Major drawback of ULIPs

Major drawback of ULIPs

There have been multiple opinions expressed in different magazine articles, interviews, websites, etc. about ULIPs.

A majority of them have been focussing on two issues:

• Mis-selling (especially due to the commission structure) and
• High "charges" of different kinds, especially in the initial years.

However, of late, with IRDA tinkering with (or, to be more polite, changing) the rules to "limit the charges" and becoming more strict about mis-selling, lots of "experts" have started giving a more favourable review of ULIPs.

I disagree.

And disagree strongly. Here's why:

• ULIPs involves combining investment and insurance, which I consider inefficient and hence dislike.
• ULIPs involves long-term commitment, often practically irrevocable long-term commitment. I dislike such long-term commitments in the world of investments for the following reasons:
  1. New investment products may emerge in future, with much superior features, potential for returns, security, liquidity, etc.
  2. The fund managers managing your ULIPs may change - The new fund managers may or may not be of the same quality
  3. Even if the fund managers don't change, new fund houses may come up with much superior fund managers, thereby adversely impacting the relative performance of your ULIPs
  4. Your income levels may change - upwards (hopefully) or downwards - Your intended allocation to different investment products ought to change accordingly. Unfortunately, ULIPs don't provide the flexibility.
  5. The limitations of exit/entry clauses are "difficult". ULIPs typically involve a "Growth option" (and not a "Dividend Payout" option). This implies that you don't have the opportunity to book profits and/or drastically increase investments to a particular asset class, viz., ULIPs. The allocation to ULIPs remains fixed. At best, you can change the percentage allocated to equity vis-a-vis debt.

Take care. Happy investing!

Regards,

N

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Cash is King - 2010 Version

Cash is King - 2010 Version

A couple of days back, I came across an article which spoke about Warren Buffett holding 34% cash levels in his Berkshire Hathway portfolio as on September 30, 2010.

I've generally been increasing my cash levels for a while now.

Today, I came across this interview with another big name - Jeremy Grantham. Read this one:

• Legendary Investor Jeremy Grantham says "Sell this rally - Hold Cash!"

Lots of TV analysts and experts have also been crying themselves hoarse that our markets in India are grossly overvalued. And have been recommending that we be cautious. That we ought to increase cash levels. That we ought to be booking profits. That though the "Long-term India Story" remains intact, we ought to be wary in the short term.

I have a contrarian question:

• If so many folks are so cautious, and if so many retail guys have not participated in the rally, is it not logical that we're not anywhere close to the top, based on all the bubbles that we've experienced in the last couple of centuries?

My own answer to the above question:

Yes, indeed. We are nowhere near the top. Here's why:

• There is a good chance that with all the guys who are waiting in the wings with loads of cash, every dip will be bought into. Especially by Indian retail investors and the domestic institutions, who have actually been booking profits regularly during the past 6-8 months.
• The BIG MONEY coming from all the quantitative easing will need to be deployed. Certainly they are not going to invest in the crisis ridden markets of US or Europe. Nor will they invest in debt at yields pretty close to zilch. They will much rather park their money in good quality growh stories. Where else can they find such stories other than in the emerging markets, including India?
• The 21000 of 2008 and 21000 of 2010 are very different. A good many corporates have increased their earnings. A lot of them have restructured their leveraged balance sheets and cleaned up their acts. Many of them are much leaner, having learned their lessons. Operational efficiencies have improved. Even the reform agenda of the government has gathered some momentum. Valuations, certainly, are not as rich and as obscene as they were in January 2008.
• Even in the midst of all the corruption, there appears to be lots of political stability. We actually have a situation where there is competition to support the government. That too, publicly stated on National Television. Believe me, Manmohan Singh's position appears to be quite safe. And as long as you have political stability, one key danger for the markets is gone.
• People will make noises about inflation, but go to the malls, theatres, cricket stadiums, airports, book shops, restaurants, jewellery shops, etc. You'll be amazed at the speed with which products are flying off the shelves. You'll wonder about the existence of such a creature called poverty.

Having said all the above, you must be wondering why I'm still increasing my cash levels.

Reasons are two-fold:

• Churning of the portfolio. Some stocks have zoomed way beyond 2008 valuations. We ought to be selling them. Others are grossly undervalued, especially in the midcap space. We ought to be looking at them carefully.
• There is a lot of global economic uncertainty. In times of uncertainty, I've often come across completely inexplicable and violent levels of volatility in share prices. This volatility is a scary scenario for those who seek stability. There are others who thrive in such volatility. I prefer to think that volatility is good for me. Gives me a lot of opportunities both to get in at low levels and to get out at comparitively high levels.

So, what's the conclusion?

Simple ... ... ... ... ... ...

• Keep selling anything that you feel is overvalued today. Irrespective of what your cost price was. Profit in your bank account is better than profits in your demat account. And don't worry about whether or not the share that you just sold continues to go up further. It is always possible to have perfect 20-20 vision - in hindsight.
• Keep cash in your kitty.
• Keep buying anything that you like and you feel is undervalued today. People make more money by buying at a low price than by selling at a high price.
• And remember, you can never, never ever, catch the bottom and the top - except with some crazy luck. And I wouldn't count on getting lucky.

Let me end with a quote from Jeremy Grantham (from the interview referred to earlier in this post):

• "Cash has a virtue that people don't appreciate fully. And that is its optionality. In other words, if anything crashes and burns in value - say the U.S. stock market, if you have no resources, it doesn't help you. If the bond market crashes, and you have no resources, it doesn't help you. And what cash is is an available resource. It buys you the right to buy the U.S. market if the S&P drops from 1,220 today to 900, which is what we think is fair value."

Guess that it applies to us in India as well!

Take care. Happy investing!

Regards,

N

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Useful Info on ATMs

Useful Info on ATMs

ATMs are a boon. 99% of the time.

The other 1%, we end up facing one or more of the following problems:

• You have adequate balance in the bank, but you don't get cash
• Your account is debited, but you don't get cash
• Your ATM Card is "Swallowed" by the ATM

Here's an interesting article that I came across on the subject:

• Trouble-shooting with a problematic ATM

However, a couple of things that appear to have been missed out in the above referred article are:

• Do not take the help of strangers / security personnel - especially if they come voluntarily to help you. They could very well be part of a gang of scamsters
• In case the ATM is part of a bank branch (as against a stand-alone ATM) make it a point to personally inform the officials of the branch - in writing - about your problem (and, if possible, take an acknowledgement). If it is a stand-alone ATM or if the branch is closed, take the trouble of writing a note specifying the exact nature of the problem faced by you (along with your phone number) and put it in the drop box at the ATM. It could possibly help in the ATM care-takers to identify the affected person quickly, and, to that extent, minimise any negative consequence.

Regards,

N

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Simple thoughts on "How to choose a Mutual Fund"

Simple thoughts on "How to choose a Mutual Fund"

This is often a perplexing question in the minds of investors, especially beginners.

There are just too many mutual funds around. No point in even trying to understand all of them.

First, let's decide about the broad types:

• Equity Mutual Funds - that invest in shares on your behalf
• Debt Mutual Funds - that invest in Fixed Income products on your behalf
• Hybrid Mutual Funds - that invest in both Equity and Fixed Income products
• Other specialised funds - like those investing in gold, global markets, etc.

The above should give a clue about which ones you wish to consider at this moment in time.

Once you're through with the broad category, how do you choose the specific fund house, scheme, etc.?

Obviously, there are lots of "ranking" websites, magazines, etc. which come up with periodic lists of "top" funds. While many sources are likely to be equally good, ones that I've found useful are ValueResearch Online (valueresearchonline.com) and Economic Times.

Then again, even such "sources" provide only data. How do we find out which ones to choose from among them? I was asked precisely this question by a first-time investor.

Here again, some "don'ts" for the beginners are in order before you decide:

• Don't go for "Fancy" / "Momentum" funds
• Don't choose sector funds till you've become comfortable with investing through mutual funds
• Don't choose a scheme merely because of a fund manager - In India, fund managers come and go and you may not even notice it.
• Don't go merely / solely by schemes which have done extremely well in the recent past. (Even a reputed source of information like "Economic Times" has published on occasions "Top-5 ELSS Funds based on the last week's performance". Wonder what value that would offer, considering that ELSS funds (Equity Linked Savings Schemes) have a lock-in period of 3 years and one week's performance is of zilch value.
• Don't choose Fund Houses which have a track record of "Getting caught with SEBI" for all kinds of wrong reasons, Fund Houses which are too new (less than a minimum of 2 years), Fund Houses which are "too small" in terms of "Assets under management", etc.

Now for the actual inputs on how to choose:

• Identify the top 12-15 funds / schemes in your chosen category from a couple of sources like valueresearchonline, moneycontrol, Economic Times, etc.
• From these, eliminate those schemes which were launched within the last 2-3 years - You need a track record of reliable performance.
• Eliminate schemes from fund houses that are "too new" or from fund houses which you don't rely - for whatever reason.
• Look at the "relative returns vis-a-vis their benchmark indices" over a longer period of 3 years or more in case of equity funds and over a shorter time span of the last 6 months in case of debt funds (especially liquid funds).
• In case of Equity Funds, a further refinement could be to look at the 3-5 year performance of this scheme from Year 3 or 4 onwards from the date of the initial launch of the scheme. (Logic: In the first couple of years, there could be a positive bias due to "Extra" Fund manager attention. Or there could be a negative bias due to a smaller overall fund size, skewing the returns. By year 3 or 4, the scheme would have become a seasoned war horse and you will know the credentials better.)
• By this time, you'll typically be left with a maximum of 4-5 schemes.
• Actually, you can choose virtually any of these 4-5 schemes. Unless you are talking about very large sums of money (as a percentage of your investment portfolio or net worth), it is advisable to invest in a maximm of 2-3 schemes among the 4-5 schemes so identified. If you're investing in equity funds, it is often preferable to park the same in a liquid fund and go in for a "Systematic Transfer Plan" so that you don't end up "Timing the market"

Happy investing!

Regards,

N

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Tips to Be Debt Free

Tips to Be Debt Free

Author of this guest post: Ryan Smith, a writer associated with Debt Consolidation Care Community (debtconsolidationcare.com). He has written several articles for various financial websites. He is considered to be an expert in the Debt industry and has made significant contribution through his various articles. The article has been edited for brevity, language and relevance for the Indian audience by Mr. N.

In today's fast paced life everyone is running after money. Being financially strong is the ultimate aim of all of us. However many of us face a financial crisis for at various times. And seek the help of a loan to tide over the crisis. The real problem arises when they are unable to pay their debts in time. And the dream to become debt free starts - whether from the clutches of the moneylender or the "friendly" banker. Primary reason for getting stuck: imbalance in income and expenses. Now the question arises - How can I become debt free again? Some tips: 1. Keep a balanced monthly budget: Often, we don't realize the serious consequences of not clearing their debts within time. And continue to "spend-as-usual" with our typical monthly expenses. As a result we miss deadlines for repayment. Keeping a balanced monthly budget is vital to pay off debts in time. During indebtedness one should avoid making unnecessary expenses. And continue with the newly acquired good habit even after becoming debt-free. 2. Take help from debt negotiation services: Nowadays, debt negotiation services have become very popular, due to their value addition in the best possible debt negotiations. Help can be taken from such service providers to become debt free. These companies negotiate with banks and money lenders of the client and persuade them to reduce rates of interest on a loan, restructure the debt repayment period, etc. Debt negotiation companies are held in high esteem in the United States and many European countries, and are increasingly becoming popular even in Asian nations, including India. 3. Save & invest wisely: A rupee saved is a rupee earned. Saved pennies act as a shield against getting caught in debts. The money thus saved - after meeting your routine budget of monthly expenses ought to be invested wisely. Depending on factors such as age, risk profile, etc., you should invest such savings in an appropriate option such as fixed deposits, mutual funds and shares. Obviously, before choosing the option, one should understand the risk and reward of the chosen mode of investment clearly. Summary: Spending and saving money wisely enables a person to become and remain debt free. Any loans should be for a genuine purpose and an acute financial crisis. Taking loans for unnecessary or trivial expenses is like inviting unwanted tension into one's life.

Additional thoughts of Mr. N:

• Understand the difference between good debt and bad debt. A loan taken that generates "net income" or creates an "Asset" that eventually will either generate income or save expenses is a "Good Loan". Anything else is a "Bad Loan"
• Maintain accounts. If you don't, it makes no sense whether or not you have a budget. After all, you can't monitor the budget without accounts.
• As the saying goes, "When you are stuck in a hole, stop digging" - Make sure that you don't go even deeper into debt.
• Beware of credit cards. They can be knives in the hands of a surgeon or in the hands of a murderer.

Regards,

N

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