Should you treat mutual funds like stocks?

Mar 18, 2011

In this issue:
» UPA bribed its way through Nuke deal?
» The US headed for another war?
» Investors dumping US treasury bonds
» Are emerging markets still attractive?
» and more!

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If you think that letting someone else invest your money relieves you of all the responsibility, then you better re-think. Though mutual funds are meant to take away the task of stock selection and portfolio allocation from you, your role remains significant nonetheless. We suggest that you look at your mutual fund investments the way you look at your stocks.

Why not? You can very well apply several principles here that you apply while you invest in stocks. How do you ideally go about selecting a stock? You look for a robust business with a good track record right? You can do that with a mutual fund as well. Firstly, be just as wary about New Fund Offers (NFOs) as you are about IPOs. Do not get carried away by big names and glossy billboards.

We suggest you choose from funds that have a performance history of at least 5 to 10 years. See how well the funds have performed with respect to the benchmark indices and their peers over the years. A plethora of information on the same is freely available. Then glance through the portfolio holdings of the fund you're considering. Check the companies and the sectors that the fund is heavy on. Do you think those stocks and industries will do well? Does it suit your risk appetite?

After you have invested in a mutual fund, is your job done? Can you relax and forget about it? Not at all! You cannot afford that luxury. Your mutual fund is not a fixed deposit scheme. NAVs keep changing as stocks prices do. We're not suggesting you keep looking for the NAV and the gains every day. An ideal time horizon would be between one and three months. See how the fund has been gaining or losing relative to its benchmarks and peers. Check out how the portfolio composition is changing. Other indicators like ratios that measure risk may also give you a better picture.

At the same time remember you have not married the fund for life. It is just as important to track how other funds are doing. They could pretty much be your future investment choices.

Do you think your mutual fund investments will do better if you treat them like stocks? Share your comments with us or post your views on our facebook page.

 Chart of the day
The terrifying nuclear crisis that Japan is facing has forced us to have a look at how much nuclear energy the world produces. Today's chart of the day shows that about 14% of the world's electricity comes from nuclear power. Of the 31 countries that operate nuclear power plants, only France uses them as its primary source of electricity. Several other developed economies also have significant nuclear power generation capacity. India and China have a very small contribution from nuclear power. India needs to learn lessons from the Japanese crisis and re-think its nuclear power expansion plans.

Data source: World Nuclear Association

As prices of food and other essential items continue to stretch the common man's budget, his worries are only set to multiply. The loans obtained for purchase of home, car or consumer durables are also set to get dearer. The RBI once again raised benchmark interest rates yesterday. This raise is the eighth one in the last 12 months. Chances are that this time the rate hikes will not even offer any upsides on the deposits front. For most banks have already upped their deposit rates and are now looking to pass on the higher costs to loan customers. Thus the higher interest rates hereon are unlikely to add to the income of the common man. But what it is surely set to do is dent their disposable income further. The only way to safeguard their income is to ensure that they have some inflation hedging assets in their portfolio.

It seems like 2011 is a continuation of scam nightmares for the UPA government. Latest news doing the rounds is that the government had bribed the Members of Parliament (MPs) to get the famous Nuclear Bill passed in its favour. And this revelation is made in the latest cable leak by popular whistle blowing website, Wikileaks. The cable alleges that the government had bribed MPs in 2008 to secure the passing of the bill in the Parliament. As per the cable, some of the senior government officials had shown two cash chests containing cash of almost US$ 25 m which was supposed to be used to secure the vote. While basis of these allegations are still to be verified and investigated, it definitely goes on to raise more important governance issues. Poor governance has been one of the biggest deterrents to India's growth plans.

We all know how costly the wars in Afghanistan and Iraq are proving to be for the US economy. At a time such as this when it should rein in wasteful spending big time, comes another war related news from the Middle East. Apparently, the United Nations has authorised military strikes against Libyan leader Muammar Gaddafi should he start acting stupid. The authorisation is in response to Gaddafi's bold statements that he will spare no one and kill brutally whoever decides to go against him. We just hope that the conflict does not escalate a great deal. If it does, then there could be further problems for the US. Already, the US economy is running a big deficit. Another war would mean more spending and hence, more money printing. Thus, the war might spell the end of Gaddafi. But what it will also do is perhaps bring the day of reckoning for the US dollar.

What could be safer than sovereign bonds? Especially, if you consider US treasury bonds. After all they are guaranteed by the US government, which has time and again proved that it has unlimited pockets. But, are they good as an investment tool? Let's first go back to the basics of bonds. There is an inverse relationship between the price of a bond and interest rates. When interest rates are high, prices of bonds fall. And vice versa. The treasury bull market started in the 1980s when Fed chairman, Paul Volcker raised interest rates to as high as 20% to tame inflation. Thus, yields moved up to as high as 15.8% in September, 1981. Thus it made sense to buy bonds at that point.

However, yields dropped to a low of 2.1% in December, 2008 and currently are hovering around the 3.4% mark. Fearing an end of the 3-decade rally in treasuries, investors are pressing the exit button. Bill Gross, head of Pimco, the US$ 237 bn world's biggest bond fund has dumped US government debt. Warren Buffet, the most famous investor and BlackRock, the biggest money managers are both shifting to short term debt. According to Jim Rogers, US government bonds are not a safe haven any longer. Concerns that investors have is an expected rise in inflation and the rampant spending of the US government. Both these factors will slowly but surely lead to an increase in interest rates. With this, short term debt, equities and energy holdings seem to be the new flavours in town.

Emerging markets (EM) were the apple of the investors' eye in 2010 led by the strong GDP growth in these countries against a backdrop of recession in the developed world. But so much money poured into these emerging markets that asset prices began to get inflated. Moreover, unpredictable weather patterns impacted agricultural production. This then led to higher food prices. As a result of which overall inflation rose in the emerging economies. And so in a short span of about five months, EM equities have underperformed their developed market counterparts by 7.4%. But in the longer term, these concerns may not really play out. For instance, structurally, inflation in EMs has been showing a declining trend from an average of 50% in 1980s and 1990s to just 6.6% in 2000s. If growth gathers pace, capital investments will pick up too and inflation could fall. Further, it seems that the QE program has to end at some time. In fact, the reduction in easy liquidity as a result of this and its impact on EM assets is also beginning to be priced in. Thus, while in the near term, EM assets seem highly priced, they will not vanish from the investors' radar in the longer term.

In the meanwhile, Indian stock market indices continue to trade in the negative territory. At the time of writing, the benchmark BSE Sensex was trading lower by around 218 points. Stocks from oil & gas and technology lead the pack of losers. All sector indices except metals are trading below the dotted line. On the other hand, the Asian and European stock markets are trading strong.

 Today's investing mantra
"A small leak can sink a great ship." - Benjamin Franklin

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11 Responses to "Should you treat mutual funds like stocks?"

Manoj Kumar

Mar 25, 2011

Very Good Advice indeed! Worth following.


bharat c dalal

Mar 20, 2011

Your articles are very interesting and perceptive. I would like to have your views on expensive and inferior
education in Business and technical aspects. The rule of
AICT is reducing quality education initiatives. A small surface survey would indicate that AICT is corrupt and its policies are indeed destructive and are giving a great opportunity for foreign educational institutes to provide quality education.


Shome suvra chakraborty

Mar 19, 2011

The mutual fund aggregates pools of fund from smaller investors as well and invest in diversified portfolio where the unsystematic risk is diversified away. ETFS are mainly investing in stock indexes where minimum variance hedge ratio can be a good hedge against volatility.


Manohar Sharma

Mar 19, 2011

Yes I completly agree that mutual funds need to be treated in the same manner as the stocks.I have learnt it at a huge cost while listening to specialists from various banks or other advisors.



Mar 19, 2011

About rethinking on Nuclear power: The earthquake in Japan measured 8.9 on the Richter scale. The Fukushima plant was engineered to withstand earthquakes up to 8.2 on the Richter scale. One should understand that the difference between 8.9 and 8.2 is not 0.7 since the Richter scale is a logarithmic scale. The difference is 5 times or 500% so a 8.9 earthquake is 5 times more powerful and destructive as a 8.2 earthquake. This shows that Japanese engineering was excellent.
India cannot afford to go slow on Nuclear energy, since this would mean continuing our dependence on foreign oil, a continuing trade deficit and perpetual poverty for our people. We should engineer our plants to withstand more sever calamities.


Kishen Narayan

Mar 19, 2011

Please inform whether Income by way of dividends from stocks
(shares)is exempted from tax. If yes, indicate the Section
under which it is exempted. As I know Dividends from Mutual
funds are exempted U/S 10(35). Thank you.
Kisen Narayan.



Mar 18, 2011

In my Views it is wrong....but look after every 3 months



Mar 18, 2011

Your great, easy to read and insightful articles are backed by a non-responsive sales team with little evident desire to close deals. My past attempts to subscribe to mid cap & small cap reports have proved futile. If someone's listening, pls write to me.


Sawant V E

Mar 18, 2011

Your comments about recent earthquake in Japan and related nuclear power plants security reflects your knowledge about nuclear power and its security, better avoid commenting on unknown subjects.



Mar 18, 2011

You may be aware that War on Libya would be funded from froze assets of Gaddafi. Again each country involved has
a national interest at heart, particularly,Italy,France,
Britain. Again further damage to infrastructure and military hardware will create a new market in billions. Any damage in lives and assets will b called collateral
unavoidable damage. Just repetition of what they did to
Iraq. It is win win war irrespective of human costs.
Again it would be difficult to segregate between pro-Gaddafi and rebels. This is at best face-saving last minute venture.

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