Monday, July 20, 2015

How To Pick A Good Mutual Fund and My Way of Buying funds...

Are you thinking about investing in a mutual fund, but aren't sure how to go about it or which one is the most appropriate based on your needs? You're not alone. However, what you may not know is that the selection process is much easier than you think.

Identifying Goals and Risk Tolerance
Before acquiring Units in any fund, You must first identify his or her goals and desires for the money being invested. Are long-term capital gains desired, or is a current income preferred? Will the money be used to pay for college expenses, or to supplement a retirement that is decades away? Identifying a goal is important because it will enable you to dramatically whittle down the list of the more than 5,000 mutual funds in the public domain.
In addition, You must also consider the issue of risk tolerance. are you able to afford and mentally accept dramatic swings in portfolio value? Or, is a more conservative investment warranted? Identifying risk tolerance is as important as identifying a goal. After all, what good is an investment if the you has trouble sleeping at night?
Finally, the issue of time horizon must be addressed. you must think about how long you can afford to tie up their money, or if they anticipate any liquidity concerns in the near future. This is because mutual funds have exit charges and that can take a big bite out of your return over short periods of time. Ideally, mutual fund holders should have an investment horizon with at least five years or more.

Style and Fund Type 
If you intends to use the money in the fund for a longer-term need and is willing to assume a fair amount of risk and volatility, then the style or objective he or she may be suited for is a long-term capital appreciation fund. These types of funds typically hold a high percentage of their assets in common stocks and are, therefore, considered to be volatile in nature. They also carry the potential for a large reward over time.
Conversely, if you are in need of current income, he or she should acquire Units in an income fund/MIP'S. Government and corporate debt are the two of the more common holdings in an income fund.
Of course, there are times when you has a longer-term need, but is unwilling or unable to assume substantial risk. In this case, a balanced fund, which invests in both stocks and bonds, may be the best alternative.

Evaluating Managers and Past Results
As with all investments, you should research a fund's past results. To that end, the following is a list of questions that perspective investors should ask themselves when reviewing the historical record:
  • Did the fund manager deliver results that were consistent with general market returns?
  • Was the fund more volatile than the big indexes (meaning did its returns vary dramatically throughout the year)?
  • Was there an unusually high turnover (which can result in larger expense ratio for you)?
This information is important because it will give you insight into how the portfolio manager performs under certain conditions, as well as what historically has been the trend in terms of turnover and return.

With that in mind, past performance is no guarantee of future results. For this reason, prior to buying into a fund, it makes sense to review the investment company's literature fact sheet to look for information about anticipated trends in the market in the years ahead. In most cases, a candid fund manager will give you some sense of the prospects for the fund and/or its holdings in the year(s) ahead as well as discuss general industry trends that may be helpful.

Adding to this let me Share how I select Mutual Fund scheme by studying technical data by giving you example.

first i see what is Alpha of mutual Fund Scheme ? 

Alpha talks about risk adjusted performance - whether a scheme has performed as expected or not. 

Then why shouldn't I just look at annualized return instead?

By looking at return (CAGR) only, i can't have an idea what risk it took to generate such return. So if Fund A and Fund B has generated same return, but if Fund A has taken more risk, then its Alpha would be lower than Fund B. Alpha is also sometime known as "fund manager's contribution" in return. As far as risk taken by a fund, it is expected to generate a certain minimum return. If it surpasses that expectation then we say it has created positive Alpha.

So, if I found a scheme's Alpha is 10, what does that mean?

It means whatever return was expected from this scheme, it has outperformed that by 10%. Alpha can be negative, zero or positive. But remember zero Alpha does not mean zero return. Zero Alpha means return as per expectations, neither outperformed nor under-performed. 

But how do I come to know what return is expected?

For that i need to check its Beta. 


Yes, Beta denotes the risk. Suppose the scheme's Beta is 1.2. This means if its benchmark index moves upwards by 10%, scheme is expected to move upward by 12%. Alternatively if benchmark index moves downwards by 10%, scheme is expected also to move downward by 12%. If a scheme's Beta is 1, the scheme is expected to generate as much return as its benchmark index.

So should I check Alpha or Beta then?

Both. Say, i want less risky Fund. So i should first make a list of all the funds which are having low Beta. Then within that list look for high Alpha.

So suppose a scheme's benchmark index moves upwards by 10%, its Beta is 1.2 and its Alpha is 8 does it mean then that the fund was expected to generate a return of 12% as per its risk exposure but the fund even outperformed that expectation by generating a return 20% (12 + 8).


So Beta has lot to do with a fund's benchmark index. But not all funds' portfolio has same level of similarity with its benchmark index's portfolio. In that case can its Beta be accurately calculated?

Oh yes! Sometime some fund's portfolio has hardly any similarity with its benchmark index's portfolio. In that case its Beta cannot be trusted much.

How to be sure then whether we can depend on Beta of a fund?

Check the value of its R-Squared. If it is between 75 to 100 - it means fund's portfolio has lot of similarity with its benchmark index's portfolio and hence its Beta can also be correctly derived.

So a Index Fund's R-Squared would be 100?

Brilliant! Yes, it should be. If not 100, at least close to 100. 

So "high R-Squared - low Beta - high Alpha" is a great combination then?

Yes, i can say so. But remember low Beta is not always good. my portfolio should have all type of funds. In bullish time, high Beta funds are great to have. Whereas during bearish time, low Beta funds are in high demand.

for your reference attached Scheme selected data.

FRANKLIN india Prima Fund - Growth
ICICI pru value discovery fund -growth
birla sunlife frontline equity fund
KOTAK 50 equity - growth

The Bottom Line
Selecting a mutual fund may seem like a daunting task, but knowing your objectives and risk tolerance is half of the battle. If you follow this bit of due diligence before selecting a fund, you will increase your chances of success.

Saturday, July 18, 2015

Invest cautiously despite all the talk about the 'mother of all bull runs'

Invest cautiously despite all the talk about the 'mother of all bull runs'

I haven't written a post in a while, distracted by work load which has reduced my investment update activities and I guess I was 'busy and went away'.  

So the question is, are you missing out on in the markets…

As you know, I always start with my view of how I believe the economy is performing. 

Here are some of the things I've observed-

Work and Mobility Increasing
- People continue to work more
- More Job Openings / Recruiters Calling
- People Accepting New Jobs
- More people moving to new homes/ in-state/ across state lines

Frugal Country
- Pay is increasing slowly upwards
- People are looking to continue to reduce their expenses
- Find affordable housing and living
- Everyone is looking for deals

Controlled Splurges
- More Stay cations (Stay at home vacations - theme parks, bed and breakfasts, etc)
- People waiting for great deals on vacations
- Tech Purchases: Phones/tablets, touch devices - People want exciting devices that make their lives easier and considered cool
Using my best this market is definitely not "Starting from the Bottom".

Do I have some grand plan...Yes and NO.

Here is my quick note

My Investment Plan

Don't do anything grand:
The stock market is often a leading indicator and has been doing VERY well for a year.  This market started at the bottom (hit bottom) in 2009 AND 2013 and now we are here at market highs. This means things have rebounded very well and astonishingly there hasn't been much of a pause.

What this means to portfolio:  I have kept it simple...Starting this quarter whenever bse Sensex enters into the 29500 territory I take the time to SELL some of my big winners at the top. At this point, I don't mind holding a bit of cash, buy something paying a dividend, and or wait until stocks I like drops.

Activate the Activist Investors: When I sell some winners, I'm buying stocks that may rise quickly because they are being bought by other companies or are being pushed to do something by big time investors.

Don't get swayed by bull-run talk: 
An investment decision should be based on investment horizon, goals and portfolio makeup and not purely on market movements. Though you must tweak your portfolio to take advantage of the possible bull run in the coming years, you should not go overboard.

"You should consider time horizon. If you are a long term investor, you must remain invested irrespective of the market conditions. You have to decide whether you want to play a Test, an ODI or a T20 match,"

If you have been investing for the last few years when equity markets were not doing well, you may already be sitting on good gains without doing much. That's the power of equity. Years of below par performance can be made good in just a few months.

Should you book profit if you have made decent gains?
"You can book profit partially if you need the money or for adjusting your asset allocation. But do not stop SIPs as we feel the equity market cycle is yet to pick up".

You must watch valuations of stocks they are holding. Besides, it is important to keep track of policies that may impact sectors the stocks belong to. If you are a new to Equity, it is certainly the time to have some exposure to equities, but do not go overboard. Invest in a staggered manner as equities will witness a lot of volatility in the next 12-18 months. Any fall will be an opportunity to enter the market.

Keep an eye on earnings: 
If you are investing directly, look at earnings of companies whose stocks you are holding. The financial results of companies will decide if they deserve the valuations at which they are trading. Even in a bull run, ultimately it is earnings that drive stocks. We have already seen few disappointing results with its last quarter results. Others have also posted mixed results.

Do these indicate a shift in outlook for the sector?
However, analysts see an improvement in earnings going forward. "Corporate profitability is expected to grow faster than nominal GDP with companies becoming more efficient in the last down cycle, operating leverage playing out and some pricing power coming back. The deleveraging of corporate balance sheets has also begun, supported by an improvement in market sentiment and cash flow," 

Avoid overexposure to mid- and small-caps: 
Typically, mid- and small-cap stocks or funds should not account for more than 20-30% of the portfolio. When equity markets are doing well, investors lap up these stocks in search of high returns. These move faster and in bull markets give much higher returns than the large caps. However, investors forget that sharp price changes both ways, and when markets tank, these crash much more than the large-caps.

Bull markets, ironically, can be a distraction. You should be consistent and have realistic expectations to maintain discipline so that you can take the maximum advantage of the bull run, if at all there is one in the near future.

Stick to asset allocation: 
Diversify portfolio with a judicious mix of equity, cash and debt. Stick to the ideal asset allocation. Review your portfolio once a quarter and adjust it to achieve the desired level of debt and equities.
The horizon of an equity investment should be at least three years. For short-term needs, keep money in liquid funds. For two-three years, invest in medium-term debt funds. A lot of discipline goes into creating a big long-term corpus. 

This emailer is addressed to and intended for the investors of Ritesh Sheth & Tejas Consultancy only and is not spam. You are advised to contact Ritesh Sheth & Tejas Consultancy  to clarify any issue that you may have with regards to any information contained in this emailer.The views are personal.  Ritesh Sheth & Family or Tejas Consultancy does not guarantee the accuracy, adequacy or completeness of any information in this emailer and is not responsible for any errors or omissions or for results obtained from the use of such information. Ritesh Sheth & Family or Tejas Consultancy does not have any liability to any person on account of the use of information provided herein and the said information is provided on a best effort basis. In case of investments in any of our schemes, please read the offer documents carefully before investing. 

Friday, July 3, 2015

My Take on Greek Standoff

Dear Customer,

I write to you in response to the attention that the latest episode of the Greek Standoff bears. 

In my opinion the facts of Greek insolvency, intentions, and desperation to save face is known all along. Whether within or outside of European Union, they have very little role to play in bolstering the economic prospects of EU; what with their less than 1% contribution, to EU’s GDP? Where they are playing a significant role is testing EU’s resolve in handling the situation, which is likely to repeat through Portugal, Italy and Spain soon.
What is at play here, according to me is: 
1. The tired EU doesn’t want to be seen as succumbing to the blackmail of Greece on the other hand it doesn’t want Greece to go out too. It would mean a lot instability that is a strain on everyone’s mind, diverting attention from other pressing Growth oriented issues. 
2. The equally desperate Greek Government doesn’t want to be seen as succumbing to the pressures of EU, after having promised a David Vs Goliath outcome to their electorate just a few months back. The present Syriza Government only recently captured the imagination of their electorate that a fresh start after a default is better off for everybody than complying with stringent discipline laid down by the EU. In the recent months the Syriza Govt would have realised the impracticality of pushing the EU without their people’s support. An out-of-turn referendum announced a couple of days back, is to put the onus back on people to decide on this big turning point.
My take: 
1. Greeks will vote for staying in. 
2. Syriza Government will save face and accept the significantly diluted disciplinary cuts already underway, on behalf of their people. 
3. The Greeks will realise the extent of pain in some months under the ‘austerity’ that they have accepted. 
4. Chaos returns.
Risk to my view:   Many
What should investors do? 
1. Realise that anything known by the markets rarely causes collapse. This situation which has been there for a decade doesn’t qualify for creating a collapse for 20 to 30 % in itself. 
2. It’s what will follow in terms of other countries like Portugal, Spain , Italy and the like will demand as similar accommodations, which will demand the ultimate endgame. There is probably quite some time for that. 
3. For now, Indian investors should focus on the results season and look for evidence that the economy has bottomed out and plunge headlong into Equities in line with their asset allocation. 
4. Nothing else really can matter in the long-term. The world surely has never come to an end and there are companies which are incrementally profitable. 
5. Go ahead and build back your equites and equity mutual funds by end of the ensuing results season.


Ritesh.Sheth CWM®

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This emailer is addressed to and intended for the investors of Ritesh Sheth & Tejas Consultancy only and is not spam. it is been first publised by Citadelle. I ritesh sheth fully convinced with findings so  like to share this information to all my client.You are advised to contact Ritesh Sheth & Tejas Consultancy to clarify any issue that you may have with regards to any information contained in this emailer.The views are personal. Ritesh Sheth & Family or Tejas Consultancy does not guarantee the accuracy, adequacy or completeness of any information in this emailer and is not responsible for any errors or omissions or for results obtained from the use of such information. Ritesh Sheth & Family or Tejas Consultancy does not have any liability to any person on account of the use of information provided herein and the said information is provided on a best effort basis. In case of investments in any of our schemes, please read