Will war on inflation hamper growth?

With interest rates soaring, where are markets headed? Experts give their take on the impact of rate hike on markets.

According to Vallabh Bhansali, Chairman, Enam, "The interest rate rise was a good thing, not bad. We are in a good situation, it is good for companies, which are prudent, which have their focus right, I don't see things change for them at all. All factors are a constant in a market, if not ‘x’ there is always ‘y’ to pick about. We have had a bull market for several years and the market over the last 18 years has been correcting itself from time to time, fundamentally, we are very sound."

Mihir Doshi, Country Head-India, Credit Suisse expects earnings to take a hit in the near future. "On one hand, there is need for growth but on the flip side, rates are moving higher. Our expectation would be that earnings will take a hit in the near future, in the next 6 months but the longer-term story remains strong so if one looks beyond 2008, I don’t see a problem."

Hemendra Kothari, Chairman, DSPML says, "Of course, the interest rate going up is a definite concern to a marginal cost, and to some extent, it was overheating, which RBI also controlled. There is a lot of money available from outside wanting to come in and is looking at valuations - if the market comes down, they are all waiting to come in. So the long-term growth story remains."

Novartis may stop further investments in India

The battle between Novartis and the government over India's patent laws has taken its first victim! Novartis may stop further investments in the country.

Swiss drugmaker Novartis may stop its further investments in India till the time the Indian Patent Laws are framed in compliance with the International Patent Laws. Soruces say the decision is triggered by the fact that Novartis has not been granted product patent or sole manufacturing and marketing rights in India for its life saving anti-cancer drug Glivec.

Novartis has challenged the validity of the Indian Patent Law arguing that it should grant product patent to incremental innovations or new discoveries made over existing patent filings. Novartis claims that scientific research on a compound is progressive and so every stage of research is patentable.

Separately, Novartis is also fighting a patent case at the Intellectual Property Appelate Board in Chennai against a bunch of NGOs. The NGOs have questioned the patentability of Novartis' anti-cancer drug Glivec.

When contacted over its investment plans in India due to the patent fights, Novartis says, "Lack of respect for International Intellectual Property Laws will serve as a limiting factor on India's desire to expand its research-based pharmaceutical industry. Novartis prioritizes investments in R&D in countries which respect intellectual property. Concerning our plans in Hyderabad, Novartis reviewed options to acquire land there, but no final agreement has been signed."

Novartis had earlier plans to set up large-scale commercial facilities in Hyderabad. The Glivec case is not just about Novartis getting a product patent for its drug, it will also set a precedent for the approval of other drugs, which may be based on modifications of original patent filings. And that's why even Indian companies may get impacted on the final outcome of the Glivec case.

Mkts to face serious headwinds ahead: Bear Stearns

Michael Kurtz of Bear Stearns lists out his concerns for India. According to Kurtz, the RBI is aggressively fighting inflation, credit and liquidity problem. He expects RBI to continue to bring rates up, which will work to the detriment of topline companies as well as liquidity for the Indian equities market.

He further adds, "The extreme problem, in terms of mismatch between high valuations and an earnings and return on equities story, which may normalise over the next year or two mainly because Indian companies have started to add capacity."

Kurtz also feels that India will be vulnerable to US growth concerns. "The next emerging market shock is going to be lead by US inflation scare as opposed to the shock in February that was led by US growth concerns. India will be particularly vulnerable to this kind of shock because its balance of payments is so precariously dependent on portfolio capital inflows to prop us the currency."

Speaking on the direction for Asian markets going forward, Michael Kurtz of Bear Stearns says that markets are in for some serious headwinds in the months ahead.

"We are likely to see the Fed start hiking rates in the months ahead, pulling with it the Hong Kong Bank, Bank of Japan and China's central bank, also in the process of tightening policy as well. Combine this with seasonality, the markets are in for some fairly serious headwinds in the months ahead," cautions Kurtz.

Investing in MFs? Things you must know

Successful mutual fund investing requires a plan as well as the discipline to stick to that plan. MFs allow investors to allocate investment assets across different fund categories to achieve a variety of risk/reward objectives thereby reducing overall portfolio risk. In other words, the right way to benefit from MFs is to balance the risk as well as the potential to earn. For that, one needs to know the right meaning of risk. No wonder, identifying the right level of risk tolerance and the right schemes remains the most important factors in ensuring success from a mutual fund portfolio.

In other words, a decision to invest in a fund has to be well thought out one and not based on some immediate urge. The key, therefore, is to focus on the fund selection. If you are invested in a good fund from a fund house with a proven track record, most of your worries are taken care of. This decision itself will save you of a lot of botheration in future and ensure success on an on-going basis.

Let us analyse some of the important factors that can contribute significantly to your selection process.

Investment objective and policy/philosophy of the fund

The investment objective statement of the fund usually indicates whether it will be oriented towards capital gains or income or both. The fund manager also explains his approach to market timing, risk assumption and the anticipated level of portfolio turnover in the Offer document. Some times, funds also indicate investment restrictions they have placed on the fund manager. Many a times investors have to face disappointment both in terms of performance and the volatility because they do not match their own investment objective with that of the fund. To ensure that one achieves one’s objective, it is important to place greater importance on the fund’s investment objective and its investment policy.

Concentrated portfolio vs. Diversified Portfolio

The choice between a diversified and a concentrated portfolio largely depends upon on the risk profile of an investor. It is well known fact that a well diversified portfolio enables an investor to spread his investments across different sectors and market segments of the market. The idea is that if one or more stocks do badly, the portfolio won’t be affected as much. On the other hand, if a few stocks do very well, the portfolio won’t reap all the benefits. A diversified fund, therefore, is an ideal choice for someone who is looking for steady returns over the longer term.

A concentrated portfolio works exactly in the opposite manner. While a fund with a concentrated portfolio has a better chance of providing higher returns, it also increases one’s chances of underperforming or losing a significant portion of portfolio in a market downturn. Thus, a concentrated portfolio is ideally suited for those investors who have the capacity to shoulder higher risk in order to improve the chances of getting better returns.

Past Performance

Though past performance has to be an important consideration in the selection process, it's critical that one keeps performance in perspective. No doubt, a fund's successful track record can be a positive indicator, but it cannot be a guarantee for the future growth at the same rate. While reviewing a fund's performance, one needs to not only look at performance relative to funds with similar objectives over a period of at least 3-5 years but also the risk taken by the fund to deliver those returns. In other words, the objective should be to select a fund that is managed well and provides consistent returns. Avoid those funds that are showing very high past returns but are inconsistent performers over different time periods. Remember, it may not be wise to depend entirely on the past performance. It is equally necessary to have the right mix of funds in the portfolio. Therefore, one should first decide the allocation to each asset class and then select funds for each one of them. By investing in a haphazard manner, one may end up having over exposure to an asset class and that may hamper the chances of success.

Level of Risk

To determine the right level of risk tolerance is an important ingredient for investors and can go a long way in designing an optimum investment strategy. Besides, it helps in customizing fund category allocations and suitable fund selections. There are certain broad guidelines to determine the risk tolerance.

These are:

• Be realistic with regard to volatility it is necessary to consider the effect of potential downside loss as well as potential upside gain.
• Determine a "comfort level" -- if one is not confident with a particular level of risk tolerance, then select a different level.
• Regardless of the level of risk tolerance, adhere to the principles of effective diversification -- the allocation of investment assets among different fund categories to achieve a variety of distinct risk/reward objectives and a reduction in overall portfolio risk.
• Reassess risk tolerance at least annually -- sometimes one’s risk tolerance may change due to either major adjustments in return objectives or to a realization that an existing risk tolerance is inappropriate for one’s situation.

Since it is the level of risk that provides the guidance about the level of volatility, and the kind of return one can expect, one has to be careful while assessing this.

Variety of funds offered by a fund house

Most fund houses offer a family of funds thereby allowing investors to diversify across different asset classes to achieve different investments objectives as well as to invest for different time horizons. Considering the variety of funds on offer from a fund house, is important, in case one is required to make changes in line with one’s revised investment objective/s or time horizon. In that case, it is much more convenient to move money within the same fund house rather than redeeming from one fund house and reinvesting in some other fund house. Besides, one can avoid the risk of redeeming at one level and reinvesting at a different market level. However, if the fund house where one is invested does not have the required options or the performance of alternate fund being considered is not up to the mark, it will not be prudent to go for the convenience alone.

Tax Efficiency

Tax efficiency of an investment option considered for selection can be critical for the long-term success of a portfolio. As per the Income tax rules, there are two types of funds i.e. debt funds and equity funds. Those funds that have exposure of 65 percent or more to equities are considered as equity funds and all others are considered as debt funds.As regards equity and equity oriented funds, tax efficiency comes into play when one has to rebalance the portfolio or redeem holdings within one year of making investment. For debt funds, tax efficiency has a much bigger role to play in the selection process. This is because one has to consider short-term capital gains rate, dividend distribution tax as well as long term capital gains for selecting the right option i.e. dividend or growth.

ABN AMRO Sustainable Development Fund -Should you Buy?

ABN AMRO Asset Management's latest offering ABN AMRO Sustainable Development Fund seeks to invest in Socially Responsible Companies, and is the first of its kind in India. The fund house will arrive at short list in consultation with CRISIL, which would apply a filtering and screening process. ABN Amro would then subject the shortlist to further analysis and narrow it down further. Back testing this model has yielded encouraging results, says the fund house.

What is the logic behind launching "ABN AMRO Sustainable Development Fund"?

David Morrow, Global SRI Product Specialist, ABN AMRO Asset Management says, The consensus in the global investment community is that environmental, social and governance (ESG) factors are material to financial performance, and that investors should systematically assess these issues when making investment decisions. Our investment process is designed to ensure we invest in companies that are leaders on reporting on ESG issues.

Investment advisor Hemant Rustagi feels that since the fund intends to invest in companies across all ranges of market capitalization, it can find a place in every kind of portfolio. Moreover, since the fund would be investing only in socially responsible companies, the investment universe of the fund is well defined. The assets under management are likely to be more consistent compared to a normal equity fund as socially screened funds generally retain investor loyalty, he adds.

ABN AMRO Mutual Fund is optimistic about its novel product, but experts feel that there are several factors that investors should be aware of before investing in the scheme:

How reliable is the logic of ethical investing w.r.t. returns generation?

Investment expert Sandeep Shanbhag says, There are two things to note here. 'Back testing' has become a catch phrase with NFOs. If investing successfully was as simple as basing actions on 'back testing' a particular model, every mutual fund not only in India but all over the world would have made hand over fist merely by 'back testing'. It simply doesn't work that way.

Secondly, 'ethical investing' though having its place under the sun, as far as returns are concerned, has not worked. This is the experience of occidental markets where there are a number of mutual funds offering 'ethical portfolios'.However, David Morrow counters it as he says, We respect that some people discount the results of back tests; however one should not ignore the consensus of the investment community. Not only is the consensus clear, it is clear on a global basis, contrary to the opinion stated above that ethical investing has not functioned well in occidental markets. Companies that reduce their environmental impacts, have good relationships with stakeholders and society, and have governance policies that align the interests of management and shareholders are best poised for long-term success.

Can Socially Responsible Companies outperform others?

There is no conclusive evidence to prove that socially responsible companies perform better than others”, says Rustagi.

David Morrow clarifies, Actually, the majority of academic studies have shown positive correlations between environmental, social, and corporate governance performance, and financial performance. In our view, this relationship will bear out more strongly in emerging markets, because we believe international investors will pay a premium to invest in responsible companies in emerging markets. Why? Because these companies are more likely better-managed companies that have lower risk and better long-term growth prospects as they focus on new business opportunities related to sustainable development.

Conclusion:

Those investors who don't mind compromising on returns potentially that can be generated by investing in the broad market and would like to see their money encourage socially responsible companies may take exposure as this scheme is the first of its kind in the Indian market, says Shanbhag.

It is too early to predict a slowdown in terms of earnings growth for equities

Nilesh Shah, President of Kotak AMC says it is too early to predict a slowdown in terms of earnings growth. He gives his view on earnings growth, the markets and even advises what would be a better option for investment.

An interview with Nilesh.........

Q: Have things now clearly tipped in favor of a slowdown in the Indian markets and would you revise any estimates that you had maybe a month ago?

A: I think it is too early to have any kind of downward revision. I guess by and large, the street does expect the GDP to sustain a growth rate in the excess of 8% and on the back of that, with inflation at about 5-6%, corporate earnings are expected to sustain a growth rate of about 18-20%.
So from that perspective, I think corporate India seems to be on course to achieve 18-20% growth and lot of this growth is going to be contributed by the technology and telecom sector and of course the banking, financials and the insurance sector. The three put together constituted about 40-50% of our Indices.
So I think from that perspective, it is too early to project any kind of slowdown in terms of the earnings growth.

Q: Agreed that growth is on track, so what are you looking at 2,000 point down from the top? Are we looking at mouth watering valuations, will you advise people to buy or would you say don’t catch a falling knife and wait a bit?

A: If one looks at the marketplace, then stock prices essentially are a function of the earnings and the P/E multiples. The earnings growth, as we all know, is broadly on track and so it is a situation of P/E multiples, which had expanded close to 19-20 times FY08 earnings have to some extent contracted to about 15-16 times, which broadly is in line with our long-term averages.
We have to keep in mind that today we are talking in context of some kind of global jitters, to which we also might have some amount of collateral damage, which could lead to marginal contraction P/E multiples on a temporary basis.

Q: Mr. Narayan Ramchandran was saying that double-digit growth is great, but even low double-digit growth is something one has got to learn to live with. The concern here perhaps is that today fixed deposit possibly gives you 10% fairly risk free, so do you see money moving away from equity into debt or atleast money that into the side line not coming back into the markets?

A: After a very long time, fixed income markets- whether it’s in the form of debt or deposits, essentially they are into one-year fixed income products that have started giving you close to about 10% returns and that surely can be very tempting because we are seeing the situation after three-four-five years.
So I think it can be very tempting in the short-term, but we need to keep in mind that these returns essentially are on a pre-tax basis; on a post-tax basis, investors do end-up earning anywhere between 7-8%.
In the backdrop of that, equities have been delivering returns anywhere in excess of 25%. And even if that contracts down to as low as 15-20%, we have to keep in mind that from more than one year perspective, those returns are tax free.
So, I think on post tax basis, equities over longer periods of time can give significantly higher returns and that’s something which investors need to keep in mind in their financial planning.

Q: Has the Budget changed your outlook on any sectors, cement, IT for instance?

A: Since the Budget is all about the fiscal policy, it definitely has an impact on some of the sectors. The most obvious one has been the cement sector, where having the variable or the differential excise duty depending upon the final retail selling price of cement. I think that sector is going to have problem, the problem may not be so much in terms of the ability to raise prices or maybe significant changed in earnings, but its probably that if the industry does not reduce rates, it could further face subsequent actions from the government. So from a sentiment perspective also that sector continuous to look weak.
From a positive perspective, there aren’t too many sectors, which stand to gain tremendously from the Budget. But areas like telecom, technology, media are sectors that have remained relatively, insulated not only from the Budget, but from essentially any kind of a global slowdown or any of these concerns of interest rates or inflation.

Correction could be bit deeper in India: JF AMC cont.....

Q: What feelers are you getting from the sub-prime mortgage market? What is your own sense? Will there be a much larger spillover or do you think we have seen the scariest bit already?

A: I think everyone has agreed that it is not likely to lead to systemic crisis; now if you say that sub-prime loans count for say roughly 10% of the total mortgage loan book and maybe one third of those go for closure, not all of them are going to be in dire straits, then it would be an add-on to delinquency mortgage or maybe getting up to a delinquency ratio of 5-6%, then that is a lot way above normal but it is not enough to cause tremendous damage to the whole US financial system and it is not really going to be on par with the savings on loan crisis but it will take a while to work off.

Q: There are several parallels drawn with the situation you had in May. Are we somewhere there and do you think it will be the same period in terms of time by when the market starts pulling back or showing more recovery?

A: Every correction is different, and we have had corrections in the Spring, now in the last three to four years, which have typically been around 15% for other global emerging markets and around 8-9% for the developed markets.

I don’t think one should read too much into that, it is not a seasonal thing and each correction can be different. All we would say is that most retail investors are better off trying not to time these things, but stay invested for the long term and allow the dollar cost averaging to actually buy units now through the correction, which will be cheaper than when markets are most expensive and have recovered.

Q: What is the sense you are getting on India from out there from a lot of the funds and investors?

A: The sense we are getting is that nobody is worried about the long-term India story - that it is going to be one of the most exciting places to be in terms of equity investments for the next 10 years. People are a bit worried about inflation. They recognise that the RBI has moved - whether it is ahead of the curve or slightly behind is another issue. So nobody is thinking of reducing or pulling out or saying this has been a bad idea. There is a tremendous amount of confidence in the India story, but in terms of timing that the people expect, given how rapidly the market moved up last year and the correction could prove to be a little bit deeper.

Correction could be bit deeper in India: JF AMC

Geoff Lewis, Head of Investment Services, JF Asset Management, comments that inflation is an issue for the Indian markets and nobody's pulling out. He opines that correction could be a bit deeper in India.
Lewis says that hedge funds have reduced net equity positions and that the correction could last for another six weeks.
JF Asset Management states that the US economy's outlook is uncertain due to the lower risk appetite. He adds that a soft-landing is seen in the US despite subprime issues and weak data.

An interview with Geoff .......

Q: How do you sense the global situation, or rate the global situation right now because it seemed a bit uncertain over the last few weeks? What are the cues you are picking up from the US?

A: Basically, we are still ultimately in the soft-landing camp, but I think things like the sub-prime lending crisis coming to a head and some rather weak US data have made the economic outlook for the US economy rather more uncertain of late. This uncertainty is leading to a reduction in risk appetite and to a period of correction in the global equity markets.

Typically, corrections last about six weeks and involve 5-10% fall in the developed markets and maybe 15-20% fall in the global emerging markets. So we think there is a further period of consolidation and correction to come, but this a growth scare, not an inflation scare; I think an inflation scare at this point would be more damaging to the market outlook.

Q: Has this uncertainty led to any kind of major redemptions in the region or lots of investors trying to pullout or sell out their emerging market investments?

A: So far the scale of the outflows has been relatively limited and compared to what we saw in the correction in May-June last year, a lot of people are looking for maybe a relatively shallow correction in terms of how long it lasts. It could be a longer phase of consolidation - that would be welcome. Either the time or depth of the correction, can lead to overvaluation and remove some of the froth in the equity markets.

The hedge funds have already reduced the equity exposure quite considerably. The retail investor puts some pressure towards the end of these corrections and you get some redemptions from mutual funds. But so far it has been on a very limited scale on this occasion.

Q: How much more are you expecting by way of risk adjustment then for the emerging markets? Do you think with that fund outflow situation, it will be the emerging space that will be hit the hardest?

A: A lot of global strategists are recommending a more cautious attitude and maybe a period of neutrality, or some underweight in emerging markets space. A lot is going to depend on the outlook for the US economy.

We are relatively optimistic that three to four periods of sub-trends and the 2-2.5% growth will remove the inflation threat and enable Fed to start cutting interest rates in the second half of the year.

With growth being very firm in Asia, for example, and also in some of the other emerging market areas, on a 12-month view, the outlook for emerging markets according to me, is pretty good and what encourages me is the deeper correction seen last year.

The scale of the selling from some of the new investors in BRIC funds like the Japanese investors was not as much as it might have been.

Q: Tactically, then at this point, in a situation where there might be a soft-landing for the US, where fund flows are quite if not viciously getting pulled out, how would you approach the emerging markets? Is this a buying opportunity or is it not yet?

A: I think rather not yet; we have to wait for the other shoe to drop, as we are still in a period of weak US growth; so the activity numbers are likely to disappoint in the first half of this year and we have not seen enough of a correction yet; so on a tactical basis I would advice to wait a little bit.

What we have seen is that for most investors it doesn’t pay to try and time these funds. If you just return through the volatility of May-June and did nothing and remained invested over the following six months on a broadly diversified portfolio of outfunds, you would have returns plus 12%. In the three months including the correction, you would have lost 2%; so it pays to ride through the volatility more often than not.

5 ways to diversify your portfolio

Any financial planner worth his salt will vouch for the importance of diversification. In fact, diversification should be regarded as one of the basic tenets of financial planning. Having the desired degree of diversification makes the portfolio a resilient one. A downturn in a given investment can be offset by the presence of another. In this article, we discuss the various means that can aid investors in achieving a desirable degree of diversification in their portfolios.

• Diversify across asset classes Firstly, the portfolio must be diversified across various asset classes. Depending on the investor’s risk profile and needs, assets like equities, fixed income instruments, gold and real estate among others should find place in the portfolio. This will grant stability to the portfolio, by making it resistant to the vagaries of the market. For example, when equity markets are at their volatile best (as they are at present, for instance), the portion invested in fixed income instruments like fixed deposits (FDs) and fixed maturity plans (FMPs) can prove to be handy.

• Diversify across investment avenuesWithin each asset class, there is a need to be diversified across various investment avenues. For example, the equity portfolio can comprise of direct equity investments, investments in mutual fund schemes and unit linked insurance plans (ULIPs). Similarly the fixed income portfolio can be constructed from FDs, FMPs and small savings schemes. An insurance portfolio could hold a combination of term plans, endowment plans and ULIPs.

• Diversify across time horizonsInvestors should hold multiple investment portfolios each catering to a distinct need and running over a commensurate time horizon. For example, typically an investor could have short-term goals (going on a vacation), medium-term goals (buying a house) and long-term goals (providing for retirement). Each of these objectives should be backed by a distinct portfolio and the investments therein should be aligned with the time frames. Equities can account for a higher portion of the long-term portfolio given that they are best equipped to deliver over longer time frames. Conversely, fixed income instruments could dominate the short-term portfolios.

• Diversify across providers/suppliersEnsure that your investments are spread across various providers/suppliers. For example, the mutual fund portfolio should have schemes from various asset management companies (AMCs). Each AMC can offer a unique investment style and process, thereby aiding the portfolio on the diversification front. Similarly, FD offerings from multiple banks can be considered for investment. Investors should make use of the plethora of providers to their advantage, by selecting the “best-in-class” financial service providers/asset managers and in the process de-risk their portfolios.

• Diversify across countriesInvestors now have the option to invest globally. Domestic mutual funds have been granted permission to invest in foreign stocks. Similarly, resident Indians are also permitted to invest in assets and securities abroad, subject to the regulations issued by the Reserve Bank of India (RBI). By adding foreign assets to their India-centric investment portfolios, investors can expose the same to a different set of market forces, thereby imparting it a unique diversification edge.

Case Study: Too many funds spoil it

In our interaction with clients, we have noticed two things – an inexplicable draw towards NFOs (new fund offers) and the need to populate the portfolio with as many mutual fund schemes as possible. In our view, both these are fallacies that could prove fatal to the investor’s long-term financial health. Everything that glitters is not gold and there isn’t always safety in numbers.
To address the ‘NFO Menace’ (we could not find a term more apt than menace given that most NFOs do more harm than good), we recently wrote an article on how most investors are forever looking for something new to add to their portfolios. Unfortunately since NFOs are perceived (in reality, most are recycled versions of existing funds) as new and they come at an ‘extremely cheap NAV (Net Asset Value) of Rs 10’, they command a lot of investor attention.

In this case study, we discuss the case of a client our team of financial planners met recently. His case was typical of what we have seen with several clients – too many mutual fund schemes competing for space in the portfolio. The client under question had 15 equity funds. While that may not sound like a huge number of funds to some visitors, in our books, 15 equity funds are way too many for any individual, who treats investing as a part-time activity, to track competently.

So when we saw our client’s 15-fund-strong portfolio (which was more like a 15-fund ‘fragile portfolio’), after carefully understand the client’s need and subsequently considering each scheme, we asked him to do away with most funds. There were mainly two reasons for this – one, some of the funds did not add any value to the portfolio and only overlapped with other funds and two, many of the funds were not well managed and were nowhere close to meeting Personalfn’s rigorous fund selection process.

Having ‘cleaned’ his equity fund portfolio of all the niche funds and non-performing funds, we recommended what can be termed as an Ideal Portfolio (of Equity Funds) to the investor. This ideal portfolio had 6 funds; yes, only 6 from hundreds of equity funds. The reason for our ‘stingy’ selection approach is that there just isn’t need for all the fancy themes and ideas being marketed by fund houses. The average investor does not need more than half a dozen funds embracing the broadest investment styles. When you have funds with broad investment mandates, you can do away with funds with niche investment mandates.

More and more funds only bloat your portfolio without adding sufficient incremental value. Ultimately, there is a cost associated with mutual funds, both in terms of money (entry loads) and time (remember you have to track these funds regularly; in most instances your agent will disappear once he sells you those duds).

As Warren Buffet, the renowned investor once said, ‘Diversification is a protection against ignorance. It makes very little sense for those who know what they are doing.’ In other words, if you are certain about your mutual fund investments, you do not need to diversify impulsively; rather you just need to pursue a focussed mutual fund strategy with the best fund picks. Given the nature of this discussion, in time, we plan to address this issue through a dedicated article.
The ideal portfolio that we selected had funds that rank high on sponsor credibility, fund management philosophy, investment approach and processes and performance. These are the funds that have met and continue to meet our demanding fund selection processes over the years. In a nutshell, the key traits of the Ideal Portfolio included:

• A good mix of large cap/mid cap/flexi cap funds and value style and growth style funds. The idea is to give the investor the broadest investment mandates and styles so as to achieve maximum results with the minimum of funds.

• There are no sector/thematic funds in our portfolio.

• All AMCs (Asset Management Companies) that manage the funds in the Ideal Portfolio have close to 10 years of experience in the fund management business

• Over the years, the funds in our portfolio have consistently outperformed their benchmark indices by pursuing well-defined processes. Put simply, this means that they adhered to their investment mandates, performed well across market phases (particularly the downturns) and had no surprises for investors either during an upturn or downturn.

3 steps to evaluate your fund manager

Mutual funds are increasingly finding greater acceptance among investors, when it comes to planning their finances. However, given the numerous schemes in each category, and many more being launched every month, how does an investor determine where to invest? To start with, we recommend that you take a close look at the fund management team, in other words, the brains behind the mutual fund.

The fund manager, also known, as the “Portfolio Manager” is an individual (although increasingly, he is being replaced by a team of two to three fund managers) who decides where, and in what allocation, money is to be invested. Given the importance of the fund manager/fund management team, it is pertinent that you, the investor, evaluate him very carefully.
Here are some parameters on which you should evaluate the fund manager:

1. Adherence to mandate

Every mutual fund scheme has an investment objective, which the fund manager must adhere to. If the fund manager is not faithful to the mandate, then you may find yourself invested in a scheme whose objectives no longer match yours. And then of course, if you were to take corrective measures, there will be implications in terms of taxation and loads.
There have been instances when funds change their mandates depending on what’s “hot” in the stock market. Such funds again must be avoided as their focus is on asset accumulation and not money management. A fund manager who adheres to the mandate under all conditions regardless of market conditions should be preferred over one who does not.

2. Investment style

It is important for an investor to understand the investment style followed by the fund house. One way to classify investment styles is individualistic style and team-driven style. The basic difference between the two is that in the former, you have a ‘star’ fund manager who plays an important (at times, even indispensable) role in taking investment decisions. In the other style, there is a team that takes the investment decision based on certain processes and systems. The team has a fund manager who participates in the investment process, but he is not a star; instead, he takes the final call based on the team’s consensus. Needless to say the second approach is a lot better; one key reason being there is no over-dependence on one individual.
Investors must be cautious while investing in a fund that pursues the individualistic brand of fund management. This is particularly so, since switching between fund houses is a common practice within the fund manager community. Testimony to this fact is that apart from a few names, we can’t think of many fund managers who have been associated with a fund house for more than even 5 years. When a star fund manager quits the fund house, the existing funds could witness a dip in performance. Also investors are hassled into tracking his whereabouts and then investing/redeeming their monies based on his latest employment.

One thing that is critical while deciding on which mutual fund to opt for is to ascertain whether the fund house has a process-driven approach to identifying the right investment opportunity. A process-driven approach brings in discipline, which in the long-term is a key factor in determining performance.

3. Evaluating performance

Higher returns or a rapidly appreciating NAV (net asset value) do not necessarily mean that the fund manager is doing the right thing. There is a lot more to performance than just the headline NAV return number. Among the ‘numbers’ one should focus on.

One, the most basic - a comparison of the fund’s performance over various time periods vis-à-vis both the benchmark index and its peers. The comparative performance, both absolute and risk-adjusted, will give you an insight into the fund manager’s ability to outperform the peers and the benchmark over different periods of time. A well-managed fund should be a consistent outperformer.

Two, the performance of the fund during downturns in the market should be evaluated carefully. A fund managed by a smart fund management team should ideally fall a lot lower than the market due to the prudent investment calls. Remember, it’s only in lackluster/bear markets, that the stock picking ability of the fund management team really comes into play (in bull markets almost anyone can deliver a return).

Above we have listed just three points for you to keep in mind when selecting the right fund manager/team while investing your money. Once you select the right fund management team, you have made a start, but there is a lot more homework still to be done in terms of selecting the right mutual fund. An easier alternative is to engage the services of an honest and competent financial planner.

MF NAVs advance higher as markets bounce back

Equity diversified NAVs advanced higher and recovered earlier losses as markets bounced back.

The Sensex closed up 169.21 points or 1.36% at 12624.58, and the Nifty up 57.05 points or 1.57% at 3690.65.

All sectoral funds gained. The BSE Bankex, Healthcare, Auto, FMCG and IT indices rose 0.5%, 0.6%, 0.9%, 1.3% and 2%, respectively.

Long term debt funds ended with negative returns; advance:decline ratio stood at 24:40.

> Equity diversified NAVs advance higher
> All sectoral funds gain
> Long term debt funds end with negative returns

Among the equity diversified funds, the top gainers were DWS Alpha Equity Fund (G) up 1.49%, UTI Opportunities Fund (G) up 1.35% and Pru ICICI Growth Plan (G) up 1.33%. The top losers were ABN AMRO Opportunities Fund (G) down 4.80%, ABN AMRO Dividend Yield Fund (G) down 3.84% and BOB Diversified Fund down 3.15%.

Among the tax saving funds, the top gainers were DWS Tax Saving Fund (G) up 1.38%, Escorts Tax Plan (G) up 1.11% and Tata Tax Advantage Fund - 1 (G) up 0.99%. The top losers were ABN AMRO Tax Advantage Plan (ELSS) (G) down 5.13%, BOB ELSS 96 down 3.14% and HSBC Tax Saver Equity Fund (G) down 2.83%.

Among the sector funds, the top gainers were Franklin Infotech Fund (G) up 1.66%, UTI Petro Fund (G) up 1.63% and UTI Software Fund (G) up 1.59%. The only loser was SBI Magnum Pharma Fund (G) down 0.64%..

Among the balanced funds, the top gainers were Sundaram BNP Paribas Balanced Fund (G) up 1.22%, LIC MF Unit Linked Insurance Scheme up 1.03% and Escorts Balanced Fund (G) up 0.96%. The top losers were Kotak Dynamic Asset Allocation (G) down 4.79%, BOB Balance Fund (G) down 2.90% and BOB Children Fund - Study Plan down 2.64%

IT cos hit by rupee surge

Everytime the rupee goes up - the fortune of IT companies goes down. Wipro earns over two thirds of it's revenue from the US, so do Satyam, Infosys and TCS. That's why every time the rupee appreciates, the revenues of IT companies depreciate. The last 2 quarters have been particularly tough - the rupee has gone up by almost 5 %.

On April 4, the rupee touched an 8-year high. Analysts estimate IT companies' revenues for the january to march quarter will be lower by about 1.5%. The next quarter will be worse.

"I think on account of weakness of the dollar against the rupee, you will see Infosys be the first one to come out with a muted guidance," says Ashwin Mehta, Analyst, Ambit.

Analysts estimate that every 1% rise in the rupee reduces profits by 30-40 basis points. Most IT companies buy hedges to protect against currency fluctuation. But here's where the cookie crumbles.

Brokerage house CLSA says - Wipro will be the worst hit amongst IT companies. That's because last quarter, it reduced its hedge by 50%. Infosys did so by 4%. But on the other hand, Satyam increased its hedge by 60% and TCS by 14%.

So companies like TCS and Satyam lose less if the rupee rises and if it depreciates - they only forego a premium. So if the rupee continues to appreciate, IT stocks will fast lose currency in the markets.