on others to make bill payments physically and are not comfortable doing it online. Automating payments can simplify your father’s financial life and you should help with the online set-up.

Another important aspect of financial knowledge is to do with Wills. Only a small number of Indians make Wills. Educate your father on the importance of having a Will so that he can pass on his assets to whom he wishes. I recently came across a case where the children were disputing the donation to their father’s favourite charities. A Will is a good way for your father to leave behind for causes that he believes in, apart from deciding how he wants to split his wealth among family members.

Finally, make your father realize the importance of sharing all information around their finances with your mother as well since in that generation most women were not involved or included in financial decisions. Help them create an inventory of their financial assets that also has details of the relationship manager, agent or broker. This should be shared with their spouse. Women tend to face a lot of difficulties in handling money when they lose their spouse, as they were not managing money and don’t know where to start. They are often negatively influenced by relatives.

When a friend’s father realized that his time was limited, he made a handwritten list of all assets and ensured that all nominations were in place apart from explaining to his wife about their finances. After his death, his wife was able to have the assets transferred to her name within a short period. This also meant that she was not dependent on other family members.

These days, parents seem to shield children from money matters and not teach them to be financially independent. So much so that I regularly meet millennials who are financially dependent on their parents despite earning well. Remember, children generally emulate parent’s spending and saving habits and it would bode well for you to pass on your parent’s legacy of spending cautiously and saving well for the better things in life, to your children as well.

Performance of a mutual fund scheme or PMS portfolio is assessed with reference to a benchmark. There are various benchmarks available; the designated benchmark is the one with nearest correspondence with the composition of the portfolio. However, this comparison with a benchmark is never perfect. It is to give an indication that if you were invested in the benchmark portfolio, how much you would have earned.

 Recently, mutual funds were told to compare their performance with total return index (TRI) as against the regular benchmarks like Nifty or Sensex, as these take into account only the price of the stocks and not the dividend payout. The regular indices are known as price return index (PRI) as these are based on the price of the stocks. The logic was, the outperformance claimed by the mutual fund schemes was not fair, as they get dividends from their stock-holdings whereas Nifty or Sensex is based on price only. The dividend yield, i.e. dividend as a percentage of the market price of the stock, in the Indian context, is about 1.5% but over a long period of time, the compounded impact comes into effect.

Why is the comparison not perfect? The composition of the index itself is subject to change, though not as frequently as your fund. For example, Sensex was initiated in 1986 with the base year as 1978-79 = 100, which was the first reference point. Most of the stocks that were part of initial Sensex are out now, replaced by new companies, though the number of stocks remain 30. The change in composition from time to time is done to reflect the changes in the economy and market; some companies fade out and other companies gain importance and market capitalisation. Nifty 50 index computation is similar; the base date is November 1995 = 1000 and there is a once-in-six-months Nifty reconstruction policy. The indices regularly tracked by market participants are PRI, and the TRI is calculated by adding back the dividend. So, while comparing a fund with an index, we are comparing a dynamically managed fund (other than index or passive funds) with a set of stocks representing majority market capitalisation, subject to occasional change. Sometimes identification of the benchmark itself is a question, for instance, for flexi- or multi-cap funds which invest across large-, mid- and small-cap stocks.

As an investor, you have a choice of funds from the actively managed ones, and you would like to pick the best performer. Even if all the funds in your portfolio have outperformed the benchmark, you are not bothered so much about comparison with index. You would wish, you had held a higher proportion of the top performing fund, which has ‘beaten’ the peer group. Hence, from your perspective, it is the peer group of funds or products and comparison inter-se, over a reasonably long period of time, to pick your basket. There are certain so-called absolute return products, where the objective is to generate returns in all market conditions. In a prolonged bear market, it is difficult to generate positive returns, in spite of the partial short positions in the portfolio. These products claim outperformance in prolonged bear phases by losing less than the index. Here also, you would like to pick the most consistent ‘absolute return’ product, i.e. you would go by peer group comparison.

Globally, there is marked shift from actively managed funds to passive ones, i.e. index funds. However, the Indian context is different. There is enough outperformance of the indices and it makes sense to invest in actively managed funds, to participate in the growth story. You have to match the fund objective with your investment objective, and do an inter-se comparison of the funds or products in that category, to pick your basket.

Ultimately, what matters to you is the return from your portfolio. You do need to gauge the performance of your funds and for that you need a perspective, which is the relevant benchmark. That apart, you need not perform a rigorous analysis as it is about a perspective only. You don’t take home returns from the benchmark, unless you are invested in an index fund. You are paying a higher expense to the manager in an asset management company or a PMS or an alternative investment fund, as compared to index funds, for not only outperforming the index but for generating peer-group alpha. The simplest and popular method is to look at returns over various horizons like 1-year, 3-years, or others. A better way of doing it is calculating ‘peer group information ratio’, which is returns from the product over the peer group, divided by standard deviation. This gives the variability-adjusted peer group outperformance.