Archive for 2006

LinkFest #5 – Myths, advice, caution and all…

No Comments » Written on December 28th, 2006 by
Categories: Readings
Let your money work for you (Equitymaster)
The three D's of investment - Diversification, Dollar Cost averaging and Discipline are touted in this equitymaster article. I beg to differ on a few things: Don't use "Dollar cost averaging" - Rupees are more likely all that is available to you. Cost averaging is part of Systematic investments - but average with the right investments, not dumb ones. Diversify, but not to the extent that your returns are bad because of diversification - buy good companies or mutual funds. Don't buy twenty diversified funds! That's way too much diversification for you, plus it doesn't work really. And disciplined investing - that's very much recommended.

5 common investment myths (Personalfn)
A good article about what people tend to believe and the ground reality. That Rs. 10 is not a better buy than a Rs. 100 fund (I agree), long term is not necessarily good, investments and risk taking abilities are individually unique, SIPs are not necessarily good (I agree), and that you can actually diversify too much.

Unshining India, (Dhirendra Kumar, Value Research Online)
A very interesting take on how people are going berserk just led by the "India shining" story. Everyone and his aunty is buying property because they feel that the economy cannot go down. Led by the lucre of a booming economy, investors are putting money down based on future calculations of income, earnings, GDP growth, whatever - and additional fuel comes from TV channels, fund managers, investment advisors and the like. My thumb rule for you is: When people tell you "if you don't invest now, it'll be too late", that's the time to stop and play some gully cricket. But read this article - I wish Kumar had expanded a little more, and pushed his point through rather than sitting on the fence.

MF vs. Sensex, Sensex wins? (Economic Times)
Turns out mutual funds have underperformed the equity indexes this year. This is the case with the US over the last few years too. Is India now becoming a mature market?

Earlier Linkfests: 1, 2, 3, 4

Posted in Readings

Mutual Fund Identification Number (MIN) now mandatory

4 comments Written on December 28th, 2006 by
Categories: MutualFunds
AMFI has notified all mutual fund investors that as per enhanced KYC (Know Your Customer) norms, a new unique identification number will be issued to mutual fund investors. This number is called the Mutual fund Identification Number (MIN).

From January 1 2007, any investment in a mutual fund worth over Rs. 50,000 will need MIN information of the investors.

Does this apply to me?
If you are a mutual fund investor in Indian Mutual Funds, or will be at some time in the future, Yes. Currently it is only mandatory for investors that investAct now, because later when you really want to invest, the lack of a MIN will prove to be a pain.

This also applies if you are a company or a non-individual investor (like an HUF).

How do I get this MIN thing?

  1. Download the MIN application form, print it out and fill it up.
  2. Second, get the following documents ready:
    • A passport size photograph.
    • An identity proof (PAN card, Passport, Voter ID card etc.) (Exhaustive list provided in the application form)
    • A copy of your PAN card
    • An address proof (Telephone bill, passport, etc)(Exhaustive list provided in the application form)
  3. Paste the photograph on the form and sign across it.
  4. Take a copy of all documents above, including the filled up form.
  5. Go to an Investor Service Center and submit all these documents with the originals. Take back the originals and your copy of the filled up form, duly acknowledged.
  6. You should get a MIN over the counter.
  7. The documents will later be scrutinised and if anything is missing your MIN will be rejected, and you'll get a letter saying so. If a MIN is rejected, any investment made with that MIN will be cancelled and the money refunded to you.
  8. If everything is ok, you will have a permanent MIN for all future investments.
Note that if you don't want to give the originals for over-the-counter verification, you can produce a certified true copy. Get a copy notarised by a registered notary, a commercial bank manager or a gazetted officer and submit that.

How much does it cost?
Nothing. It's free for now. They might decide to charge later, so it's in your interest to get your MIN immediately.

Do I have to do this again and again for every single fund?
No. MIN is a single identification number that works with all mutual funds as per AMFI.

Do Existing investors need to do something? Nothing if you don't plan to invest more than Rs. 50,000 in a fund after Jan 1, 2007. If you have an SIP that invests more than Rs. 50K per installment, you'll need a MIN. I suggest you get a MIN anyway.

Why do I have to do this?
When I was a kid, my parents used to tell me "Don't ask questions, just do it!". But today it's important to address the question of "Why?". The Government of India is very worried about the fact that money laundering is becoming more and more prevalent. Converting "black" to "white" money without paying any tax is what many people want to do, but that is cheating the government.

What they want to do is to stop all avenues for this purpose. People have been using cunning strategies like investing in other people's names, or using fake names and addresses to avoid the tax man. In order to curb this, the goverment expects all financial bodies to "know their customers" - meaning, they should have a photo identification, address proof etc.

But this is also an inconvenience to an honest tax paying investor. So, given that frauds happen with large amounts (typically much higher than Rs. 50,000) they have decided to limit the MIN requirements to only investments above Rs. 50,000. Unfortunately, people are even more cunning and I am sure they will try to invest Rs. 49,000 instead, to avoid the MIN measures - so I am definite that the requirement will soon apply to all investors. It is in your interest to get a MIN fast, and while it is free.

What about Non Resident Indians (NRIs)?
NRIs and Persons of Indian Origin (PIOs) can invest in Indian Mutual Funds. They also need a MIN. Now, how can you expect NRIs to submit original documents? And submit forms themselves?

Firstly, original documents are not needed. Get document copies signed by a notary in your country, including address proof in the country you are in. You'll need the notary to sign and provide his seal on the document - only registered notaries will do.

To submit documents, have distributors in India submit on your behalf. Send the notarized copies PLUS the filled up form to your distributor and ask them to submit on your behalf. You don't need to give a power of attorney or any letter for submission of documents - that can be done by anyone. Ask them to scan a copy of the MIN document you have received and mail it to you, apart from sending it back by post. If you need such support, let me know; I can find someone who'll do this for you.

PIOs must provide a notarized copy of their PIO card as well. Remember to get back a copy of the acknowledged, filled up MIN form, because you will need to provide that along with your application for future investment in Indian mutual funds.

Okay, I'm still confused. What to do?
Read the FAQ, and if you're still confused about something, leave me a comment.

Resources
Frequently Asked Questions (AMFI)
MIN Application Form (Individual, Non-Individual) (AMFI)
List of Investor Service Centers

Posted in MutualFunds

Futures and Options: An introduction

22 comments Written on December 25th, 2006 by
Categories: Futures, Options
Futures and Options (F&O) is a famous phrase used by TV channels, web sites and in conversation nowadays but many of you many not familiar with the concept. Let me try and explain, in very simple terms.

Firstly, let me confirm what you already know: That you can buy and sell stocks on an exchange, and prices of stocks vary every day, and perhaps every minute. You buy a stock hoping for future appreciation, and sell when you want to exit or book profits.

This is called the "cash" or the "spot" market - that means, when you say "I will buy 100 shares of company X at Rs. 152" on a stock exchange, someone can sell it to you and you will get the shares "on the spot". (Technically, you'll get delivery after two days but that is really an administrative lag) You also pay money "on the spot" - that is, you will need to immediately pay the Rs. 15,200 in the example above.

Futures
Now, let me talk about the futures markets. A future is a derivative contract in which two parties agree to buy or sell something to each other on a particular price at a FUTURE date.

That means delivery is not immediate, it is at a much later date. And payment is also not immediate, it is at a later date. This kind of contract is also called a "forward contract".

Why do people do this? And how is this different from buying today?

No delivery right now
Futures are for different kinds of requirements. For instance you may not have the money right now to buy, but you believe the price will go up. You just buy a forward contract for a later date, and on that date you buy and IMMEDIATELY sell, so that you will simply pocket the difference (or lose the difference if the stock has lost money).

Short Selling
Secondly, futures can be used to "short sell". If you want to sell something you should own it first, no? But futures are different - since they are for a later date, you can sell something without owning it, and then buy it later! So if you believe the price of an item is going down, you can SELL a forward contract. Since you don't have to deliver it right now, the buyer does not care if you already have it or not. On the later date, just buy from the market and give it to the buyer, pocketing (or losing) the difference.

Hedging
Futures are also for "hedging". Let's say you are a rice farmer and have 1000 kilos of rice growing in your farm. You can harvest it only three months later but right now the price is very good, nearly Rs. 20 per kilo. But you know that this year, the rains have been kind, so every rice farmer is going to get a good crop. So there will be too much rice in the market, and prices will come down, even as low as Rs. 12 per kilo! What can you do?

You can't sell the rice right now, because then the buyer will say "show me the rice" and you can't show him because you can't harvest it until three more months. But if you don't sell right now you will lose Rs.8 per kg!

What you can do is SELL a futures contract for 1000 kilos at today's price for three months later, Rs. 20 per kilo. Then three months later when you harvest if the price has gone down to Rs. 12 per kilo, you sell it in the market for Rs. 12 per kilo and make Rs. 12,000. Then you also have to sell 1000 kilos in your forward contract at Rs. 20, but for that you simply buy from the market at Rs. 12 and give it to the buyer at Rs. 20, making the extra Rs.8 per kilo, totally Rs.8000. Meaning you have made Rs. 20,000 for your 1000 kilos!

You may be thinking: Why doesn't he simply give the 1000 kilos from his farm to the buyer? Well, the buyer may be in Brazil! Market traders for commodities like Rice can be anywhere in the world, therefore when you enter into a futures contract on an exchange, you need not terminate it with delivery. (in India, in most cases, you can't even if you want to). You buy and sell on the very same exchange on the "SPOT" price on the date of delivery. Meaning, if you SOLD a futures contract, then on the future date the exchange will assume that you will buy at market price (spot price) and give you the difference between your future contract price (selling price) and the spot price (buying price).

The Underlying
In the example above, what was bought/sold in the future was "RICE". This is the "underlying" commodity being traded in the futures contract. Rice is also traded in the "spot" market - which can be your local kirana store, or a wholesale APMC yard or a commodity exchange (meaning, you pay and you get your goods right now). The "underlying" can be anything - a commodity like rice, a set of company shares, an index value, foreign currency etc.

Exchanges
Okay what if I tell you that I will buy rice at Rs.20 and the price falls to Rs. 12? I can then run away and hide in a corner, and break my promise, because I stand to lose Rs. 8. This is where exchanges come in.

Exchanges ensure that your contract is executed. They "assure" your contract. So if I run away, the exchange will still make sure you get your profits. They will chase me for the losses. (In fact a futures contract must be traded on the exchange. If it's not, then it's just a "forward" contract)

Contract Values and Margin In order to make sure that I don't run away from them, exchanges ask for a "margin" - a certain portion of the contract value as a "deposit" until the contracted date. In India this is between 12 to 50% of the contract value for shares; so if you buy a future for buying 100 Infosys shares at Rs. 2200, the contract value is Rs. 220,000. The margin can be 20% (dictated by your broker or the exchange) so the margin will be Rs. 44,000. You are required to pay the margin on the day you buy or sell the futures contract. On the contracted date (in the future), you will get back your margin plus your profit (or minus your loss).

Mark to market
Let us assume I bought a forward contract (100 shares of INFY at current future price of Rs. 2200 per share, on January 27, 2007) paying a margin of Rs. 44,000. Now suddenly if there is a crash and the price of INFY in the spot market dipped to Rs. 1700? Essentially I have lost Rs. 500 per share - which, for 100 shares, is Rs. 50,000! This is greater than my margin of Rs. 44,000 so the broker or exchange may still think I can run away and they will be left to cover the loss. So they can make a "Marked to market" margin call, meaning that they will ask me to provide the extra Rs. 6,000 as an additional margin (and maybe another 20,000 to cover a FURTHER fall in prices, that they can do).

Usually mark-to-market means the difference between the spot price and the agreed future price - this can be positive ("Mark-to-market profit") or negative ("MTM Loss"). Futures are actively traded in the market, and the price of the future is not decided by you - so once you have bought the future, you can SELL the contract to someone else. Let's say the the contract I bought at Rs. 2,200 is now trading at Rs. 2,300 instead. I can sell the contract itself, and I make the Rs. 100 as profit per share - for 100 shares, it's a Rs. 10,000 profit. The exchange will also give me my margin back, and take a margin from the new owner of the contract.

Square off
On the agreed date of the contract, the exchange will "square off" all contracts. Meaning, all buyers and sellers will be paid back their margin including any marked to market profits or minus any losses as of that date. To avoid arbitrary dates, stock exchanges in India have only three open (purchaseable) future contract dates - the last thursday of the current month, the last thursday of next month and the last thursday of the month after that. These are called near month, month+1, month+2. The square off happens at the end of that Thursday.

Options
Futures are pre-agreed contracts and the buyer MUST sell and the seller MUST purchase. They have no choice in the matter at all, once they sign the contract the contract has to be marked to market every day, they have to pay the margin and they have to square off. That means both the buyer and the seller has an OBLIGATION to square off the deal.

Now futures dealers are also quite smart - they want to make profits but they want to reduce their losses. So there is a concept of "options" - a kind of derivative contract which is slightly different.

The buyer of an Option has the RIGHT, but not the obligation to exercise the contract. What does this mean? Let's say I think the Infosys share will go up next month, but I am not sure.

Instead of buying a future, I can buy a "CALL" option, which is a "right to buy" at a later date. If on that date the contract is favourable to me (meaning the spot price of INFY is higher) I will purchase it and square off, resulting in a profit to me.

If the spot price is lower than my call option price, I will "ditch" the contract, and not exercise it...meaning I have no losses.

But then the person selling it to me must be really stupid. Because if the price is higher, he has the OBLIGATION to sell it to me and make a loss, but if the price is lower I don't exercise the option and he does not make a profit. So why would he do it? He charges me a "premium" which is the amount I pay to buy the option. It may be very cheap; about Rs. 20 per share, but that is the money for his trouble that he gets to keep in case I decide not to exercise the option. If I decide to exercise, he still keeps the margin, but pays the mark-to-market loss.

Calls and puts
The right to BUY an underlying stock at a certain price is known as a call option. The right to SELL an underlying stock at a certain prices is a PUT option.

It is quite confusing. You can buy a call option, and you can buy a put option. You have to associate the phrase "call" with "right to buy" and "put" with "right to sell". (If you are really confused, repeat this mantra 108 times: 

  CALL is the right to purchase
  PUT is the right to sell
)

Strike price
Now futures are traded like shares - so the price of the future is readily available in the market, and goes up and down every day. But an option is slightly different, because it is a right and not an obligation. You buy a future in the futures market, based on who is willing to pay how much for a future.

But an option is always at a pre-agreed price. In stock exchanges for stocks and indices, the exchange allows different strike prices, usually Rs. 10 between each other, and a new list of tradeable strike prices is released everyday. These will usually be a few priecs above the current market price, and a few prices below.

Example: If Infosys is trading at Rs. 2172 today, the exchange may allow strike prices of Rs. 2150, 2160, 2170, 2180, 2190 and 2200. If the price goes up to 2200 the exchange may open up NEW strike prices of 2210, 2220 and 2230 (the other ones are still available of course).

Writers
If you buy a CALL option then you buy the right to purchase something. But who sells it to you? This other person does not have the RIGHT to sell it to you, she has the OBLIGATION of selling it to you if you want it. This person is called a writer. You can buy an option, but you can also WRITE an option (meaning you are now obligated to sell it).

If you write an option you will receive the premium that the buyer will pay. (Minus any brokerage and taxes).

Writers have a problem: They have limited profits (the margin they receive, when the strike price is not profitable for the buyer) but unlimited risk of loss when the strike price is profitable. That means for a call option, if the spot price is below the strike price, the buyer will not exercise the option, therefore you only get the premium. If the spot price is above, buyer will exercise and you pay the difference (but keep the margin).

Let's say you buy a CALL option of 100 INFY shares from me (Rs. 2200 strike price, Jan 07, Rs.20 premium per share). You pay me Rs. 2000 (Rs. 20 x 100 shares) as premium. If the price goes to Rs. 2,300 you will exercise the option and I will have to pay the Rs. 100 difference per share, totally Rs. 10,000. My loss is Rs. 8,000 because I got the 2,000 premium.

If the price goes down to Rs. 2,100, you will not exercise the option, and I will get only Rs. 2,000, which was the premium.

Why do I write options? Because most options go unexercised! Meaning, I can write an option today and it is quite likely that the market price will not be within the premium so I won't have to lose money! And after all, I can write a CALL option and BUY a future at the same time, ensuring that I make profits in the difference. (This is also hedging)

In the money, out of the money
If a call option strike price is below the spot price, it is "in the money". Meaning, if INFY price is Rs. 2200 and I have bought a call option for Rs. 2100, I am making profits, so the option is "in the money".

The reverse is "out of the money" or "OTM". Meaning, if I buy a call option for a strike price of 2100 but the current price is Rs. 2000, then I am not making profits right now, so the option is OTM. Writers usually like to make OTM contracts so that they are not immediately exposed to loss. (In the money options usually trade for a big premium, so big that when you consider the premium, you are making losses!)

Conclusion
This has been a long post and I am also tired, so I will stop here. Please post your questions and I will try and sort out any other things I may not have mentioned, or that are not very clear. Thanks for reading!

Posted in Futures, Options

PAN number is now mandatory

3 comments Written on December 21st, 2006 by
Categories: Uncategorized
SEBI has posted a circular (MRD/DoP/Dep/SE/Cir-13/06, Sep 26 2006) that makes a PAN card mandatory, from Jan 1, 2007, for all customers who buy or sell stocks in Indian Stock Exchange. In addition, the PAN card must be verified by the brokers visually - so they need to see the original PAN card, and you need to provide them with a copy.

Now even if you don't trade regularly it is necessary for you to go to your broker's office and provide them with a copy of your PAN card. This applies to online trading accounts as well.

Failing to do so means you will not be allowed to trade, and your account may be frozen post Jan 1, 2007. Please do this promptly and enjoy the holidays!

Posted in Uncategorized

Fundas: Long Term Capital Gains

3 comments Written on December 20th, 2006 by
Categories: CapitalGains, IncomeTax
Long term capital gains (LTCG) applies when you profit from a "capital asset", in this context meaning something that involves a long term investment, sold after a long period of time. For stocks and mutual funds, the minimum period between purchase and sale is 1 year. For property or most other asset types it is three years. (If you buy and sell within this period, SHORT term capital gains applies, that's a different concept.)

The government had decided that it will reward you for making long term investments, so tax on long term gains is generally lower than the regular tax. Currently long term capital gains tax is 20% or 10% or even 0%, the difference between the three is explained below.

Capital gains is the PROFIT obtained when you buy today and sell a while later. Therefore LTCG is the difference between the selling price and the buying price. But you could have bought something for Rs. 10,000 in 1980 and sold today for rs. 100,000 - have you made a profit? Not really, because Rs. 10,000 in 1980 was a big amount of money! Inflation has reduced your profit, and in this case you may have actually made a loss!

So the tax department allows you to "index" your purchase according to inflation. They release a Cost Inflation Index (CII) table every year containing an "index" value for each year - 1980 being 100, 1981 being 109, 1990 being 182 and so on. (See: http://incometaxindia.gov.in/ItInformation/CostInflation.asp)

This means something bought in 1980 for Rs. 10,000 and sold in 1990 for Rs. 20,000 does not mean Rs. 10,000 profit! The CII for 1990 (year of sale) is 182, and CII for year of purchase is 1980. So real cost of purchase is Rs. 18200, arrived at like this:

Rs. 10,000 x (182 divided by 100)

The real profit therefore is Rs. 1,800, and tax = 20% of that, = Rs. 360.

This concept is called "Indexation" meaning you are accounting for inflation of your purchase value.

So if you index your purchase, government charges you 20% LTCG tax.

But what if you bought in 2003 and sold today? The CII for 2003 is 447 and this year is 519. So if you bought for Rs. 10,000 in 2003 and sold today for Rs. 20,000 what is your "indexed" purchase value?

Indexed purchase value = Rs. 10,000 x (519 / 447) = Rs. 11,610

So you have still made a profit of approximately Rs. 8,400 and 20% of that is payable as tax = Rs. 1,680. But there is an alternative:

The government allows you on extra benefit: If you don't want to index your purchase, you can pay only 10% of a non indexed purchase - in this case it means you will use a purchase price of Rs. 10,000 only. So your non indexed profit is Rs. 10,000 and therefore LTCG tax @ 10% is Rs. 1,000 - this is a lot lesser than the indexed gain!

Finally, if you invest in stocks or equity mutual funds, the government deducts a "securities transaction tax" (STT) from your transaction (about 0.25% of the entire transaction value). If you pay STT, LTCG tax is ZERO.

SO in short:

Indexed profit: 20% LTCG Tax
Non indexed profit: 10% LTCG Tax
Stocks and Equity funds where you pay STT: 0% LTCG Tax.

(Note: Why I say "where you pay STT" is - if you do not sell in an exchange or surrender stocks in a buy back offer or surrender stocks in an ADR offer like in Infosys recently , no STT will be paid, and therefore the 20% or 10% taxes will apply)

Also read: http://theinvestorblog.blogspot.com/2005/11/capital-gains-tax-primer.html

Posted in CapitalGains, IncomeTax

SIPs are not necessarily less risky, or better for the long term

8 comments Written on December 19th, 2006 by
Categories: MutualFunds, SIP
Systematic Investment Plans or SIPs are now touted around by mutual funds and advisors as the best way to invest in a volatile market, and that small investors must use that approach to enter the market. I don't particularly deny that statement, but I feel that SIPs need a lot more history to prove themselves in India.

Read this personalfn article for an overview of why SIPs are recommended for investors. Very good points, mind you. But let me try and see if the results show the same as the theory.

India has very little historical data - since most mutual funds have existed only since 92-93. The U.S. has a far longer and perhaps richer history, so I have chosen to look up SIPs in the U.S. market, and the SIP concept there is called "Dollar Cost Averaging" (DCA).

Read this research paper on the subject that talks about DCA and how it compares with three other strategies: Lumpsum investing (putting money upfront), Buy and Hold (half in equities and half in t-bills) and Value Averaging.

The results, taken from data from 1970-1999, and also from 1950-1999 yields interesting results. The DCA strategy performs worse than Lumpsums for both large caps and small caps. Also, for small cap stocks, it does worse that all other strategies!

Secondly, look at the "standard deviation", meaning the variation on either side from the average. This is an indicator of risk, since your returns may be higher or lower than the average by a big margin (high risk) or very less (smaller risk). The SD for Lumpsum investing is the highest, obviously, because you are investing in a high risk avenue (stocks) with upfront money. But DCA has a higher standard deviation than value averaging or buy and hold too - which means, it has higher risk than them - this, additionally, indicates that for a lower long term return, you are taking on a higher risk.

And lastly, the paper states that SIPs are not necessarily less risky. But they may also not appeal to the "behaviour" of the investor, which is why most SIPs are advised. Meaning, most advisors feel that you should not attempt to time the market and go for an SIP regardless of ups and downs, so that you don't feel really bad if the market goes down since this strategy averages the cost of purchase during lows.

But if you look at the returns and the risk you are taking, you may find lower returns for higher risk using this strategy, which obviously does not help your mood!

There are disadvantages of SIPs that very few people talk about. You need to provide either cheques or an ECS mandate upfront to transfer a fixed amount per month to the fund, on a fixed date. Most investors will invest in multiple funds, on a fixed set of dates (many mutual funds only offer certain dates - 5th, 15th, 25th etc. - for SIP investments)

The first disadvantage is that you can't easily stop one intermediate payment. I usually tend to take holidays that are not inexpensive. So I may need money one month to spend well, and I don't want to invest that month - stopping SIP payments is a huge nightmare, especially if you have invested in many mutual funds. Plus if you did stop one payment, you have to come back and restart all your SIPs because the fund assumes you have stopped the strategy completely!

Secondly, the amount is fixed. So you can't choose to invest more when you feel the market is undervalued, or less when you think it's overvalued. This, for an active investor, is a problem. For instance, I have invested much more in June 2006 than in November, simply because I thought the market was better. I have not yet invested much this month, but based on how it goes I might put in a lot more money in the end of December. This is not available in an SIP scenario.

Thirdly, the fixed dates don't give you much of an advantage. If you are an active investor you may want to invest ON the last thursday of the month, because that is the day futures are exercised and you can figure out how much you want to invest based on the rollover. Nobody offers you that facility.

Finally, there is an issue with cash flow: I personally have committments that are either sudden or annual. Like taxes, or holidays or emergencies. I need to have the flexibility to address investments based on my cash flow, which is not very predictable. SIPs take away that flexibility from me.

In conclusion, I think SIPs are a good investment for many (I will post about that later) but if you are an active investor you might want to consider some of the negatives before you plonk a ton of future cash flow into this investment.

Posted in MutualFunds, SIP

LinkFest #4: Open Letter, Real Estate bubble, Money Today

1 Comment » Written on December 15th, 2006 by
Categories: MutualFunds, Readings, RealEstate
Open letter to analysts from a harried investor (Author unknown)
A seriously hassled investor telling the TV analyst what he thinks of him. This is quite applicable to India as well. Eventually I will provide a table of all the recommendations by various analysts on a shared Google Spreadsheet. We will then see the date of recommendation and the high/low prices after that - perhaps we will be able to see if their "predictions" are anywhere close.

A new Insurance and Mutual Fund company: Bharti-AXA
A new entrant to the Indian financial world, Bharti-AXA will set up a mutual fund AMC and an insurance company. This can result in two things: Fund manager churn from an existing AMC if they try to grab one, and more NFOs. Let's see how it goes.

SEBI suspends Reliance Broking arm for four months (Sify)
SEBI has uncovered some broker regulation violations by Reliance Stock and Share Broking in 1999, when it was part of the RIL group. It has therefore suspended it from trading for the next four months. This company is now owned by the Anil Ambani group; and supposedly is not doing all that much business anyhow.

Money Today: A new magazine
I picked this up at a newsstand recently and was quite surprised to see some excellent articles. Read about their latest insurance calculator much on the lines of my article.

Is there a bubble in real estate? (IndiaEconomy.org)
A very interesting article and discussion around whether the spurt in real estate prices in India constitutes a bubble. The parallels with Japan, America and indeed, earlier Indian events are quite revealing. I've commented there too.

Earlier Linkfests: 1, 2, 3

Posted in MutualFunds, Readings, RealEstate

Is a Rs. 10 mutual fund better than a Rs. 100 fund?

4 comments Written on December 15th, 2006 by
Categories: Commentary, MutualFunds
A number of people think that the unit price of a mutual fund matters when they purchase; i.e. that a cheaper unit price is better. Why? They say that they will get more units for the same money, and isn't that better?

"Number of units"
The "Number of units" does not matter at all. It is all about gain percentages. The best funds have gained some 750% in five years. What does that mean? That means if you bought that fund at Rs. 10 in 2001 its NAV will now be Rs.75 .

If you bought it at Rs. 20, NAV will be Rs. 150.

There are lots of such funds whose NAV is greater than 100 or 150 because they have performed very well.

What's the NAV?
The total NAV, or "Net Asset Value" is a simple concept - First you get the "Net Assets", which is the sum total of all the assets minus any liabilities of the fund. Meaning, add the current market value of all the shares, minus any open redemption requests and any applicable charges (like Daily fund management fee etc.) and you get the Net Assets. Divide the Net Assets figure by the total number of outstanding units and you get the unit price (called the "NAV Unit Price" or simply, the NAV).

Most web sites and newspapers call the unit price "NAV". It's actually the NAV unit price, so the phrase is confusing. Let me not confuse you any further: I will call the total assets as the "Net Assets" and unit price as the "NAV".

Now you might think, if you have a 10,000 rupees, is it better to buy 1,000 units of one fund quoting at Rs. 10 NAV, or 100 or those quoting at hundred? Frankly it's dependent on how the fund performs. If the second fund grows at 20%, your units are worth Rs. 12,000 at an NAV of Rs. 120. If the first one grows at 10%, your units are worth Rs. 11,000 at Rs. 11 NAV. What is better? Obviously the second one, but over here the NAVs are still Rs 11 vs. Rs. 120!

Lesser number of units is like small change
But what if you have a 1000 Rs. NAV? That's a problem, you think; if you want 2,500 rupees, you have to sell three units! That means you take out more than you want, right? Also what if you have 1200 rupees to invest? You can only buy one unit, right?

Wrong.

In Mutual funds you also get "fractional" units. So if you invest Rs. 1000 in HDFC Taxsaver, whose nav is Rs. 149.44, you will get 6.692 units. (Some funds even go to fourth decimal)

You can then sell fractional units also, like 1.212 units etc!

Growth is important, not unit price
What you care about is how much your money grows, not the number of units you have. It is just as difficult for a Rs. 10 fund to move to Rs. 12, as it is for a Rs. 50 fund to move to Rs. 60.

Posted in Commentary, MutualFunds

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