Monday, July 28, 2008

Some question in the current market scenario

Do you believe that India’s long term growth story remains intact?
Yes, but with one caveat. The long-term growth story was never as rosy as it was made out to be nor was it sustainable.

In other words, those who thought that the Indian economy could grow at double digit rates forever were living in a fantasy world. Growth is almost never linear. It is two steps forward, one step back. Note that after this you are still one step ahead.

What is your assessment of the current Indian equity markets in the context of various domestic and global concerns? How long could the pain last?
The longer the party, the more severe the hang over is likely to be. The gain lasted a long time. The pain will last awhile as well. In some ways, the pain will have to last long enough for the excesses of the last few years to be washed away.

Will picking defensive/value stocks work in the Indian context in current circumstances?
Depends on what you are trying to accomplish. If you want to preserve principal and derive cash flows, there are no safe stocks. Even the safest sectors will see volatility in stock prices.
If you have a longer time horizon and are willing to bear ‘paper losses’ in the short term, a strategy to adopt would be to buy mature companies with solid cash flows, good management, significant competitive advantages and reasonable market prices.

What are the lessons to learn from the current meltdown in equity markets, including India?
Humility …No one is bigger than the market or smarter than the rest of the world. Risk is upside and downside… What goes up can come down. Models are only as good as the inputs that go into them.

How relevant is the valuation of the broader market when valuing a particular stock?
A fair amount… After all, the way the entire market is valued tells us something about the risk aversion of investors, risk premiums and the level of interest rates. Those are all key inputs into the valuation of an individual company.

What are the simple and most effective ways of assessing portfolio risk?
Look at how much your portfolio varies across time and how it moves with the market. If your portfolio seems to be moving too much or is out of synch with the market, you are not diversified sufficiently.

How would you value a company which is aggressively investing in capacity expansion and has a long gestation period? Should investors pay a premium for the future?
Depends on whether the investment in capacity is a sensible investment or not. There is nothing inherently good about investing for the future, if the investments you are making will be delivering sub-standard returns.

In the case of loss making companies with potential to break even in the due course of time, what tools should be used to arrive at valuations?
Why would you need different tools for valuing money-losing companies? In fact, your tools for valuing all companies should be fundamentally the same. You cannot create new sets of rules/models/principles for different classes of stock.

Commodity stocks tend to attract high valuations during the peak of commodity cycle and correct significantly when the cycle turns down. How does one capture the risk of cyclicality of the business?
Commodity stocks are more driven by commodity prices than by business cycles. In the current cycle, the two have moved together. If you look historically, that has not been true.

In the 1990s, for instance, real economies grew but oil prices stagnated. If you have a cyclical company, it will be affected by economic cycles. The only thing you can do to capture the risk of cyclicality is to demand a higher return on these investments.

What are the valuations tools that one should use to determine the selling point for a particular equity investment?
The same tools that you used to decide what and when to buy – cash flows, comparables – should be the tools that you decide to use when to sell.

Monday, July 21, 2008

Why is Nuclear-deal good for the country.

India would require 500-600 thousand MW of power by 2030 up from 132,110 at present. Thus nuclear power is the only way forward for India.

Energy needs of India are increasing exponentially and only nuclear power is the way forward. Increased price of oil and gas internationally, issues of climate change associated with coal as well as the breakdown of consensus on big dams, India needs Nuclear Energy.

India generates 132,110 lakh MW of power annually. Of this, 64.7 per cent is generated from thermal power, 26.2 per cent is generated through hydro electric power, 5.9 per cent is from renewable power sources and only 3.1 per cent through nuclear power.Nuclear power would contribute 10 per cent of the country's energy needs by the year 2022 and 26 per cent of the needs by the year 2052.

Share of nuclear power in world wide energy production was one per cent in 1960 and between 1960 to 1986, it rose to 16 per cent of world's energy production. The share has remained constant since then.There are 439 nuclear power reactors operating around the world and the US accounts for 104 of these reactors followed by France at 59, Japan at 55, Russian Federation 31 and Republic of Korea 20.

Out of the 35 new nuclear power plants under construction in the world, Asia accounts for 24 of these. While China is building six new nuclear power plants to get 5,222 MW power for its grid, India too is building six such plants which would add 2910 MW of to its grid.

Nuclear Deal

What does Indo-US nuclear deal mean?

The US House of Representatives voted on Wednesday to approve a landmark deal that will allow the United States to sell civilian nuclear technology to India.

Here is an overview of the deal and its implications:

WHAT IS THE PACT?

The legislation amends Section 123 of the Atomic Energy Act of 1954. It lets the US make a one-time exception for India to keep its nuclear weapons without signing the Nuclear Non-Proliferation Treaty (NPT).

The amendment overturns a 30-year-old US ban on supplying India with nuclear fuel and technology, implemented after India's first nuclear test in 1974.

Under the amendment, India must separate its civilian and military nuclear facilities, and submit civilian facilities to inspections by the International Atomic Energy Agency (IAEA).

WHY IS IT CONTROVERSIAL?

Critics say it undermines the NPT, which holds that only countries which renounce nuclear weapons qualify for civilian nuclear assistance.

The accord sends the wrong message: it could undercut a US-led campaign to curtail Iran's nuclear program, and open the way for a potential arms race in South Asia.

India says 14 of its 22 nuclear facilities are civilian. Critics say the pact could make bomb making at the other eight easier, as civilian nuclear fuel needs will be met by the US

WHAT DO THE DEAL'S SUPPORTERS SAY?

US President George Bush calls the deal necessary to reflect the countries' improved relations. It strengthens international security by tightening US ties to ally India, the world's biggest democracy. It also ensures some of its nuclear industry will undergo international inspection.

New Delhi, which relies on imported oil for some 70 per cent of its energy needs, says nuclear power will help feed its rapidly expanding economy.

France, which signed a similar deal with India in February 2006, says the move will help fight climate change and aid non-proliferation efforts.

HOW IS PAKISTAN INVOLVED?

Pakistan sought a similar civilian technology deal with the US but was refused last in March. It is the only other confirmed nuclear power not to have signed the NPT - saying it will join after India does.

Pakistan's own expanding nuclear program could fan the rivalry between India and Pakistan.

INTERNATIONAL RIVALRIES?
China is said to have supported Pakistan's nuclear weapons program since the 1980s. Some analysts see the Indo-US deal as part of attempts by larger powers, the US and China, to shore up influence in South Asia by building up rival arsenals.

The IAEA said in 2004 that Libya and Iran's nuclear programs were based on Chinese technology provided by Pakistan.

Trust Vote

Trust Vote on July 22. What is Trust Vote?

A trust vote is a motion through which the government of the day seeks to know whether it still enjoys the confidence of parliament.

A trust vote is sought either during the first session of a newly-elected Lok Sabha if it is not clear whether a party or a grouping of parties command a majority in the house, or at any time during the five-year tenure of the house if it becomes apparent that the government of the day has lost its majority.

There have been eight trust votes in the past 29 years, with the government of the day winning six. In two instances, the prime minister of the time quit before facing the house.

In the present case, Prime Minister Manmohan Singh will be moving a trust motion Monday, which will be voted on Tuesday after a debate, following the withdrawal of support by the Left parties on the India-US nuclear deal.

While the deal, or any other issues will not be specifically mentioned in the motion, it definitely will figure during the two-day debate.

Thus, inflation and the spiralling prices of consumer goods will most certainly figure during the debate.

Soon after the Left withdrew its support, Manmohan Singh called on President Pratibha Patil and offered to seek a trust vote in parliament.

Had he not done so, it would have been for the president to decide on whether to allow the prime minister to continue in office.

There are no express provisions on this in the constitution and the president is expected to act in a manner consistent with tradition and which furthers democracy.

Since the prime minister holds office during the pleasure of the president, a prime minister can be removed if the president is satisfied that a trust vote is called for but is not being sought. The government would be expected to resign if it loses a trust vote. If it refuses, the president has the power to remove the prime minister. In the Indian parliamentary history so far, no prime minister has been forcibly removed.

In practice, no government would refuse to resign after losing a trust vote. If a government loses a trust vote and resigns, the president will ask it to continue as a caretaker government, with theoretically the same powers it had before the vote.

As per convention, such a government would not take any major policy decisions since parliament would stand dissolved ahead of general elections.

Saturday, July 19, 2008

Impact of U.S recession in India

Fears of a US recession led to panic in the Indian stock market. January 21 and 22 saw a meltdown with a mind-boggling US$450 billion in market capitalization being vaporized. An unprecedented interest cut by the Fed led to a bounce-back on January 23 and at the time of this writing, the benchmark index (BSE) has gained 2.5%, almost in line with Hang-Seng, Nikkei, and Kospi.

History might hold a clue here. The last time the bubble burst (2001–2002), the DJIA went down by 23%, while the Indian Index fell by 15%.

The effects of this recession on India may be quite distinct from those of the past. Here are some areas worth following:

1. A credit crisis in the United States might lead to a restructuring of asset allocation at pension funds. It has been suggested that CalPERS is likely to shift an additional US$24 billion to its international portfolio. A large portion of this is likely to flow into India and China. If other funds follow suit, a cascading effect can be expected. Along with the already significant dollar funds available, the additional funds could be deployed to create infrastructure—roads, airports, and seaports—and be ready for a rapid takeoff when normalcy is restored.

2. In terms of specific sectors, the IT Enabled Services sector may be hit since a majority of Indian IT firms derive 75% or more of their revenues from the United States—a classic case of having put all eggs in one basket. If Fortune 500 companies slash their IT budgets, Indian firms could be adversely affected. Instead of looking at the scenario as a threat, the sector would do well to focus on product innovation (as opposed to merely providing services). If this is done, India can emerge as a major player in the IT products category as well.

3. The manufacturing sector has to ramp up scale economies, and improve productivity and operational efficiency, thus lowering prices, if it wishes to offset the loss of revenue from a possible US recession. The demand for appliances, consumer electronics, apparel, and a host of products is huge and can be exploited to advantage by adopting appropriate pricing strategies. Although unlikely, a prolonged recession might see the emergence of new regional groupings—India, China, and Korea?

4. The tourism sector could be affected. Now is the time to aggressively promote health tourism. Given the availability of talented professionals, and with a distinct cost advantage, India can be the destination of choice for health tourism.

5. A recession in the United States may see the loss of some jobs in India. The concept of Social Security, that has been absent until now, may gain momentum.

6. The Indian Rupee has appreciated in relation to the US dollar. Exporters are pushing for government intervention and rate cuts. What is conveniently forgotten in this debate is that a stronger Rupee would reduce the import bill, and narrow the overall trade deficit. The Indian central bank (Reserve Bank of India) can intervene anytime and cut interest rates, increasing liquidity in the economy, and catalyzing domestic demand. A strong domestic demand would also help in competing globally when the recession is over.

In summary, at the macro-level, a recession in the US may bring down GDP growth, but not by much. At the micro-level, specific sectors could be affected. Innovation now may prove to be the engine for growth when the next boom occurs.

U.S. recession effect in India..........

Thursday, July 17, 2008

Do i need to pay tax even though it gets deducted from my Salary?

This is a common question everyone asks. Taxes gets deducted from my salary, do i still need to file income tax return. The answer is Yes.

Filing of tax is compulsory for every person whose gross total income, that is, the income under the five heads before allowing for any deduction such as insurance premium, exceeds the basic exemption limit. For financial year 2007-08 (assessment year 2008-09), this exemption limit was Rs 145,000 for women below the age of 65, Rs 195,000 for persons above 65, and Rs 110,000 for any other individual.

Every person falling in the tax bracket should file a return, even if his tax liabilities have been taken care of by the employer through tax deducted at source.

Persons whose salaries have been subjected to TDS are also required to file return because they may have earned from sources other than salary.

Monday, July 14, 2008

RCom, MTN talks of merging extended till July 21

The Anil Ambani-controlled Reliance Communication (RCom) and South African telecom major MTN have extended the period of exclusive talks for a possible merger till July 21, RCom said in a statement Wednesday.

"RCOM and MTN have agreed to continue their negotiations in relation to such potential business combination, and have extended the period of exclusivity until July 21, 2008," the statement said.

MTN and RCom, India's second biggest mobile operator, have been locked in exclusive merger negotiations for 45 days that ended Tuesday. If successful, the talks would net the merged entity with more than 116 million mobile subscribers across India, West Asia and Africa. The two companies had announced May 26 they had entered into exclusive negotiations for 45 days for a potential business combination.

ADAG planning to acquire Cement manufacturing plants

The Reliance Anil Dhirubhai Ambani Group (ADAG) is looking for acquisitions to start its cement business much before it completes its 4,000 MW mega power project at Sasan in Madhya Pradesh, which would provide the fly ash used to make cement.

The company has started talks with various small and medium companies through a merchant banker to shortlist acquisition targets.

The group has also appointed Anil Singhvi, former managing director of Ambuja Cements, vice-chairman of Reliance Natural Resources, the company which will set up the cement business. ADAG's bankers have also held talks with the Mehta group, which has two facilities, Gujarat Sidhee Cement and Saurashtra Cement in Gujarat, with a total capacity of 2.3 million tonnes.

An email sent to Jay Mehta, the group's executive vice-chairman, on Friday did not elicit a response. Mehta could not be reached on his office number either. The coal-fired Sasan project is scheduled to go on stream in 2012-13. But a source familiar with the negotiations said, "the group is looking at the cement business beyond just utilising the fly ash coming out of Sasan.

"Initial discussions with Birla Corporation, the flagship of the M P Birla group, came to nothing. Birla Corporation has a cement manufacturing capacity of 5.7 million tonnes, of which the facility located at Satna, close to Sasan, manufactures 1.5 million tonnes.

ADAG "declined to comment" on queries sent by the newspaper.

Wednesday, July 9, 2008

What is Section 80C, tax planning and investments


We will look at Section 80C, one of the most important provisions for investors in the tax laws.

What is Section 80C?

The government, in order to encourage savings, gives tax breaks to certain financial products as discussed in Section 80C of the Income Tax Act. These investments are often referred to as 80C investments.

Up to a limit of Rs 1 lakh, the money that you invest in these products is deductible which means that you don't have to pay income tax on it. Thus if you are in the 30 per cent tax bracket and you invest the maximum allowed you save Rs 30,000 in taxes.

There are a wide range of investments you can make to claim the Section 80C benefit. To keep things simple we will focus on two categories: Small savings schemes and ELSS (equity linked savings schemes). Other 80C products include your provident fund, the repayment of principal on your home loan and your life insurance premium.

Small savings schemes

These include the public provident fund (PPF) and National Savings Certificate (NSC). They offer a return of around 8 to 8.5 per cent which is quite low compared to typical returns in equity products. Furthermore, there is a relatively long lock-in period, 15 years for the PPF and 6 years for the NSC. Their main advantage is that they offer a guaranteed return unlike equity-based products.

Equity linked savings schemes

These are basically mutual funds which are specially created to provide tax benefits. As with regular mutual funds there is no guaranteed return and you can lose money in a period of falling stock prices as has happened in the first half of 2008. However, ELSS usually provides a higher return than small savings schemes and also a lower lock-in period of three years.

Examples of ELSS include Franklin India Taxshield and HDFC [Get Quote] Taxsaver. As with regular mutual funds, these schemes pursue a range of investment strategies: For instance, some may focus on large cap stocks while others may focus on small and mid cap stocks. It makes sense to invest in more than one scheme to diversify some of your risk.

Making a choice

How do you decide to allocate your Rs 1 lakh 80C limit? This will depend on your other financial decisions; for example whether you have taken a home loan or purchased life insurance. As to the decision between small savings schemes and ELSS two of the most important factors are your attitude to risk and inflation.

As recent months have shown so clearly, stock markets are a lot riskier than small savings schemes. However, the flip side is that riskier investments like stocks offer a higher rate of return particularly over the long run. From the perspective of a young investor who may not need most of her/his investment money till retirement it probably makes sense to tilt towards riskier assets.

The other important consideration when evaluating returns is to adjust for inflation.

In other words, if your investment generates a return of 8 per cent and inflation is 7 per cent, then your inflation-adjusted return is only one per cent. When inflation moves into double digits you are actually making a negative inflation-adjusted return, as is happening currently. This is a fundamental problem with any investment product that offers a fixed return at a time of high and rising inflation.

By contrast stocks are a better hedge against inflation especially in the long run. Though inflation increases the costs of firms it also allows them to charge a higher price to their customers thereby protecting profits to some extent. This in turn means that stock prices and equity-based products can offer better protection from inflation over a number of years though not necessarily in the short run.

What about the element of timing when it comes to equity schemes? For instance, stocks have clearly taken a pounding in the last six months. However this doesn't necessarily mean it's a bad time to invest in stocks; valuations in some companies look quite attractive now and over a three-year horizon you could see decent returns.

From the point of view of the average investor it's probably best to take timing out of the picture by following a systematic investment plan which means you invest a fixed amount every month.

Small savings schemes and ELSS each have their advantages and disadvantages. Based on your investment strategy and particularly your attitude towards risk you have to choose how much to invest in them as part of your Section 80C investments.

Monday, July 7, 2008

Filing Income Tax returns

Filing of tax is compulsory for everyone whose gross total income - the income under the five heads (salary, business, capital gains, house property or other sources) before allowing for any deductions such as insurance premium - exceeds the basic exemption limit.

And you know you can't run away from it any more. We are talking about 31 July, the day we are reminded of our bondage, the price we have to pay for many of the good things in our life. This happens to be the last day for filing income tax returns for all salaried Indians, be they resident or non-resident.

For financial year 2007-08 (assessment year 2008-09), this limit was Rs 145,000 for women below 65 years of age, Rs 195,000 for senior citizens (above age 65 years) and Rs 110,000 for any other individual. It is compulsory for every person exceeding these limits to file the return before the prescribed date, even if their employer has taken care of their tax liabilities by reducing their salaries by the necessary amounts before paying the rest to them. Paid this way, it is known as tax deducted at source or TDS.


ITR Forms

There are two income tax return forms, ITR-1 and ITR-2, for salaried individuals. Your sources of income (they will fall under one or more of the five sources mentioned earlier) will decide your form. You will have to submit the filled form to the tax authorities and get an acknowledgement from them.

Use ITR-1 to file your tax return if your income is from salary, pension or interest. In case of any capital gains, income or loss from house property and income from any other source, you will have to use ITR-2. You can go to www.incometaxindia.gov.in/download_all.asp to download these forms.

You will find ITR-1 relatively simple to fill up. A prerequisite for the exercise is Form 16, the certificate that comes from the employer showing the TDS from the income chargeable under the head salary. ITR-1 is almost a replica of Form 16. All you have to do is pick the numbers from Form 16 and put them in the ITR form.

Apart from salary income, there is an important component of income that many taxpayers ignore while filing their returns. It is the interest income earned from the funds lying in savings accounts in banks. Disclosing that, however small it may be, is mandatory.

You just have to add the total interest credited to your bank account in the last financial year. Scrutinise your income tax return to ensure that no taxable income is undisclosed. After you file your return, the tax authorities will hand you an acknowledgment. That's it, you are through with the filing of returns.

You will need to fill up ITR-2 if you, as a salaried individual, have made any capital gains. This form is filled in the same way as ITR-1. In addition, you will have to fill in income, if any, from house property and other sources.


How to file

The actual filing of return can be done either by using the traditional paper form or electronically, over the Internet. The second, known as e-filing, is fast catching up. The digital method is compulsory for companies, but optional for salaried individuals still. However, it may well become compulsory for individuals with a certain level of income in times to come. So, it may not be a bad idea to familiarise yourself with this process.

Before you start filing the return, check if you would be getting a refund from the IT Department or have to pay tax. In case of the latter, even before starting the filing process, you should first get hold of Form 280, fill it up and deposit it any bank along with the tax payable in cash or cheque. You can also pay tax through Internet banking. In both cases, you will get a receipt number which has to be quoted in the ITR form.


Offline filing

There are two options - you may either submit the ITR form at the nearest income tax office after filling it up yourself, or you may get a chartered accountant or a tax return preparer to do it for you. Try to visit the ITO well before the last date for filing return as crowds increase as 31 July draws near.

You may also take help from the public relations officer of the ITO to fill the form. No documents or investment proofs need to be attached with the form, but remember to bring photocopies or originals with you to the ITO. These will come in handy if you are asked to authenticate the maths.

The fee of a CA would depend on your income slab and the number of income sources. Typically, it would range from Rs 300 to Rs 2,000, depending on the complexities involved. One good thing about filing through a CA is that it would bring down the margin of error to nil. Also, depending on the acumen of the CA, which often gets reflected in the quality of his practice, he would suggest some tax saving ways to you for the future.


Online Filing

E-filing is done through sites authorised by the IT Department to file taxes on your behalf. To e-file, you will have to input the details of Form 16 in the software of the website, which would automatically generate an electronic return in XML format.

This format helps in sharing of structured data across different information systems. A PDF file of the relevant ITR form is also created along with the XML format. You can download this ITR form, submit it at the ITO and get an acknowledgement.

Save the XML file to your desktop and then upload it on incometaxindiaefiling.gov.in - the IT Department site. Some sites also have provision for online payment of tax. Use of a digital signature will render the e-filing process complete without involving paperwork and visits to the ITO.

In case DS is used, the acknowledgement will be emailed to you. If you upload the file on the tax department's site without the DS, the acknowledgement, called ITR-V, emailed to you will have to be submitted at an ITO within 15 days of downloading it. A DS can be acquired from any of the agencies authorised by the government for the job, including the private and government websites meant for filing tax returns.

E-filing is not just convenient and saves time, it can also be done from anywhere. What is especially important is that the online method reduces or even eliminates the interface between the tax assessee and tax officials.


Online sites

Among the major sites offering e-filing facilities are Taxspanner, Taxsmile and Taxshax. You can either take printouts of the relevant ITRs from these three sites and physically submit them or upload your XML file on the IT Department's site.

Taxspanner uploads the taxpayer's file directly and emails ITR-V to him. With Taxsmile, you can submit the forms at any of its offices spread over the country. They will then forward it to the ITO.

All the three sites are secure and easy to navigate. The major difference among them is on two counts - the number of income sources covered and the process. Get clarity on the cost and features offered. The minimum cost package would normally be only for salary income. The advanced version might be required if you have income from other sources.

The tax sites also differ in the way they ask for information and allow you to input figures. Taxshax gets most of the figures filled up in a single page. Taxspanner has a step-by-step guide and takes one piece of information on one page. Taxsmile gives both these options.

Use of DS raises the cost of e-filing. The amount of this increase varies across tax sites. A DS can be obtained from Taxsmile for Rs 500. Apart from this, you will have to pay for the basic package. Your DS comes with a validity period, after which it has to be renewed.

A DS from Taxspanner, for example, is valid for two years. This site offers a deal in which you can file returns for three years at a cost of Rs 250 a year. To get your DS from a tax site, download the relevant form from it, attach the required documents, such as your identity and address proofs, and courier them to the address concerned. The entire process of acquiring a DS may take around 15 days.

A tax return can also be filed from the government site - incometaxindiaefiling.gov.in/portal/index.jsp - meant for it. Your PAN will work as the username for registering at this site.


Stick to the deadline


Whether you are going offline or online, make sure you are on the right side of 31 July. If tax is due and return is not filed till 31 March of the following year, a penalty of Rs 5,000 is levied. Penalty may also have to be paid in the form of interest. Check out the answers on the next few pages to some frequently asked questions to get on top of tax returns. And then go ahead and file with a smile.

Effect of US Recession on the world Economies

Will the recession in America effect the other economies in a big way?

Yes this recession would effect other economies such as the EU as this is a recession for all world driven by US. Economic experts say that China, Japan, Canada, Mexico and German will suffer bad after the US. Rest of the world will suffer for lesser extent.

All countries own some international currency for their regular imports. China has 1530 billion dollars, Japan 935 billion dollars and so on. Out of this money about 66% is US dolars. As oil is selling only in US dollars all countries need US dollars to buy oil. If dollar falls. All countries loose their money from 66%.

All the other countries are connected to the US, as US is consuming highest commodities in the world in some way or other. German has the biggest share in euro. Some say euro is the transformation of Deutsche Mark, and as German suffers, euro suffers. So Europian Union will suffer.

Wednesday, July 2, 2008

Mutual Fund tips for New Entrants

The first and foremost thing is, first-time or naive investors should invest money for long-term, learn from their lessons and invest regularly.

Please find below answers to question that you may be wanting to know and may find it more useful.

Q: There has been a very dramatic erosion in net asset values. If you were to sum up the last six months, how would you look at the mutual fund industry and what does it look like from here in terms of sector funds and equity diversified funds because looking at these returns and they are in excess of the kind of fall that we have seen on the market?

A: There are a lot of outliers in the whole thing. The averages do not reveal the whole truth. If we dissect the numbers intensely and then we look at things, we get a completely different picture. The popular fund, the larger fund have not lost as much but the biggest loser over the past six months has lost 54%, which is nearly 1.5 times more than the Sensex. So in that sense we come across a large number of fund, which did not have any risk containment thing factored into their portfolio. They have been on a free fall and my worry is that we are getting into a phase where a number of these funds will be exposed to the risk that a good part of their portfolio will be illiquid.

Q: That means trading or churning the portfolio would not be as easy.

A: It will be impossible for them to churn the portfolio of the remaining-that is the other side of the bear market that markets decline and initially the redemption pressure drives you to sell what you can sell easily and then the leftover is completely unsellable. So the bad gets worse in a bear market and that is what some of these funds which are at the bottom of the heap will be faced with.

Q: The fact remains that people who had invested right at the top of the market-which is at 21,000 point-have seen a lot of erosion in their net asset values, what do you think about it?

A: There is nothing new about it and investors invest very confidently when the market is at its peak that can be said for all bull markets whether 1984 or 2000 and now. So there is a lesson to be learnt from here. First and foremost you should invest your long-term money for a naive first time investor and learn from your lesson and invest regularly; this is a lesson to be learnt. If you have stopped investing maybe it is about time that you get started with regular investing. Make sure that you have chosen a good fund, do not buy the popular fund again because most investors chase past performance. Everybody is in the business of chasing momentum that could be risky.


Q: What is your view on Reliance Diversified Power Fund?

A: I am quite optimistic about this fund over the next 3-5 years because there are a lot of things which will happen. It is a specific sectoral fund and is a good vehicle for targeted diversification. But it should not be the only investment which one should have. One should make sure that it is not more than 10-20% of one’s total portfolio. It is a concentrated bet. But one can still be optimistic. The fund manager has done extremely well with his asset allocation.

Sometimes all the sectoral funds of Reliance Mutual have the mandate that they could be fully into fixed income if they want to and they have been able to successfully do that.

Q: What are the fund recommendations?

A: Choose a well-rated diversified equity fund and invest regularly in something which is proven for over five years like HDFC Top 200, Franklin Prime Plus or HSBC Equity or Magnum Contra. Choosing one or two of these funds and investing regularly can take you through. If you are investing for five years, it is always a good time to step in.

Q: What are your views on gold funds?

A: All Gold ETFs offer similar returns and costs. It is a hard to understand sector and investors chase returns. It can be risky if the cycle turns. Funds have complex investment strategies. Look at it as more of a fund allocation as gold cannot be a mainstream investment.

Q: Tell us about mutual fund SIPs.

A: If the investor is a saver who is looking to invest, some of the guidelines can help them. Invest regularly and it is a bad idea to invest lumpsum anytime. Choose a good diversified equity fund if one has 15 years in mind.

But in any portfolio, have a 5-10% fixed income allocation because there is a roll for fixed income in any portfolio. Rebalance it annually so that there is no tax implication of that. Don’t buy too many funds. Buy one or two good funds. Review it annually. One can invest in Franklin Prima Plus, HDFC Top 200, HSBC Equity Fund and Magnum Contra.

Q: What are the debt funds to invest for optimum post tax returns?

A: One should consider the FMP which is on offer currently but the differential between that, if it is a small amount of money and the difference between a bank deposit and choosing an FMP or making a choice of a short cash plus fund is not worthwhile. But if the investment is of more than one year, then you do have some interesting options.

Q: What should investors be buying if they are investing for more than a year?

A: Fixed income funds have been through uncertain times. There are a couple of fixed income categories that are in red. Arbitrage funds score very well on the tax efficiency because the returns from these funds is treated like an equity. It is tax free and quite efficient and you are completely insulated from the equity risk.