Wish you all a very happy and prosperous diwali

Wish you all a very happy and prosperous Diwali

12 top picks you may invest in for this Diwali

Angel Broking is positive on a range of domestic cyclical stocks and quality mid-caps where there is still upside left in terms of value and where earnings outlook remains strong. Amongst sectors banking is one of the preferred sectors as plays on the overall economic revival story, says the report.

 

 

Angel Broking's market strategy report Earnings growth to drive market forward Markets have witnessed a strong rally in the last eight months, which has so far been aided by the deeply beaten down valuations. Going ahead, we believe that acceleration in earnings growth will drive the markets forward. We expect the performance of various domestic cyclical sectors to continue improving going forward on the back of the improving economy and policy environment. In our view, top-line and earnings are at subdued levels across most cyclical sectors and are likely to show material improvement going forward, which is not yet fully reflected in consensus. Further, we expect earnings growth to be better than sales growth in the coming years on the back of improvement in operating margins, capacity utilisation and financial leverage (which would reflect in lower depreciation and interest costs). Lower inflation and interest rates to catalyze investment cycle The government and the Reserve Bank of India (RBI) have been continuously making efforts to bring down inflation, which is now beginning to yield results. Lower crude oil prices and stable currency have aided in easing of inflationary pressures. Going forward, we expect inflation to continue trending lower as RBI's tight policy as well as the government's decision of measured 4-5% hike in minimum support prices as opposed to average hikes of 10-12% in last few years, would aid in lowering food and overall inflation. As inflation reaches RBI's comfort levels of 6%, we expect rising financial savings and declining interest rates, which would also act as a catalyst for the investment cycle. Earnings growth to outpace sales growth There is increasing credibility that the better inflation and policy environment are likely to push up GDP growth and consequently corporate sales growth. Further, we expect earnings growth to be better than sales growth in the coming financial years. The better demand environment and resulting improved pricing power, coupled with lower cost inflation are likely to help companies in reviving their operating margins back to previous levels. Moreover, under-utilized capacities set-up prior to the downturn, capex on stuck or delayed projects due to policy logjam as well as stretching working capital requirements had burdened P&Ls in the form of higher depreciation and interest costs (as per data across 1,883 listed companies, excluding BFSI, IT, Pharma & FMCG). Hence additional topline growth in the next few years will not require commensurate interest & depreciation costs. Moreover, higher cash-flows, easier access to fresh equity capital and lower interest rates are likely to further aid in lower interest costs as a percentage of sales. All these factors are in our view expected to cumulatively contribute towards higher growth in earnings. Outlook and Valuation We are positive on a range of domestic cyclical stocks and quality mid-caps where there is still upside left in terms of value and where earnings outlook remains strong. Amongst sectors we like, banking is one of the preferred sectors as plays on the overall economic revival story. We like both private and PSU banks - private banks in anticipation of continued structural market share gains and PSU banks as beneficiaries of improving asset quality and lower interest rates. We also like stocks in the tyres and auto ancillary space owing to recovery in auto sales volumes and improving margins. We are positive on cement stocks, on similar expectations of economic revival and more specifically, pick-up in infrastructure and construction activity due to the government's focus. We particularly like smaller regional cement players as their valuations still look compelling. Top picks Company CMP (Rs.) TP (Rs.) Axis Bank  379 501 Banco Products  139 182 Bank of India  239 310 Crompton Greaves  203 235 Goodyear  644 756 ICICI Bank  1,460 1,894 India Cement 108 146 Infosys  3,889 4,700 Jagran Prakashan  122 154 Mangalam Cement  244 337 Punjab National Bank  900 1,109 Siyaram Silk Mills  712 952

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Why all this market volatility is here to stay

According to Wall Street pros, Europe, Ebola, ISIS and a pick-your-poison menu of other headwinds have made a world full of promise suddenly appear to be a minefield without a map.

 

 

What is making the market volatile is pretty obvious. What is likely to keep it volatile is a little less so.

Wall Street pros have trotted out all the usual suspects to explain why the major averages have wiped out almost all their gains for the year: Europe, Ebola, ISIS and a pick-your-poison menu of other headwinds that have made a world full of promise suddenly appear to be a minefield without a map.
Read More Correction watch: Here are the levels to watch
Underlying the investing climate is a general level of uncertainty.
A growing chorus of investors worry not simply that the world is changing but is doing so in ways for which policymakers are not prepared. How does the Federal Reserve unwind its massive easing measures? What happens if things don't go as planned? In the case of a big scare, particularly in the fixed income market, will a lack of buyers turn a selloff into a stampede?
"We're seeing this move for the third time," Peter Boockvar, chief strategist at The Lindsey Group, said in reference to the Fed likely exiting the third leg of its quantitative easing bond-buying program this month. "People are acting like they've never seen this before. This is what happens when QE ends. All the warts and blemishes start to matter." Indeed, there are warts and blemishes aplenty, even amid the wine and roses.
Read more: This is the 'doomsday' bond market scenario
Greece sparked the most recent euro zone worry when leaders there announced what amounts to a go-it-alone strategy—minus central bank assistance—in righting its ship.
Meanwhile, investors jump each time it appears the Ebola scare is spreading. And to top things off, the supposedly sacrosanct US, which is expected to rise above the global economic weakness, has problems of its own, particularly in terms of consumer strength as evidenced by September's anemic retail sales numbers released Wednesday.
Read More Capitulation? Market drops on weak data, snaps back
Looking at the big picture, Boockvar believes that the downdraft in stocks is just getting started.
"This is not your standard 5 or 6 percent correction," he said. "This is going to be the first 10 percent correction we've had in a long time—at least."
But while equities get the most headlines, the reaction in the fixed income markets may be even more telling.
German bund yields slumped Wednesday prior to the US market open while Greek yields spiked. For its part, the benchmark US 10-year Treasury note briefly slid below 2 percent—where it has not closed since May 21, 2013—in what Boockvar called a pure safety play amid global turmoil.
"It's the classic flight to safety," Boockvar said. "When you're in a flight-to-safety trade, people are more worried about safety than the smarts of it."
Read More Euro zone crisis 2.0? Greek stocks tank
The massive decline comes the same week that a Bank for International Settlements official expressed fears over a "violent" market drop, particularly in bonds.
"If I had told you that there were heightened tensions in the Middle East and Eastern Europe, uncertainty about the turning point in US monetary policy, a succession of strong US job numbers, uncertainty about the future direction of policy in Europe and Japan, as well as increased concern about the strength of the Chinese economy, you would not be expecting that to make for a benign time in financial markets," Guy Debelle of the BIS said, according to prepared remarks for the Australian and New Zealand Investment Conference on Tuesday. "But that is what we have seen for much of this year."
Debelle's fears over market stability stem not only from those factors but also from a lack of liquidity in the fixed income markets—remarks that mirrored those from the TABB Group's Anthony Perrotta, who warned last week of a "doomsday" scenario shaping up in fixed income.
A "reason to suspect that the selloff might be violent is the starting point, namely zero nominal interest rates," he said. "That is a point we haven't started from before (with the possible exception of Japan). There are undoubtedly positions out there which are dependent on (close to) zero funding costs. When funding costs are no longer zero, those positions will blow up. Where are they? How large are they?
"I don't really have a good answer to those questions. It appears more likely that they are held by real money investors than directly on the balance sheets of the core banking system, which is probably a good thing. But then if we think back to 2007, structured investment vehicles weren't directly on the balance sheet of the core banking system either."
The result: Financial markets faced with uncertainty that isn't going away. The Europe slowdown is probably in the early innings, the Fed hasn't even begun to raise interest rates yet, and geopolitical crises seem to pop up by the day.
Investors, then, may not want to sell into the weakness, but they for sure had better be paying attention.
Read More After VIX 'super spike,' is the worst ahead?
"It's all occurring at a time when you have some expensive financial assets out there. That makes for a pretty volatile mix," said Gary Pzegeo, managing director at Atlantic Trust Private Wealth Management. "If you get a new piece of information and you get a big seller, there are lots of people who are watching the market, see the prices and are quick to pull the trigger."
Pzegeo believes the bull run that began 5½ years ago remains intact, but sees "a new and more challenging phase ahead" exacerbated by potential liquidity events the likes of which Debelle and others have cited.
"You have to be careful that liquidity events don't turn into fundamental events," he said. "You have to watch some of the markets that have been founded on very liquid (conditions) and make sure that they're still functioning—that this does not spin into something worse."

Moneycontrol.com

Diwali buying: Why Goddess Lakshmi will approve of equities

Investing in ‘flavor of the season’ financial instruments, namely gold and silver is a considered a smart choice by some. So is the decision to invest in FDs and PPF. Our studies indicate that an investment of Rs 100 in trusted financial instruments for 30 years would grow 22 times.

 

Diwali, the most glamorous of all Indian festivals, is usually the time when goddess Lakshmi showers her blessings on her devotees in the form of an annual bonus. With a great bonus comes great responsibility -the responsibility of making a wise decision and to use the money efficiently. While the temptation to lavishing your family and friends with long awaited gifts is high during the festive season, it comes at the cost of failing to boost the corpus available for investment. So instead of spending on crackers to light up this Diwali, how about we make a decision to invest to light up Diwali in the next few decades for our families?

What are the options available?  
There are several options available for making the most of this extra income. Holding on to cash for future use is one of them, but is a loss making initiative in the long run. Cash lying in lockers is guaranteed to lose value over time due to inflation.

Investing in ‘flavor of the season’ financial instruments, namely gold and silver is a considered a smart choice by some. So is the decision to invest in FDs and PPF.  Our studies indicate that an investment of Rs. 100 in these trusted financial instruments for a period of say 30 years would grow 22 times. These returns are definitely better than keeping funds idle.

Is there not a better investment option?
But Diwali is not about just the sweets and sparkles. It is about creating a big bang and one of the best ways to create that impact in our investment portfolio is to add the flavor of equities. Equities have out-performed other investment asset classes, over the long-term, in India as well as globally. They protect your capital against inflation and provide you with a real rate of return. Equities in our investment portfolios are therefore essential to ensure a bumper Diwali!

Why Goddess Lakshmi would approve of equities?
Equities have an expected probability of delivering returns ahead of inflation, which is a key requisite for wealth creation. Equity performs much better compared to other investment options in the long run. We compared returns from investments in various financial instruments and the results are depicted in the chart below.

Rs. 100 invested in equities would grow 100 times for the same period of 30 years as compared to 22 times growth of investment in traditional financial instruments. The chart uses financial year end values for Sensex and year averages for Gold, Silver, PPF and FD rates. It ends on March 31, 2012 and the impact of taxes has not been considered. Equity has no long term capital gains tax. Except PPF, all other investments attract income or capital gains tax. This tax impact further lowers the return from other form of investments.

However, investing independently into equities over a long horizon requires tracking of performance and weeding out of underperforming scrip. If you are not up to regular monitoring of funds, then opting for equity mutual funds would be the best way to participate in equities. Equity mutual funds have outperformed the Nifty in 7 of the last 10 years. Designed to diversify investment portfolios, equity mutual funds are professionally managed thereby making financial planning easier, even for a novice.

To further simplify the investment process, you can register with reliable online platforms. These online platforms managed by team of personal finance experts, eliminate the need for investors to conduct their own research. They recommend scientifically selected mutual funds for investment thereby adding value to your investment portfolio.

With goddess Lakshmi bringing luck and buck this Diwali, make her annual trip special for your loved ones by investing in building their bright future.

 

Moneycontrol.com

How Smart Do You Have to Be to Succeed?

Threshold Theory: How Smart Do You Have to Be to Succeed?

by James Clear | Read this article on JamesClear.com

How smart do you have to be to succeed?

What about to become a creative genius? Did Picasso and Mozart use superhuman intelligence to create their masterpieces?

And similarly…

• How intelligent do you need to be to become a successful entrepreneur?
• How good does your training program need to be to become an elite athlete?
• How perfect does your weight loss program need to be to burn fat?
  These are questions that we don’t often ask ourselves, but they are built into our beliefs and actions about many phases of life. We often think that the reason we aren’t succeeding is because we haven’t found the right strategy or because we weren’t born with the right talents.
  Perhaps that is true. Or, perhaps there is an untold side of the story…
  “The Termites”
  In 1921, there was a psychologist at Stanford University named Lewis Terman who set out on a mission to conduct a research study unlike any before it.
  Terman began by finding the 1,000 smartest students in California between the third grade and eighth grade as measured by IQ. [1] After much testing and searching, Terman gathered a final sample of 856 boys and 672 girls. The children became known as “The Termites.”
  Terman and his team began testing the children in nearly every way you could image. They tracked their IQ, analyzed how many books each student had in their homes, took their medical histories, and on and on. But that was just the beginning.
  What made Terman’s study unique is that it was the first longitudinal research study, which meant that Terman continued to track and test his subjects for years afterward. The study, which is now famously known as Genetic Studies of Genius, collected data from the students throughout their entire lives. Terman collected additional data in 1928, 1936, 1940, 1945, 1950, and 1955. After Terman died in 1956, his colleagues continued tracking The Termites in 1960, 1972, 1977, 1982, and 1986.
  To summarize, the study started with the smartest group of children in the entire state of California and then tracked their success throughout their entire lives. Decades later, the researchers had discovered something very interesting…
  Threshold Theory
  The surprising discovery that came out of Terman’s study is best described by creativity researcher and physician, Nancy Andreasen…
  “Although many people continue to equate intelligence with genius, a crucial conclusion from Terman’s study is that having a high IQ is not equivalent to being highly creative. Subsequent studies by other researchers have reinforced Terman’s conclusions, leading to what’s known as the threshold theory, which holds that above a certain level, intelligence doesn’t have much effect on creativity: most creative people are pretty smart, but they don’t have to be that smart, at least as measured by conventional intelligence tests. An IQ of 120, indicating that someone is very smart but not exceptionally so, is generally considered sufficient for creative genius.” [2]
  Remember our question from the beginning: “Did Picasso and Mozart use superhuman intelligence to create their masterpieces?”
  According to Threshold Theory, not necessarily. Being in the top 1 percent of intelligence has no correlation with being fantastically creative. Rather, there is a minimum threshold of intelligence that you need to have, and after that it comes down to a lot of deliberate practice, putting in your reps, and developing your skill set.
  
  Threshold Theory in Everyday Life
  If you look around, you’ll see that Threshold Theory applies to many things in life. Success is rarely as simple as “just work harder.” The fundamentals matter. There is a minimum threshold of competence that you need to develop in nearly any endeavor.
  After that, however, the difference is between those who put in the work and those who get distracted. Once you have a basic grasp of the right things to do, it becomes about the consistency of doing the right things more often. Once you understand the fundamentals, it comes down to your habits.
  Some examples…
  Weightlifting: Assuming you’ve met some minimum threshold and are doing reasonably effective exercises (like these) with reasonably effective form, the details don’t really matter that much. Once you’ve passed this basic threshold, what makes 95% of the difference is this: Are you showing up to the gym and putting in your reps?
  Writing: Assuming you understand the core principles of writing and the basics of grammar, what determines your ability to write well more than anything else is writing a lot. Once you reach the threshold of writing a decent sentence, the thing that leads to success is writing more.
  Entrepreneurship: Assuming you know what the most important metric is for your business, what makes the biggest difference is focusing on that metric every day. Once you cross the basic threshold of knowing what to work on, the most important thing is continuing to work on that one thing and not something else.
  If you’re brand new to an area, then it’s possible you haven’t learned enough to cross the threshold yet. But for most of us, we know what works and we have enough knowledge to make progress. It’s not about being more intelligent or more skilled, it’s about overcoming distraction and doing the work that already works.

Choosing A Mutual Fund

Choosing a fund

Mutual fund is the best investment tool for the retail investor as it offers the twin benefits of good returns and safety as compared with other avenues such as bank deposits or stock investing. Having looked at the various types of mutual funds, one has to now go about selecting a fund suiting your requirements. Choose the wrong fund and you would have been better off keeping money in a bank fixed deposit.Keep in mind the points listed below and you could at least marginalise your investment risk.

Past performance

While past performance is not an indicator of the future it does throw some light on the investment philosophies of the fund, how it has performed in the past and the kind of returns it is offering to the investor over a period of time. Also check out the two-year and one-year returns for consistency. How did these funds perform in the bull and bear markets of the immediate past? Tracking the performance in the bear market is particularly important because the true test of a portfolio is often revealed in how little it falls in a bad market.

Know your fund manager

The success of a fund to a great extent depends on the fund manager. The same fund managers manage most successful funds. Ask before investing, has the fund manager or strategy changed recently? For instance, the portfolio manager who generated the fund’s successful performance may no longer be managing the fund.

Does it suit your risk profile?

Certain sector-specific schemes come with a high-risk high-return tag. Such plans are suspect to crashes in case the industry loses the marketmen’s fancy. If the investor is totally risk averse he can opt for pure debt schemes with little or no risk. Most prefer the balanced schemes which invest in the equity and debt markets. Growth and pure equity plans give greater returns than pure debt plans but their risk is higher.

Read the prospectus

The prospectus says a lot about the fund. A reading of the fund’s prospectus is a must to learn about its investment strategy and the risk that it will expose you to. Funds with higher rates of return may take risks that are beyond your comfort level and are inconsistent with your financial goals. But remember that all funds carry some level of risk. Just because a fund invests in government or corporate bonds does not mean it does not have significant risk. Thinking about your long-term investment strategies and tolerance for risk can help you decide what type of fund is best suited for you.

How will the fund affect the diversification of your portfolio?

When choosing a mutual fund, you should consider how your interest in that fund affects the overall diversification of your investment portfolio. Maintaining a diversified and balanced portfolio is key to maintaining an acceptable level of risk.

What it costs you?

A fund with high costs must perform better than a low-cost fund to generate the same returns for you. Even small differences in fees can translate into large differences in returns over time.

Finally, don’t pick a fund simply because it has shown a spurt in value in the current rally. Ferret out information of a fund for atleast three years. The one thing to remember while investing in equity funds is that it makes no sense to get in and out of a fund with each turn of the market. Like stocks, the right equity mutual fund will pay off big -- if you have the patience. Similarly, it makes little sense to hold on to a fund that lags behind the total market year after year.

What is Mutual Fund? .... Why Invest in Mutual Fund

Introduction

The Mutual Fund Industry

The genesis of the mutual fund industry in India can be traced back to 1964 with the setting up of the Unit Trust of India (UTI) by the Government of India. Since then UTI has grown to be a dominant player in the industry. UTI is governed by a special legislation, the Unit Trust of India Act, 1963.

The industry was opened up for wider participation in 1987 when public sector banks and insurance companies were permitted to set up mutual funds. Since then, 6 public sector banks have set up mutual funds. Also the two Insurance companies LIC and GIC have established mutual funds. Securities Exchange Board of India (SEBI) formulated the Mutual Fund (Regulation) 1993, which for the first time established a comprehensive regulatory framework for the mutual fund industry. Since then several mutual funds have been set up by the private and joint sectors.

Growth of Mutual Funds

The Indian Mutual fund industry has passed through three phases.The first phase was between 1964 and 1987 when Unit Trust of India was the only player.By the end of 1988,UTI had total asset of Rs 6,700 crores. The second phase was between 1987 and 1993 during which period 8 funds were established (6 by banks and one each by LIC and GIC).This resulted in the total assets under management to grow to Rs 61,028 crores at the end of 1994 and the number of schemes were 167.

The third phase began with the entry of private and foreign sectors in the Mutual fund industry in 1993. Several private sectors Mutual Funds were launched in 1993 and 1994. The share of the private players has risen rapidly since then. Currently there are 34 Mutual Fund organisations in India. Kothari Pioneer Mutual fund was the first fund to be established by the private sector in association with a foreign fund.

This signaled a growth phase in the industry and at the end of financial year 2000, 32 funds were functioning with Rs. 1,13,005 crores as total assets under management. As on August end 2000, there were 33 funds with 391 schemes and assets under management with Rs. 1,02,849 crores. The Securities and Exchange Board of India (SEBI) came out with comprehensive regulation in 1993 which defined the structure of Mutual Fund and Asset Management Companies for the first time.

 

What is a Mutual Fund

Like most developed and developing countries the mutual fund cult has been catching on in India. There are various reasons for this. Mutual funds make it easy and less costly for investors to satisfy their need for capital growth, income and/or income preservation.

And in addition to this a mutual fund brings the benefits of diversification and money management to the individual investor, providing an opportunity for financial success that was once available only to a select few.

Understanding Mutual funds is easy as it's such a simple concept: a mutual fund is a company that pools the money of many investors -- its shareholders -- to invest in a variety of different securities. Investments may be in stocks, bonds, money market securities or some combination of these. Those securities are professionally managed on behalf of the shareholders, and each investor holds a pro rata share of the portfolio -- entitled to any profits when the securities are sold, but subject to any losses in value as well.

For the individual investor, mutual funds provide the benefit of having someone else manage your investments and diversify your money over many different securities that may not be available or affordable to you otherwise. Today, minimum investment requirements on many funds are low enough that even the smallest investor can get started in mutual funds.

A mutual fund, by its very nature, is diversified -- its assets are invested in many different securities. Beyond that, there are many different types of mutual funds with different objectives and levels of growth potential, furthering your chances to diversify.

 

 

Why invest in Mutual Funds.

Investing in mutual has various benefits which makes it an ideal investment avenue. Following are some of the primary benefits.

Professional investment management

One of the primary benefits of mutual funds is that an investor has access to professional management. A good investment manager is certainly worth the fees you will pay. Good mutual fund managers with an excellent research team can do a better job of monitoring the companies they have chosen to invest in than you can, unless you have time to spend on researching the companies you select for your portfolio. That is because Mutual funds hire full-time, high-level investment professionals. Funds can afford to do so as they manage large pools of money. The managers have real-time access to crucial market information and are able to execute trades on the largest and most cost-effective scale. When you buy a mutual fund, the primary asset you are buying is the manager, who will be controlling which assets are chosen to meet the funds' stated investment objectives.

Diversification

A crucial element in investing is asset allocation. It plays a very big part in the success of any portfolio. However, small investors do not have enough money to properly allocate their assets. By pooling your funds with others, you can quickly benefit from greater diversification. Mutual funds invest in a broad range of securities. This limits investment risk by reducing the effect of a possible decline in the value of any one security. Mutual fund unit-holders can benefit from diversification techniques usually available only to investors wealthy enough to buy significant positions in a wide variety of securities.

Low Cost

A mutual fund let's you participate in a diversified portfolio for as little as Rs.5,000, and sometimes less.

Convenience and Flexibility

Investing in mutual funds has it’s own convenience. While you own just one security rather than many, you still enjoy the benefits of a diversified portfolio and a wide range of services. Fund managers decide what securities to trade, collect the interest payments and see that your dividends on portfolio securities are received and your rights exercised. It also uses the services of a high quality custodian and registrar. Another big advantage is that you can move your funds easily from one fund to another within a mutual fund family. This allows you to easily rebalance your portfolio to respond to significant fund management or economic changes.

Liquidity

In open-ended schemes, you can get your money back promptly at net asset value related prices from the mutual fund itself.

Transparency

Regulations for mutual funds have made the industry very transparent. You can track the investments that have been made on you behalf and the specific investments made by the mutual fund scheme to see where your money is going. In addition to this, you get regular information on the value of your investment.

Variety

There is no shortage of variety when investing in mutual funds. You can find a mutual fund that matches just about any investing strategy you select. There are funds that focus on blue-chip stocks, technology stocks, bonds or a mix of stocks and bonds. The greatest challenge can be sorting through the variety and picking the best for you.
 

Types of Mutual Funds

Getting a handle on what's under the hood helps you become a better investor and put together a more successful portfolio. To do this one must know the different types of funds that cater to investor needs, whatever the age, financial position, risk tolerance and return expectations. The mutual fund schemes can be classified according to both their investment objective (like income, growth, tax saving) as well as the number of units (if these are unlimited then the fund is an open-ended one while if there are limited units then the fund is close-ended).

This section provides descriptions of the characteristics -- such as investment objective and potential for volatility of your investment -- of various categories of funds. These descriptions are organized by the type of securities purchased by each fund: equities, fixed-income, money market instruments, or some combination of these.

Open-ended schemes

Open-ended schemes do not have a fixed maturity period. Investors can buy or sell units at NAV-related prices from and to the mutual fund on any business day. These schemes have unlimited capitalization, open-ended schemes do not have a fixed maturity, there is no cap on the amount you can buy from the fund and the unit capital can keep growing. These funds are not generally listed on any exchange.

Open-ended schemes are preferred for their liquidity. Such funds can issue and redeem units any time during the life of a scheme. Hence, unit capital of open-ended funds can fluctuate on a daily basis. The advantages of open-ended funds over close-ended are as follows:

Any time exit option, The issuing company directly takes the responsibility of providing an entry and an exit. This provides ready liquidity to the investors and avoids reliance on transfer deeds, signature verifications and bad deliveries. Any time entry option, An open-ended fund allows one to enter the fund at any time and even to invest at regular intervals.

Close ended schemes

Close-ended schemes have fixed maturity periods. Investors can buy into these funds during the period when these funds are open in the initial issue. After that such schemes can not issue new units except in case of bonus or rights issue. However, after the initial issue, you can buy or sell units of the scheme on the stock exchanges where they are listed. The market price of the units could vary from the NAV of the scheme due to demand and supply factors, investors’ expectations and other market factors

Classification according to investment objectives

Mutual funds can be further classified based on their specific investment objective such as growth of capital, safety of principal, current income or tax-exempt income.

In general mutual funds fall into three general categories:

1] Equity Funds are those that invest in shares or equity of companies.

2] Fixed-Income Funds invest in government or corporate securities that offer fixed rates of return are

3] While funds that invest in a combination of both stocks and bonds are called Balanced Funds.

Growth Funds

Growth funds primarily look for growth of capital with secondary emphasis on dividend. Such funds invest in shares with a potential for growth and capital appreciation. They invest in well-established companies where the company itself and the industry in which it operates are thought to have good long-term growth potential, and hence growth funds provide low current income. Growth funds generally incur higher risks than income funds in an effort to secure more pronounced growth.

Some growth funds concentrate on one or more industry sectors and also invest in a broad range of industries. Growth funds are suitable for investors who can afford to assume the risk of potential loss in value of their investment in the hope of achieving substantial and rapid gains. They are not suitable for investors who must conserve their principal or who must maximize current income.

Growth and Income Funds

Growth and income funds seek long-term growth of capital as well as current income. The investment strategies used to reach these goals vary among funds. Some invest in a dual portfolio consisting of growth stocks and income stocks, or a combination of growth stocks, stocks paying high dividends, preferred stocks, convertible securities or fixed-income securities such as corporate bonds and money market instruments. Others may invest in growth stocks and earn current income by selling covered call options on their portfolio stocks.

Growth and income funds have low to moderate stability of principal and moderate potential for current income and growth. They are suitable for investors who can assume some risk to achieve growth of capital but who also want to maintain a moderate level of current income.

Fixed-Income Funds

Fixed income funds primarily look to provide current income consistent with the preservation of capital. These funds invest in corporate bonds or government-backed mortgage securities that have a fixed rate of return. Within the fixed-income category, funds vary greatly in their stability of principal and in their dividend yields. High-yield funds, which seek to maximize yield by investing in lower-rated bonds of longer maturities, entail less stability of principal than fixed-income funds that invest in higher-rated but lower-yielding securities.

Some fixed-income funds seek to minimize risk by investing exclusively in securities whose timely payment of interest and principal is backed by the full faith and credit of the Indian Government. Fixed-income funds are suitable for investors who want to maximize current income and who can assume a degree of capital risk in order to do so.

Balanced

The Balanced fund aims to provide both growth and income. These funds invest in both shares and fixed income securities in the proportion indicated in their offer documents. Ideal for investors who are looking for a combination of income and moderate growth.

Money Market Funds/Liquid Funds

For the cautious investor, these funds provide a very high stability of principal while seeking a moderate to high current income. They invest in highly liquid, virtually risk-free, short-term debt securities of agencies of the Indian Government, banks and corporations and Treasury Bills. Because of their short-term investments, money market mutual funds are able to keep a virtually constant unit price; only the yield fluctuates.

Therefore, they are an attractive alternative to bank accounts. With yields that are generally competitive with - and usually higher than -- yields on bank savings account, they offer several advantages. Money can be withdrawn any time without penalty. Although not insured, money market funds invest only in highly liquid, short-term, top-rated money market instruments. Money market funds are suitable for investors who want high stability of principal and current income with immediate liquidity.

Specialty/Sector Funds

These funds invest in securities of a specific industry or sector of the economy such as health care, technology, leisure, utilities or precious metals. The funds enable investors to diversify holdings among many companies within an industry, a more conservative approach than investing directly in one particular company.

Sector funds offer the opportunity for sharp capital gains in cases where the fund's industry is "in favor" but also entail the risk of capital losses when the industry is out of favor. While sector funds restrict holdings to a particular industry, other specialty funds such as index funds give investors a broadly diversified portfolio and attempt to mirror the performance of various market averages.

Index funds generally buy shares in all the companies composing the BSE Sensex or NSE Nifty or other broad stock market indices. They are not suitable for investors who must conserve their principal or maximize current income.
 

Risk vs Reward

Having understood the basics of mutual funds the next step is to build a successful investment portfolio. Before you can begin to build a portfolio, one should understand some other elements of mutual fund investing and how they can affect the potential value of your investments over the years. The first thing that has to be kept in mind is that when you invest in mutual funds, there is no guarantee that you will end up with more money when you withdraw your investment than what you started out with. That is the potential of loss is always there. The loss of value in your investment is what is considered risk in investing.

Even so, the opportunity for investment growth that is possible through investments in mutual funds far exceeds that concern for most investors. Here’s why.

At the cornerstone of investing is the basic principal that the greater the risk you take, the greater the potential reward. Or stated in another way, you get what you pay for and you get paid a higher return only when you're willing to accept more volatility.

Risk then, refers to the volatility -- the up and down activity in the markets and individual issues that occurs constantly over time. This volatility can be caused by a number of factors -- interest rate changes, inflation or general economic conditions. It is this variability, uncertainty and potential for loss, that causes investors to worry. We all fear the possibility that a stock we invest in will fall substantially. But it is this very volatility that is the exact reason that you can expect to earn a higher long-term return from these investments than from a savings account.

Different types of mutual funds have different levels of volatility or potential price change, and those with the greater chance of losing value are also the funds that can produce the greater returns for you over time. So risk has two sides: it causes the value of your investments to fluctuate, but it is precisely the reason you can expect to earn higher returns.

You might find it helpful to remember that all financial investments will fluctuate. There are very few perfectly safe havens and those simply don't pay enough to beat inflation over the long run.

                

Types of risks

All investments involve some form of risk. Consider these common types of risk and evaluate them against potential rewards when you select an investment.

Market Risk

At times the prices or yields of all the securities in a particular market rise or fall due to broad outside influences. When this happens, the stock prices of both an outstanding, highly profitable company and a fledgling corporation may be affected. This change in price is due to "market risk". Also known as systematic risk.

Inflation Risk

Sometimes referred to as "loss of purchasing power." Whenever inflation rises forward faster than the earnings on your investment, you run the risk that you'll actually be able to buy less, not more. Inflation risk also occurs when prices rise faster than your returns.

Credit Risk

In short, how stable is the company or entity to which you lend your money when you invest? How certain are you that it will be able to pay the interest you are promised, or repay your principal when the investment matures?

Interest Rate Risk

Changing interest rates affect both equities and bonds in many ways. Investors are reminded that "predicting" which way rates will go is rarely successful. A diversified portfolio can help in offseting these changes.

Exchange risk

A number of companies generate revenues in foreign currencies and may have investments or expenses also denominated in foreign currencies. Changes in exchange rates may, therefore, have a positive or negative impact on companies which in turn would have an effect on the investment of the fund.

Investment Risks

The sectoral fund schemes, investments will be predominantly in equities of select companies in the particular sectors. Accordingly, the NAV of the schemes are linked to the equity performance of such companies and may be more volatile than a more diversified portfolio of equities.

Changes in the Government Policy

Changes in Government policy especially in regard to the tax benefits may impact the business prospects of the companies leading to an impact on the investments made by the fund

Effect of loss of key professionals and inability to adapt business to the rapid technological change.

An industries' key asset is often the personnel who run the business i.e. intellectual properties of the key employees of the respective companies. Given the ever-changing complexion of few industries and the high obsolescence levels, availability of qualified, trained and motivated personnel is very critical for the success of industries in few sectors. It is, therefore, necessary to attract key personnel and also to retain them to meet the changing environment and challenges the sector offers. Failure or inability to attract/retain such qualified key personnel may impact the prospects of the companies in the particular sector in which the fund invests.

How to set your financial goals?

How to set your financial goals?    

"By failing to prepare, you are preparing to fail" - Benjamin Franklin (a well-known polymath, politician, writer and scientist).

We all have some wishes and responsibilities in life. For instance, you might want to go on a holiday, make sure your child attends one of the best colleges in the city or buy a car. To achieve these ambitions, it is extremely important that you have a plan. Just like a student needs to prepare and study well if he wishes to score good marks in a test, you as an individual also need to plan and set your financial goals in order to fulfill your dreams in life. You see, setting goals, is the first step towards achieving them. If you go wrong here, there are slim chances that you would be able to fulfill your wishes on time.

Hence, for your benefit, I have listed down certain points which must be borne in mind while setting your financial goals:

·         Include your spouse while making goals

You must ensure that you also include your spouse, irrespective of the fact whether she / he is earning or not, while making a list of all the goals which you want to achieve. This is because your spouse might have a lot of inputs which could change the characteristics of your financial goal. For instance, she might be more aware about the academic subjects that your child is inclined towards and the course which he / she is likely to pursue. This might help you while planning for your little one’s future. Also, it is better to have common goals regarding plenty of things such as the family’s dream holiday, buying a new house and so on. Moreover, including family members while setting goals, will avoid conflicts of interest and disagreements within the family in the long run.

·         Make realistic goals

You might want to travel across the world, live in the most luxurious hotels, buy the most expensive clothes and accessories, and drive your own new sports car and so on. However, these things become a reality only for a handful few people. Hence, it is imperative to let your list of financial goals be realistic. If you set up financial goals that are basically a list of all your heart's desires, you might be disappointed if things don't seem achievable. Although, you must push yourself a little bit to get that extra edge and realise your true potential, it is also important to know your capabilities and not discourage yourself.

·         Set specific goals

One of the most important points to be kept in mind while setting financial goals is that they should be extremely specific. You must know for whom you are making the goal (for example for yourself or your children), what do you want to achieve, when will the goal occur (say after 5 or 10 years), what is the purpose of the goal, what are the requirements and constraints and so on. Any vagueness while setting a financial goal could become an obstacle when you go out to achieve them.

Attach an approximate value to each of your goal so as to understand how much you need to save every month. It is necessary to take into account and assume a realistic inflation rate and rate of return while determining the cost of your goals. This is extremely important as the inflation bug eats into our hard earned savings every day. For instance, a business school charges Rs 25 lakh today and your child will likely attend in 5 years from now; with 8% annual inflation, the fees you will end up paying would be Rs 36.73 lakh after 5 years. That’s a big difference, and if you planned as per today’s estimate then after 5 years you would be running from pillar to post to arrange for the differential amount or would not be able to send your child for post graduate studies.

·         Prioritise your goals

It is important to rank your goals in order of importance. This is because only then will you realise the urgency of some goals and meet them on time. For instance, the need for getting an insurance policy is more important than going for a vacation. Also, paying the school fees of your child for the next semester is more important than saving for the latest mobile phone. Goals could be short term (within 2 years), medium term (3 – 5 years) and long term (5 years +). Remember that, while prioritising them, it is also imperative to keep in mind the time horizon remaining for the goal. It will also be prudent to put all the goals along with their specific details and priority down on paper so that you remember all the details. Moreover, having everything in black and white will discourage you to use the money set aside for a particular high priority goal for any other less important things.

·         Start early

There might be certain goals which won’t show up in your life for quite some time such as your retirement or your child's marriage etc., so you might think that why should you plan for and set goals which are a long time away. However, remember that setting goals in advance can give you a precious gift – "time". The longer the time you have before the goal turns up for fulfillment, the lesser you will need to save each month and more you can gain from the compounding effect.

Once you have finished setting up all your financial goals, you shouldn’t waste time and start investing regularly. Before you invest, chalk out an asset allocation plan. You should then carefully choose suitable investment avenues. Time left in achieving a particular goal and your risk appetite would largely decide how your asset allocation would look like.

We must understand that financial goals, once constructed, are like a road map for the achievement of your objectives. They make your aspirations take shape and become achievable. You must review your financial goals periodically to include any changes that are happening in life.