Investing_in_Equities_Through_Mutual_Funds

INVESTING IN EQUITIES THROUGH MUTUAL FUNDS ARINDAM GHOSH We have innumerous demands in our life to deal with, innumerous dreams to give shape and innumerous commitments to fulfill in our lifespan. A dream home for comfortable stay, a dream car to move around, a good education for children, a holiday at foreign destination, an early retirement – the ends may be different, but the means probably the same—money. Earned wisely, saved regularly and invested smartly. We all have our own way of earning, may be from service, business or profession, but the essence of our discussion is regular and smart investment of our earnings. The question is not now investment only, it is smart and wise investment, i.e. choosing among the best alternative from a number of options. And over time Equity stocks has provided the best performance as far as return is concerned. Cumulative annualised returns of different asset classes (1985 – 2008*) Source: CLSA 17.9 % 11.6 % 10.6 % 8.1 % The chart shows that in Indian market during last 23 years equity has really outperformed. But the unfortunate part of it is that even then the Indian investors tend to remain content with the traditional investment options like Bank Fixed Deposits, Govt Bonds and Securities, Post Office Savings and Insurance. But all of them failed to beat the present rate of inflation. Just pause for a second to think that the inflation rate is around 12% and your Provident Fund or Post Office Savings are giving you a return of 8.5%. Then are those really fruitful investments or a slow erosion of your hard earned money' But although the return on equity gives a very rosy picture one should not forget the point that the above analysis is made on the basis of a long range data, i.e. one should have a long term view of investment while investing in stocks. This is true that Stocks are not expected to beat the Bonds and Securities every year, but the long-term investors should put bulk of their assets in variety of Stocks. But where is the problem' If we agree that no other investment can give us as much as we can expect from equities, who is holding us from investing in Share Market' It is no other than our awareness, knowledge and understanding of the market. In today’s world of global communication, information is not a costly thing, but the analysis and understanding of that analysis definitely require some expert knowledge which one may acquire through in-depth studies. Again, does everyone have the required time to study and learn all these intricacies after maintaining his own official or business schedule' Probably very few can. So' Should the rest be rested on their traditional investments only and earn a return insufficient to beat the inflation' The answer is NO. They also should invest in equities only and invest through Mutual Funds. Understand what you want from your investments, and leave the rest to the money managers: Mutual Funds. These investment vehicles don’t demand your deep understanding of financial matters and they don’t even demand investment of your precious time. A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. Anybody with an investible surplus of as little as a few hundred rupees can invest in Mutual Funds. These investors buy units of a particular Mutual Fund scheme that has a defined investment objective and strategy. The money thus collected is then invested by the fund manager in different types of capital market instruments such as shares, debentures and other securities. These could range from shares to debentures to money market instruments, depending upon the scheme’s stated objectives. The income earned through these investments and the capital appreciation realised by the scheme are shared by its unit holders in proportion to the number of units owned by them. Thus a Mutual Fund is the most suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low-cost. The flow chart below describes broadly the working of a mutual fund: [pic] The advantages of investing in a Mutual Fund are manifold: Professional Management: The most important advantage one gets by investing through Mutual Fund is the help of a professional management which manages the fund in the best possible manner. We just entrust them to control our invested funds and the fund manager, by virtue of understanding investments and being in the market, assess various options with the help of a well qualified and dedicated research team which analyses the performance and prospects of companies and invest accordingly for us to achieve the objectives of the scheme. They earn performance based incentives and higher the return they earn for us, higher is their incentives. At the end of third week of July, 2008 whereas all other tax savings (ELSS) funds have given a minimum one-year negative return of 11% , Sundaram Tax Saver reduced by 0.44% only. This is the effect of a professionally managed Fund house that could set this example. Diversification: Conventional investment wisdom says “Do not put all your eggs into one basket”, which means we should always spread our risks while investing. We should not only diversify among asset classes, i.e. Equity and Debt, but also among various sectors and various stocks within each sector. Mutual Funds invest in a number of companies across a broad cross-section of industries and sectors. This diversification reduces the risk because seldom do all stocks decline at the same time and in the same proportion. That way, if a part of our portfolio were to go through a downturn, gains from others may offset the erosion. The investment strategy adopted by the Mutual Funds is diversification and bounded by law they can not invest more than 10% of their total funds in any particular company. Hence we may have the taste of a diversified and less risky portfolio with Fund with far less money than you can do on your own through Mutual Fund. Return Potential: Over a medium to long-term, Mutual Funds have the potential to provide a higher return as they invest in a diversified basket of selected securities. As on 31st of December, 2007 the study shows the following: BENEFIT OF LONG-TERM INVESTMENTS IN MUTUAL FUNDS Mutual Fund Returns (annualised CAGR %) | |3 years |5 years |7 years |10 years |12 years | |Highest MF Returns |65.7 |72.6 |52.8 |43.1 |37.3 | |Lowest MF Returns |31.3 |36.7 |18.6 |19.2 |14.7 | |Peer Group Returns |49.0 |54.4 |36.1 |34.1 |27.6 | |Index Returns |43.4 |41.2 |25.3 |19.0 |17.2 | Source: CRISIL Small Investments: Mutual Funds target the small investors. Most schemes keep their minimum investments at Rs.1000-5000. For an affordable amount one can start investing in Equity market through Mutual Fund only. Particularly among Salaried persons Systematic Investment Plan (SIP) is very popular where one can invest an equal amount every month on a particular date of his choice by Post-dated cheques or Auto debit facility. Thus not only a good amount can be accumulated bit by bit, but also the benefit of Rupee Cost Averaging can be availed. Liquidity: While investing by yourself, selling may sometimes be a painful proposition. Tax free Bonds, PPF does not allow premature withdrawal, Bank FDs also penalize you for it. Real Estate and Arts may offer you a return higher than equity but their liquidity is very low. In open-ended schemes, you can get your money back promptly at Net Asset Value from the Mutual Fund itself whenever you want. With close-ended schemes, you can sell your units on a stock exchange at the prevailing market price. Most funds mail your redemption proceeds within three to five working days. Low Costs: Mutual Funds are a relatively less expensive way to invest compared to directly investing in the Share markets because the benefits of scale in brokerage, custodial and other fees translate into lower costs for investors. Convenient Administration: Mutual Fund reduces paperwork and helps you avoid many problems such as bad deliveries, delayed payments and unnecessary follow up with brokers and companies. Mutual Funds save your time and make investing easy and convenient Transparency: You get regular information on the value of your investment in the website of the Mutual Fund and AMFI in addition to disclosure on the specific investments made by your scheme, the proportion invested in each class of assets and the fund manager’s investment strategy and outlook. Flexibility: According to your needs and convenience Mutual Funds offer a variety of schemes to suit your varying needs. Apart from one time investments, there are alternatives of Recurring Deposits, MIS, Fixed Deposits and many more to suit the need of everyone. Choice of schemes: In India there are 956 different schemes from 34 houses giving a wide choice for everybody to invest in Mutual Fund. Tax benefits: The Dividends distributed by the Mutual Funds are tax free and the assessee also can take the benefit of Indexation (adjustment of Inflation) in case of Capital Gain and Capital Loss also can be set off against other incomes. Moreover Long Term Capital Gain also is exempt from Tax in case of Equity Funds. Well regulated: All Mutual Funds are registered with SEBI and they function within the provisions of strict regulations designed to protect the interests of investors. The operations of Mutual Funds are regularly monitored by SEBI. Now let us throw some light on the success story of the Mutual Fund industry. Starting in the year 1964, the industry has gone a long way. From Rs.25.00 crores in 1965 the Asset Under Management (AUM) has grown upto Rs.505152 Crores in 2008. GROWTH OF AUM SOURCE : AMFI It is said that the Mutual Fund industry is still in its infant stage. The ratio of AUM against Bank Deposit is as low as 25% in India, whereas in developed market such as the USA, the ratio is 148% and even in Brazil the same is 96% . And the research shows that the industry is set to treble its assets within 2013 and six-times within next five years. This indicates that there is much scope of growth in this industry till now. In fact, 75% of total investments of the Fund houses are coming from top eight cities. The reason behind is not only concentration of rich people in metros , but lack of awareness also plays a vital role behind such a discriminating outcome. Now the Fund houses also started giving thrust to tier II and tier III cities. During my long stay in Sikkim and more particularly working in the field of finance I noticed that here also the conception of Mutual Fund investment is not very clear among the mass. As such the people of Sikkim are mostly happy with the traditional and conventional investment opportunities like Insurance, Post Office savings and Bank Deposits. But although those are absolutely risk-free but the returns are mostly insufficient to beat the inflation. But mainly due to lack of awareness and absence of proper advisory services people of Sikkim could not avail the opportunity of investing in Mutual Funds. One more reason has been the requiremet of PAN Card which was made mandatory from 2007. But later on vide Circular No. MRD/DoP/MF/Cir-08/2008 it was made clear that ” In the light of the representations received regarding similar exemption for investments in mutual funds, it has been decided to exempt investors residing in the state of Sikkim from mandatory requirement of PAN for their investments in mutual funds also. Howerver, this would be subject to the mutual funds verifying the veracity of the claim of the investors that they are residents of Sikkim, by collecting sufficient documentary evidence. Mutual Funds are also advised to ensure strict compliance with the applicable ‘Know Your Client’ norms” . But still it is better to avail the PAN Card because any investment for Rs.50000.00 or more in Mutual Fund will require submission of PAN Card. Having PAN Card does not mean that you have to pay Tax, for getting refund of the Taxes Deducted at Sources (TDS) you have to have a PAN Card. And the Government also thinking of making PAN mandatory in case of investments in Insurance and Bank/PO deposits above a certain amount. And making a PAN Card also is not difficult. By filling a Form (Form No.49A) and depositing with your address and identity proof and the requisite fees, one may have his PAN Card within 15-20 days time. In conclusion , one must agree that investing in equities has no alternative these days both for high networth individuals (HNI) and the middle and upper middle class pleople. But one shuold also understand the philosopy of investing. If we plant a seedling and everyday pick it up from the pot to see how much it has grown, it can”t satisfy you. Similarly all your investments also require a reasonable time to show you results. And standing on today, where the Sensex is nearing the lower bottom level, three years may be taken as a reasonable. Only thing you have to do is to pick up the right Fund that suits your requirement and risk appetite and just stay invested. Lets conclude with a quote of Bill Gates “If you are born poor, its not your mistake. But, if you die poor its your mistake.” [Author is an M.Com (Gold Medalist), Cost Accountant, and former Area Manager of LIC Housing Finance Ltd, Gangtok. He is presently working as a Financial Advisor and can be contacted in 9474688799 or arindamgtk@yahoo.com] * * * ----------------------- 8. 10.6 11.6 17.9 0.0 5.0 10.0 15.0 20.0 Gold Bank FD G Sec Equity (% Annualized returns) [pic]