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Portfolio Management Scheme: A unique investment opportunity

Friday, April 08, 2011 at 8:16 PM Article by Unknown 1 Comment

What is Portfolio Management Scheme?
Portfolio management scheme popularly known as PMS are specialized investment vehicle for lump sum investments. The portfolio manager invests the money in shares and other securities and manages the portfolio on behalf of the client.

One can invest fresh money in Portfolio Management Scheme and the portfolio manager will construct a portfolio by deploying that money. Also one can transfer his existing share portfolio to the Portfolio Management Scheme provider. In that case, the portfolio manager will revamp the portfolio in sync with his investment philosophy and strategy.

Once the Portfolio Management Scheme account is opened, the client will be given with a web access to his portfolio. The client can look at where the portfolio manager is investing client’s money. Also one will be able to generate reports like Investment Summary, Portfolio Transaction List, Performance Analysis, Portfolio Statement and Quarterly capital gain report.

As a result, Portfolio Management Scheme relieves investors from all the administrative hassles of investments.
Portfolio Management Scheme Vs Direct Stock Market investment:
One can directly invest in stock market. Then what is the advantage of investing in the stock market through a Portfolio Management Scheme. Investing in share market demands knowledge, right mindset, time, and continuous monitoring. It is difficult for an individual investor to meet all these demands. But a Portfolio Management Scheme meets these demands easily. The Portfolio Management Scheme will be managed by an experienced professional. It saves the time and effort of the individual investors. Hence it is advisable to outsource the stock market investment to a sound Portfolio Management Scheme operator instead of managing it on our own.
Portfolio Management Scheme VS Mutual Funds:
Mutual fund is also a good investment vehicle. It should also form part of your total equity investment. But mutual funds are mass products. So they will be conservative by nature. As per SEBI regulation, mutual funds have some investment restrictions. There is a maximum limit on the percentage of amount invested in an individual stock. Also there is some maximum cap on the exposure in a particular sector.

Once the fund manager reaches the maximum limit prescribed by SEBI, he is forced to invest in some other stock or some other sector. That is why we see a large number of stocks in a mutual fund portfolio. Where as a Portfolio Management Scheme will invest in 15 to 20 stocks. This concentration makes it more attractive and aggressive. Managing a 25 lakhs Portfolio Management Scheme portfolio will be more flexible when compared to managing a 2000 crores mutual fund portfolio.

Portfolio Management Schemes relatively have more flexibility to move in and out of cash as and when required depending on the stock market outlook.
Basically the conservative portion of your equity investment can go into mutual funds. The aggressive portion can go into Portfolio Management Scheme.

How to choose a best Portfolio Management Scheme?

There are so many Portfolio Management Schemes in the industry. So it is really very difficult to choose a good Portfolio Management Scheme provider. Here are some factors to be considered before choosing a Portfolio Management Scheme.
1) Yardstick for Performance:
One should not just go by the past performance alone. Making an analysis on various Portfolio Management Schemes in the industry with their past performance along with the risk adjusted return and the consistency of performance will be useful in selecting the best Portfolio Management Scheme.
2) Minimum Investment Criteria:
Investors need to avoid Portfolio Management Schemes where the minimum investment is less than 25 lacs. Even there are Portfolio Management Scheme operators who keep minimum investment for their schemes as low as 5 lacs. But these kinds of Portfolio Management Scheme operators will have more number of PMS accounts. When the quantity (the number of PMS A\cs) goes up the quality (the performance) may relatively come down.

Therefore it is better to choose a Portfolio Management Scheme where the minimum investment is 25 lacs or more. So that our PMS A\c will be directly handled and managed by the top level portfolio manager and not managed by the juniors and analysts. If you are planning to invest less than 25 lacs, then the ideal investment product for you would be mutual funds.
3) Conflict of interest:
Portfolio Management Schemes have been run by some stock broking companies as well as investment management companies. There is a conflict of interest in Portfolio Management Schemes run by share broking companies. The main business of a share broking company is to earn commission income by facilitating the share market transactions.
Portfolio Management Scheme is an additional business for them. It is not their core business. Hence there may not be enough focus on the Portfolio Management Scheme business. Also they may indulge in doing undue and unnecessary churning of the clients’ portfolio to earn more commission income. This will cause additional expenses and short term capital gain tax to the client.

The core business of investment management companies is managing the investments of their clients to earn management fees. So, with the Portfolio Management Schemes run by investment management companies, there is no conflict of interest or vested interest. Therefore it is always advisable to choose a Portfolio Management Scheme offered by investment management companies.
4) Role of Professional Financial Planners:
A professional financial advisor or financial planner will study and analyse the Portfolio Management Schemes run by various stock broking companies as well as investment management companies. If we approach them, they will guide us in choosing the right Portfolio Management Scheme depending upon our requirements and other factors.

Also a professional financial advisor will continuously monitor the performance of various Portfolio Management Schemes and advice the client on a regular basis on the performance of the Portfolio Management Scheme where the client has invested vis a vis the other PMS schemes in the industry. After a certain period, if necessary he may advice you to move from one Portfolio Management Scheme operator to the other.
ESOPs and Portfolio Management Scheme:
ESOPs are provided by the companies to its employees based on their service. Most of the employees are of the opinion of keeping the ESOPs as it is forever because it is their company shares. But logically it is too riskier to invest in a company to whom you work for. Because, your employment income as well as investment income will depend on the performance of a single company.
So it is not advisable to keep your investments in a company where you actually work. So it is at all times advisable to transfer your ESOPs to a Portfolio Management Scheme. They will revamp it to construct a well diversified portfolio.

Portfolio Management Scheme is an aggressive investment product and really suitable for those investors

• Who have a share portfolio and find it difficult to manage.
• Who have enough exposure in Mutual funds and looking for a different and good investment option
• Who have sizable ESOPs.

The author is Ramalingam K, an MBA (Finance) and Certified Financial Planner. He is the Founder and Director of Holistic Investment Planners (www.holisticinvestment.in) a firm that offers Financial Planning and Wealth Management. He can be reached at ramalingam@holisticinvestment.in.

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Mutual Funds- A Myth Buster!

Wednesday, April 06, 2011 at 8:12 PM Article by Unknown 0 Comments

Mutual Funds Mythbuster:

Rahul is working for a mutual fund house. They have recently came out with an NFO (new fund offer). The day on which the fund house announced its maiden NAV (net asset value), he received lot of calls from investors asking why the NAV is at below par. They thought something was wrong.
Then Rahul went on clarifying them that though both an equity fund and a stock extend market-related returns, there are some key differences between the two. If you have similar misconceptions about equity funds and stocks, this article will demystify all those misconceptions.

New Fund Offerings:
 A new fund offer is not likely to generate amazing returns as can be the case with an initial public offering from a company.
This is because the NAV reflects the market value of the stocks held by the fund on any day. Because a fund holds several stocks in its portfolio, the NAV can only reflect the combined returns on the portfolio between the NFO date and the date of first NAV.
The first NAV declared by a fund can, at times, be lower than the par value of investment. A lower NAV does not mean a cheaper fund: Just because a New Fund is issued at Rs 10, it does not mean it has a chance of giving better returns than an existing fund that has a higher NAV.
Whether the scheme in which you are planning to invest has an NAV of Rs.15 or Rs.150 does not matter at all.

There is a difference between the price of a listed security and the NAV of a mutual fund scheme. Listed security has a price, determined by the demand and supply of the security. Whereas the unit's NAV of the scheme has a value determined mathematically, by the prices of the securities in the portfolio. If the portfolio appreciates by 10% Rs.15 NAV will become RS.16.5 and Rs.150 AV will become Rs.165. So in whatever the NAV you invest your investment will fetch you 10% return.
So instead of concentrating on LOW NAV and more number of units, it is worthwhile to consider other factors (performance track record, fund management, volatility) that determine the portfolio return.
 A fund with higher NAV may give higher returns than a lower NAV fund, if its stocks did better in the markets.



Funds Vs Stocks
Point of distinction
Equity Fund
Stocks
Level of Risk
High
Highest
Entry/Exit cost
No Entry Load; But there will be Exit load. Advisory fee may be applicable.
Demat a\c and Brokerage charges
Options
Options available like dividend payout, dividend reinvestment, growth.
No such options
Minimum Investment
Min investment is usually Rs.5000.
Even one share can be bought.
Measuring Performance
Returns Vs Benchmark
Net Profit margins/EPS
Sub-division
Classified based on stocks in which it invests. (Diversified, Midcap, sectoral, thematic)
Classified as per the industry in which it operates.(FMCG, IT, PSU, METAL)
Pricing
Based on the price of the underlying securities
Based on the demand and supply of the particular stock

Dividends are not extra returns:

Immediately, after the dividend payment of dividend the NAV of the fund will fall to the extent of the dividend payment. Let us illustrate.

Fund’s cum dividend NAV is Rs.25. Proposed dividend is 50%. You are investing Rs.1 Lac and you will not get Rs.50000 as dividend. It is only Rs.20000 (50% on the face value Rs.10 is Rs.5 per unit) as the unit price is Rs.25 you will get 4000 units. Rs.5 dividend * 4000 units=Rs.20000.

And this dividend is not an additional gain or income. After payment of dividend the NAV of the scheme will fall to the extent of the payment and distribution taxes (if applicable). Now your nav will become Rs.20 and your investment value will be Rs.80000 (4000 units * Rs.20 NAV).

In a nutshell,

     Investment amount   Rs.1,00,000
     Dividend amount     Rs.  20,000
      Present Value      Rs.  80,000

It is nothing but investing Rs.80000 after dividend distribution at NAV Rs.20.

So investing in a scheme because it is declaring dividend in the near future is meaningless.
Usually a company with a liberal dividend policy may enjoy greater investor interest in the stock market. The same is not applicable to an equity-oriented mutual fund.

Investing more number of funds is not actual diversification. It may reduce your return.

Owning several mutual funds doesn’t necessarily broaden your holdings. It will be a mistake to buy the same securities over and over again in different funds with different names. You tend to believe they're diversified. But it is not real diversification.

There are only very few funds which are performing consistently. Instead of investing in few funds, if someone chooses to invest in more number of funds (because he intends to diversify) he may be forced to choose some average performing schemes also. As a result his returns will be diluted. The step taken by the investor to diversify his investment is not leading to diversification but to dilution of return.

Thus ideally your portfolio should not have more than four-five funds.
NO tax for churning:
 When we buy shares and sell them within a year we are accountable for short term capital gain tax at the rate of 15%.
But mutual funds provide the benefit of churning of stocks with no tax implications. A fund which churns its portfolio within a year is exempt from tax because it only redistributes these profits to investors.


The author is Ramalingam K, an MBA (Finance) and Certified Financial Planner. He is the Founder and Director of Holistic Investment Planners (www.holisticinvestment.in) a firm that offers Financial Planning and Wealth Management. He can be reached at ramalingam@holisticinvestment.in.


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How To Create A Workable Budget That Gives You Money And Life?

Tuesday, April 05, 2011 at 7:50 PM Article by Unknown 0 Comments




"Modern man drives a mortgaged car over a bond-financed highway on credit-card petrol."

Taking control of your cash inflow and outflow is the base for financial planning. Budgeting is important to gain control over your financial life, be prepared and avoid surprises, save for a major purchase, get out of debt and stay out of debt, expand your lifestyle, and to retire early.

Thiruvalluvar, a much celebrated Tamil poet emphasizes budgeting through his following lines:

Incomings may be scant; but yet, no failure there,
If in expenditure you rightly learn to spare. (Kural: 478)

Who prosperous lives and of enjoyment knows no bound,
His seeming wealth, departing, nowhere shall be found. (Kural: 479)

Most of us hesitate to make a budget because we think it is about cutting all the fun in life. Budgeting is not about cutting all the fun; it is about conscious allocation of funds. Once we start spending consciously, our mind will find out a whole new way of having fun within the budget.

Making Budget: A step by step guide

There is a saying, “God is in the details”. Detail every bit of your financials while creating a budget.

1. Check your financial statements:

It could be your utility bills, d’mat account statement, other investment receipts, ITR, Form 16A, Form 16, bank statement, credit card statement etc. The idea is to make out the monthly average of income and expenses. Therefore the more details you can get the more relevant and accurate will the budget be.

2. Listing out income from all sources:

It is very easy for us to list down the income from employment or self employment. Normally we will lose track of income from investments, rental income and other miscellaneous income. Also check is there any annual income. Don’t forget to record the incomes received by way of cash equivalents like meal voucher and credit card reward points.

3. Finding out your total expenses:

We can easily list down the major expenses. But listing out the miscellaneous and petty expenses would be difficult. This is where the collected financial statements would help. Don’t forget the annual expenses like car insurance and property tax. Once you have recorded all the expenses then split them into fixed expenses and variable expenses. This classification will provide much more clarity.

Most people are surprised to learn that it may go for things that we do not need at all. Writing your expenditures down provides us with the unique opportunity to visualize and find out if any money goes for things that we do not need or want.

4. Are you saving or over spending?

Now you have your total income as well as total expenses. Deduct the total expenses from the total income. You will know whether you are saving some money or doing over spending. If you are saving some money channelize that money into the priority areas such as clearing your credit card outstanding or any other loan to become debt free or retirement savings or children’s future plan. If you are on over spending, then you need to make some adjustments to expenses.

5. Review your spending pattern:

On your expenses list, pay close attention to the variable expenses. This is where you can cut short a few expenses.

Every month we need to keep aside appropriate amount for the proportionate annual expenses.

You can find out the reasons for over spending. Most of the cases it would be emotional buying or unplanned shopping. Once you have pointed out the reasons for overspending, then find out the steps or precautions to be taken to rectify the same.

6. Are you on the track? Check monthly:

Every month set aside an hour to compare the actual expenses with the budgeted expenses. If there is a negative deviation, find out the measures to control them.

Why your earlier budgeting attempts failed?

Budgeting is not a onetime activity. It is a continuous process. Normally we start budgeting with a genuine motive. But after a few months it may get off-tracked like our attempts on dieting or exercising. Therefore one needs to understand the behavioural aspects of budgeting.

1. Positive Approach:

Never focus on the negative aspects. Focus on the benefits of successful budgeting. What will you accomplish by creating a budget? It could be becoming debt free, some money for vacation, planning for retirement or children’s future.

2. Keep your enthusiasm alive:

Budgeting may over a period of time become routine and hence boring. Set a few short term goals like trying to repay the personal loan in 18 months instead of 36 months. If you achieve it reward yourself. Recognition could be a good motivating factor. Inform all your family members, friends and well wishers about your progress on budgeting. You can also join in some of the forums related to money management.

3. Have a realistic expectation:

One needs to keep realistic expectation on the outcome of the budget. Over expectation may demotivate you. Budgeting is not a magic. It is an art like singing and dancing. You will be able to progress it only over a period of time with constant practice.
If you have not done budgeting for yourself and family so far, then now is the right time to take action. The fact that you are reading this article shows you have decided to stop procrastinating, and have answered the ancient question, “If not now, when?” with “NOW!”.


The author is Ramalingam K, an MBA (Finance) and Certified Financial Planner. He is the Founder and Director of Holistic Investment Planners (www.holisticinvestment.in) a firm that offers Financial Planning and Wealth Management. He can be reached at ramalingam@holisticinvestment.in.

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Fascinating Facts About Google

Tuesday, March 29, 2011 at 7:28 PM Article by Unknown 0 Comments


Family. Larry Page’s brother, Carl, helped start eGroups, a dot-com company in the 90s that was acquired for almost half a billion dollars in 2000 by Yahoo. So even if this Google thing hadn’t worked out for Larry, he probably could’ve done alright being part of his brother’s entourage.
   
Backrub. The original name of Google was Backrub. They called it that because the algorithm ranked pages based on how many “back links” a page had.

(screen short of the first version of Backrub)

Patents. The genealogy of the Google patent is interesting. Here’s the link to the patent filed with the US Patent Office. It refers to another patent owned by Dow Jones that was very similar to the Google patent and was developed by a guy named Robin Li when he worked for a company owned by Dow jones. Both patents used similar ideas of ranking a page not necessarily by using the text on the page but also by counting how many links referenced the page. Dow Jones wasn’t really sure what to do with the patent (called RankDex) so Robin Li left the company and went to China. While there he licensed the patent from Dow Jones for almost nothing and started (and is still CEO of) a little company called Baidu.  Here’s Robin Li’s patent on RankDex. Its interesting that the same basic idea inspired both Google and Baidu.

Stanford. The Google algorithm is called PageRank. You would think it was named after its ability to rank pages but Google claims its named after Larry Page. But that’s not the interesting thing. The interesting thing is that Stanford holds the patent. They were given 1.8mm shares which they sold in 2005 for $336 million. Basically, colleges should encourage the actual developers of their patents to start companies. It pays off.

Extinction. The PageRank algorithm can not only rank pages for search engines but the exact same algorithm can be used to determine which species are about to go extinct. This paper describes it in detail. But basically, a “back link” is similar to “species that another species can eat to survive”. The more “back links” in this sense that a species has, the more likely it is to NOT go extinct. Interesting.

Politics. Larry Page and Sergey Brin are the two richest guys in the country to not make any political contributions. The 20 or so billionaires richer than them all make political contributions. I guess they don’t want to get anyone upset. Google spent more on lobbying last year than Yahoo, Facebook, and Apple combined.

Yahoo. Larry Page and Sergey Brin originally wanted to be academics. They didn’t want to build a business. They developed their initial search engine and then tried to shop it around. They were actually willing to sell it for $1 million in 1997. They went all over Silicon Valley to try and sell their search engine. They went to Yahoo, who turned them down. Later, in 2002, Yahoo tried to buy them for $3 billion but at that point Google turned them down. Now Google is worth $150 billion.

Luck. The “I’m Feeling Lucky” button probably costs Google about $110 million a year. When you click on that button it just takes you to the top search result. In other words, you skip all the ads that Google makes money on. So why don’t they just take that button off? Focus groups apparently show that people feel more comfortable with the button on there. Worth noting that @Google’s first tweet on twitter was: “I’m 01100110 01100101 01100101 01101100 01101001 01101110 01100111 00100000 01101100 01110101 01100011 01101011 01111001 00001010” which means “I’m feeling lucky” in binary.

 

Employee #1. Google’s first employee was a guy I never heard of until today. Craig Silverstein. Apparently he’s still there as Director of Technology. I don’t know what his salary is but he’s worth about $950 million according to various sites. While researching him I came across a weird anti-semitic site that I’m not going to link to. It referred to him as “the jew Craig Silverstein” (it also referred to Sergey Brin’s wedding as “jewgle” wedding) and it was about how the jews control Google, Facebook, Wikipedia, etc. The funny thing about this particular site is that it had Google Ads all over it.

Beauty. Beautiful Google Earth photos. This is not necessarily an unusual thing but I find Google Earth to be a work of art. Here’s a site that has a collection of amazing photos taken by Google Earth.


(man with gun facing Google Earth camera)


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Facebook Introduces Questions

Friday, March 25, 2011 at 8:49 PM Article by Unknown 0 Comments


Facebook recently launched a new question-and-answer feature that helps supply answers to important questions such as "Where's the best burger in New York City?" or "Which smartphone do you use?" The new feature lets you ask questions of your friends, set up a poll with a limited number of responses, and follow interesting questions asked by others. Questions is now rolling out to all users, but if you want to get started right away you can activate Facebook Questions here. Facebook's new question service has been in limited beta testing since July. 

 

Facebook Question (click to enlarge)Once it's activated, the new tool shows up at the top of your News Feed as a share option along with status updates, links, photos, and video. There is also an option in the left navigation column so you can see your friends' activity along with results from questions you have asked and answered.

Straight Question or Poll?

If you want to ask a question, just click on "Question" at the top of your News Feed and ask away.

 

Facebook Poll (click to enlarge)Let's say you wanted to ask your friends "Which sandwich chain do you prefer?" Just type in the question and then you have the option to set specific answers such as Jimmy John's, Subway, Pita Pit, and so on. You can also decide whether you want to let people add more possible answers or restrict them to a specific set of responses.
When you set your poll responses, Facebook searches for fan pages related to the answers you are supplying. Typing in Subway, for example, connects that answer to Subway's fan page. It's not clear if fan pages will have access to the data generated from answers supplied by Facebook users. Once you're satisfied with your question, just hit the "Ask Question" button and your query will show up in your friends' News Feeds.
Any time someone responds to your questions, you will get a Facebook notification letting you know.

Not Private

The first time you ask a question using Facebook's new feature, a warning shows up letting you know that Facebook Questions are not private. Questions are visible to your friends, who can also share them with their friends, and so on. In other words, anyone on Facebook could potentially see and respond to questions asked by you. In my tests, my questions did not appear on my publicly available Facebook profile; however, your experience may differ depending on your privacy settings.

 

Facebook Privacy (click to enlarge)To see how much of your profile is visible to people who are not your friends, Click on "Account" in the upper right corner and select "Privacy Settings." On the next page, click on "View Settings" underneath the heading "Connecting on Facebook." At the top of the next page, you should see a button that says "Preview My Profile." This will let you see how your profile looks to people on Facebook who aren't your friends.
Just keep in mind that even though Questions may not show up on your publicly available profile, the feature is never private.

Answering Questions

When you see a question in your News Feed that you want to answer, clicking on the question will cause a window to pop up. You can then choose to select a specific answer or simply write a response as if you were responding to a status update.
 

Answers (click to enlarge)By default, the response window will also show you how your friends answered the question. But you can also see how everyone else on Facebook answered the question by clicking on the "Others" link at the bottom of the window. To see responses to poll questions, click on the small window with three dots next to each answer. This will show you the answers of people who aren't your Facebook friends.
Again, Facebook Questions is not a private feature, so all actions you take using this service can be seen by others. Do not use Facebook Questions if don't want the world to see your responses.

Follow a Question, Ask Your Friends

If you want to follow a particularly interesting question you can click on the "Follow" link underneath the question. Whenever someone else answers the question you will be alerted.
 
Questions (click to enlarge)You do not have to answer a question to follow it. You can also ask specific friends a question created by you or by others by clicking on the "Ask Friends" link underneath each question.

Be Specific

 

My question (click to enlarge)To get the most out of Facebook Questions, it's best to be specific in your questions and not ask something generic such as "Am I A Jerk?" As you can see in the included image, generic questions can get passed around very quickly among people who don't even know you. Then again, asking random things of the whole world could end up being half the fun of Facebook Questions.


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