As per a report by the financial service company - Citi “India, thanks to its robust growth, is expected to surpass China — and the United States — by 2050 to become the largest economy in the world." However, closer at hand, our GDP is estimated to have grown at 8.6% in 2010-11. The target for 2011-12 is 9%.
The fiscal deficit has been bought down from 5.5% to 5.1% of GDP and is targeting 4.6% in 2011-12. Borrowing plan is pegged at Rs 3.43 trillion, against the expected Rs 4 trillion. But this might be difficult to achieve with the spiraling oil prices. By 2012 there is likely to be a shift from physical subsidies to cash transfers by the use of smart cards issued through the Aadhar Scheme. Disinvestment target is Rs 40,000 crores – Government is to retain 50% ownership.
The budget was on the whole market neutral with the main positive been absence of increase in excise duty on cigarette, and no roll back of the stimulus of reduction of excise duty on automobiles.
The Direct Tax Code will be implemented from 1st April 2012.
Direct taxes – Individuals
1. Exemption limit enhanced from Rs 160,000 to 180,000 for men. Women's limit remains at Rs 190,000 on the lines of the DTC which is gender neutral.
2. Exemption limit for senior citizens increased from Rs 240,000 to Rs 250,000. The age for senior citizens reduced from 65 years to 60 years.
3. A new category of super seniors introduced for those above 80 years. The exemption limit under this category is Rs 500,000
Direct taxes – Corporates
1. Surcharge on domestic companies cut to 5% from 7.5%
2. MAT raised to 18.5% of book profits from 18%. SEZ’s profits to be included under MAT
3. Foreign unit dividend rate cut to 15% for Indian Companies.
Service Tax
1. Continued at 10%
2. More services included in the service tax net including life insurance.
Housing Finance
1. Existing home loan limit enhanced to Rs 25 lacs from Rs 20 lacs for dwelling under the priority sector.
2. Low cost housing loans of Rs 15 lacs to continue to get 1% interest subvention.
Infrastructure Financing
1. FII limit for investing in corporate bonds, with maturity greater than 5 years, increased by US$ 20 billion
2. Tax free bonds of Rs 300 billion to be raised by Government undertakings to boost infrastructure development
3. Tax exemption upto Rs 20,000 for investment in infrastructure bonds extended by one year.
Mutual Funds
1. SEBI registered Mutual Funds to accept subscription from foreign investors who meet KYC requirements for equity schemes.
2. Dividend Distribution Tax for debt schemes:
(a) For corporates: 30% + surcharge for debt schemes
(b) For individuals and HUF: 25% for money market and liquid schemes.
(c) For individuals and HUF: 12.5% for other debt schemes.
Tuesday, March 1, 2011
Friday, February 25, 2011
An New Innovative way to donate - from HDFC MF
HDFC MF is in its 10th year of performance. To celebrate their place in the mutual fund industry, they would like to give back and have chosen the cause of Cancer to pay back to society. The fund would invest in a 3 year FMP, with regular dividend payouts.The following would be the benefits of the scheme.
1. HDFC Bank, and CAMs would be waiving their fees.
2. The fund would act as a three year FMP and at the end of the term your capital would be returned.
3. Regular dividends would be declared. You would have the choice of donating all the dividends or 50% dividend to the Indian Cancer Society.
Although I do hope that you will donate the full amount, but if you do donate only 50%, and assuming 8% is distributed:
(a) You will get 4% tax free returns.
(b) You will get 50% credit under section 80G i.e. Another 2%
(c) At the end of 3 years you will get your capital back. Hence with indexing this will result in a capital loss, which can be adjusted against the capital gains of any other FMP maturing during that year.
HDFC is hoping to collect at least Rs 200 corers, which would mean about Rs 15 crores donated every year. These funds would be mainly used for giving cancer treatment to the poor. To manage this amount, a committee has been set up which includes luminaries like Keki Dadiseth, etc.
The minimum investment is Rs 100,000 and I am putting in this amount. I do request you to please also donate some amount to this cause and support HDFC MF in their endeavour. It does make economic senses as well, as if you donate 50% of the dividend, you would not be out of pocket at all. Please do circulate this message to all your friends and associates too.
The fund is closing on 4th March.
Please do assist this worthy cause.
1. HDFC Bank, and CAMs would be waiving their fees.
2. The fund would act as a three year FMP and at the end of the term your capital would be returned.
3. Regular dividends would be declared. You would have the choice of donating all the dividends or 50% dividend to the Indian Cancer Society.
Although I do hope that you will donate the full amount, but if you do donate only 50%, and assuming 8% is distributed:
(a) You will get 4% tax free returns.
(b) You will get 50% credit under section 80G i.e. Another 2%
(c) At the end of 3 years you will get your capital back. Hence with indexing this will result in a capital loss, which can be adjusted against the capital gains of any other FMP maturing during that year.
HDFC is hoping to collect at least Rs 200 corers, which would mean about Rs 15 crores donated every year. These funds would be mainly used for giving cancer treatment to the poor. To manage this amount, a committee has been set up which includes luminaries like Keki Dadiseth, etc.
The minimum investment is Rs 100,000 and I am putting in this amount. I do request you to please also donate some amount to this cause and support HDFC MF in their endeavour. It does make economic senses as well, as if you donate 50% of the dividend, you would not be out of pocket at all. Please do circulate this message to all your friends and associates too.
The fund is closing on 4th March.
Please do assist this worthy cause.
Sunday, January 23, 2011
Gold and Silver
“Gold gets dug out of the ground in Africa, or some place. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility.”
Warren Buffett
However the run up of gold over the last two-three years and the huge run up of silver over the last one year have proved that not every one agrees with Warren Buffett.
US Dollar is currently the global standard of value. However when dollars can be easily created on a whim, it becomes a phony standard of value. Gold has been the store of wealth since Alexander’s time and continues to endure. Gold is the asset which cannot be inflated, yields nothing, and is no one’s liability. Hence gold and silver is the ultimate standard of value.
In the US, where interest rates are close to zero, the case for holding gold (which also gives no income) increases. Also when real interest rates (after inflation) become negative, which is happening in India too, the case for gold and silver becomes irresistible.
Hence keeping at least 5-10% of your portfolio into gold and silver is a must and would act as a “chaos hedge”, when the equity markets, inflation, etc are uncertain.
GOLD
1. The gold silver ratio, slumped to a 40 month low of 46.1 with the more than 90% rise in silver prices in the last one year. It has dropped below 45 times only twice in the past 25 years.
2. Disappointing economic news will continue to drive gold in the coming year.
3. The sharp rally is likely to be over, but further high could be seen in the coming year ahead.
SILVER
1. Silver has more than 35% of its demand coming from industrial uses.
2. The run up in silver is likely to continue in the current year.
3. India’s demand for silver is just starting to pick up, and this can boost silver prices more
Warren Buffett
However the run up of gold over the last two-three years and the huge run up of silver over the last one year have proved that not every one agrees with Warren Buffett.
US Dollar is currently the global standard of value. However when dollars can be easily created on a whim, it becomes a phony standard of value. Gold has been the store of wealth since Alexander’s time and continues to endure. Gold is the asset which cannot be inflated, yields nothing, and is no one’s liability. Hence gold and silver is the ultimate standard of value.
In the US, where interest rates are close to zero, the case for holding gold (which also gives no income) increases. Also when real interest rates (after inflation) become negative, which is happening in India too, the case for gold and silver becomes irresistible.
Hence keeping at least 5-10% of your portfolio into gold and silver is a must and would act as a “chaos hedge”, when the equity markets, inflation, etc are uncertain.
GOLD
1. The gold silver ratio, slumped to a 40 month low of 46.1 with the more than 90% rise in silver prices in the last one year. It has dropped below 45 times only twice in the past 25 years.
2. Disappointing economic news will continue to drive gold in the coming year.
3. The sharp rally is likely to be over, but further high could be seen in the coming year ahead.
SILVER
1. Silver has more than 35% of its demand coming from industrial uses.
2. The run up in silver is likely to continue in the current year.
3. India’s demand for silver is just starting to pick up, and this can boost silver prices more
Monday, November 8, 2010
TIME TO INVEST IN GILTS
Gilt/income mutual funds have two types of returns:
1. The interest return from the investment
2. Movement in the NAV, due to movement of the yield of the fund. If the yield goes up, the NAV falls, and if the yield goes down the NAV rises.
Current Yields
Currently the 10 year Gilt yields are 7.97%. They did go up to 8.15%. However, with the RBI announcement on 2nd November, of a 25 bps increase in repo and reverse repo rates, the 10 year bond yields actually fell. This is because the RBI clearly indicated that there is likely to be no more interest rate changes in the near future.
The average 10-year g-sec yield since January 2002 has been around 7.04%. Also, whenever yield crossed 8% during this period, it has not sustained that level for a long time. It did stay well over 8% for over four months in 2008, when there was a severe credit crisis.
Currently, only in 3 other countries - Pakistan (13.4%), Venezuela (13.05%) & Greece (8.82%), 10 yr G-sec trades at a yield higher than India. YTD, the yields in India has increased but decreased 295 bps in Indonesia, 232 bps in Philippines, 143 bps in South Korea, 121 bps in Thailand, 149 bps in Brazil and 130 bps in US.
Factors which are likely to cause fall in yields
1. Inflation
Inflation as measured by the Wholesale Price Index (WPI) peaked in April 2010. It is likely to moderate further because:
(a) RBIs policy of tightening liquidity.
(b) High base effect
(c) Positive impact of good monsoon.
(d) US/Euro region continue to show weak economic growth. China is showing signs of a slow down. This should result in commodities remaining stable on moving lower.
2. Fiscal Deficit
The fiscal deficit is expected to show an improving trend over the coming years, due to the following:
(a) High realizations from 3G and BWA auctions
(b) Increased prices of petrol and diesel (to be de-regulated over time). Prices of LPG and kerosene were also increased. Government finally showing signs of controlling oil subsidies burden.
(c) Tax collections have been above budget estimates
(d) Inflows to the Government due to disinvestments in PSUs
3. Increase in FII Limit
Government has recently raised the limit for FII investment in Government bonds to $ 10 bn from the earlier $ 5 bn, subject to certain maturity restrictions. The large rate differential between developed markets and India could attract offshore investors and potentially lead to increased flows in longer maturity government bonds.
4. Credit Off take unlikely to Surprise
Non-food credit growth is likely to move in the range of 20-22%. With RBI’s tightening measures over the past few quarters, credit off take is unlikely to be significant higher than market expectations.
HENCE, yields are likely to fall over medium term. Therefore, allocation to long-term bonds/ gilts is preferred and should give double digit annualized returns.
1. The interest return from the investment
2. Movement in the NAV, due to movement of the yield of the fund. If the yield goes up, the NAV falls, and if the yield goes down the NAV rises.
Current Yields
Currently the 10 year Gilt yields are 7.97%. They did go up to 8.15%. However, with the RBI announcement on 2nd November, of a 25 bps increase in repo and reverse repo rates, the 10 year bond yields actually fell. This is because the RBI clearly indicated that there is likely to be no more interest rate changes in the near future.
The average 10-year g-sec yield since January 2002 has been around 7.04%. Also, whenever yield crossed 8% during this period, it has not sustained that level for a long time. It did stay well over 8% for over four months in 2008, when there was a severe credit crisis.
Currently, only in 3 other countries - Pakistan (13.4%), Venezuela (13.05%) & Greece (8.82%), 10 yr G-sec trades at a yield higher than India. YTD, the yields in India has increased but decreased 295 bps in Indonesia, 232 bps in Philippines, 143 bps in South Korea, 121 bps in Thailand, 149 bps in Brazil and 130 bps in US.
Factors which are likely to cause fall in yields
1. Inflation
Inflation as measured by the Wholesale Price Index (WPI) peaked in April 2010. It is likely to moderate further because:
(a) RBIs policy of tightening liquidity.
(b) High base effect
(c) Positive impact of good monsoon.
(d) US/Euro region continue to show weak economic growth. China is showing signs of a slow down. This should result in commodities remaining stable on moving lower.
2. Fiscal Deficit
The fiscal deficit is expected to show an improving trend over the coming years, due to the following:
(a) High realizations from 3G and BWA auctions
(b) Increased prices of petrol and diesel (to be de-regulated over time). Prices of LPG and kerosene were also increased. Government finally showing signs of controlling oil subsidies burden.
(c) Tax collections have been above budget estimates
(d) Inflows to the Government due to disinvestments in PSUs
3. Increase in FII Limit
Government has recently raised the limit for FII investment in Government bonds to $ 10 bn from the earlier $ 5 bn, subject to certain maturity restrictions. The large rate differential between developed markets and India could attract offshore investors and potentially lead to increased flows in longer maturity government bonds.
4. Credit Off take unlikely to Surprise
Non-food credit growth is likely to move in the range of 20-22%. With RBI’s tightening measures over the past few quarters, credit off take is unlikely to be significant higher than market expectations.
HENCE, yields are likely to fall over medium term. Therefore, allocation to long-term bonds/ gilts is preferred and should give double digit annualized returns.
Saturday, October 16, 2010
Sensex 20,000 + levels
Do not look at 20,000 Sensex level as a peak, which was attained more than two years ago. This is only a level in the journey of the Sensex.
In the Short Term, the Sensex level will depend upon the following:
1. Events in India and globally.
2. Liquidity flowing into the market
(a)Foreign Institutional investors are continuing to invest in the equity
market. Net FII investment during the last three months were
i. Rs. 24978.5 crores in September 2010
ii. Rs. 11587.5 crores in August 2010
iii. Rs. 16617.4 crores in July 2010
(b)As the risk free returns in countries around the world are low, there are
opportunities of returns higher than the proportionate risk they are
taking, and hence the flows into our markets.
(c)If global recovery is stalled, Governments are already talking about
Quantitative Easing 2, which will result in further liquidity.
(d)As long as the dollar continues to remain weak, flows will continue into
India, as there are additional returns from the weakening dollar.
3. Sentiment
(a) There is no euphoria in the markets. Retail investors continue to be
skeptical. Equity mutual funds saw the largest outflows ever in September
at Rs. 72,000 crores.
(b) The last stage of the bubble is normally a surge in small and mid cap
stocks. The BSE Mid Cap Index is 19.9% below its peak and the BSE Small
Cap Index is 26.7% below its peak.
In the long run, the Sensex movement will depend on Corporate earnings. The Indian markets have traded around 15 to 16 times one year forward earnings. Today we are trading at about 18 times one year forward earnings. So let’s remember the fact that we are trading above our historical averages of the last 15 to 20 years. However, we are still lower than the peaks of 25 times in 2000 and 23 times in January, 2008. With the growth in corporate profits, and subsequent re-rating, this PE ratio should come down.
Hence going forward, the corporate earnings have to be watched very, very closely to ensure that they are not faltering. The positives in the market are:
1. We are domestic consumption driven economy with a young population
2. National Rural Employment Scheme, which results money in the hands of the rural population
3. Oil Sector deregulation
4. GST Reform
5. Direct Tax Code.
6. Fiscal situation improving with higher than expected 3G auction, and regular disinvestment.
IF YOU ARE ALREADY INVESTED IN THE EQUITY MARKET
1. Re-balance you portfolio, to maintain the equity: debt ratio you are comfortable with. Studies have shown that 94% of your returns come from maintaining a disciplined asset allocation
2. If you are mainly in equity, then do book out profits regularly. Do not allow greed to swamp your emotions. If the market then subsequently falls, you can then add to equity again.
3. Fresh investments too have to be in the ratio your asset allocation.
IF YOU ARE STARTING INVESTING IN THE EQUITY MARKET
1. Look for the long term, minimum of 3 – 5 years.
2. Invest through a Systematic Investment Plan or Systematic Transfer Plan.
3. Invest in proportion to your asset allocation, although if you are looking at a long term of more than 5 years, can take a larger exposure to equity.
There is no other investment opportunity that gives you the possibility of 15% + tax free returns, and hence there is no option but to invest into the equity market. However do understand the risks involved on the short term, and plan for the long term.
However, never try and time the market. This can have disastrous results on your returns For example:
1. Since April 2000, the Sensex has given an absolute return of 276%.
2. If you had missed the 10 best days, the return would be 216%
3. If you had missed the 20 best days, the return would be 159%
4. If you had missed the 30 best days, the return would be 110%
“Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost by the corrections themselves.”
Peter Lynch – legendary fund manager
In the Short Term, the Sensex level will depend upon the following:
1. Events in India and globally.
2. Liquidity flowing into the market
(a)Foreign Institutional investors are continuing to invest in the equity
market. Net FII investment during the last three months were
i. Rs. 24978.5 crores in September 2010
ii. Rs. 11587.5 crores in August 2010
iii. Rs. 16617.4 crores in July 2010
(b)As the risk free returns in countries around the world are low, there are
opportunities of returns higher than the proportionate risk they are
taking, and hence the flows into our markets.
(c)If global recovery is stalled, Governments are already talking about
Quantitative Easing 2, which will result in further liquidity.
(d)As long as the dollar continues to remain weak, flows will continue into
India, as there are additional returns from the weakening dollar.
3. Sentiment
(a) There is no euphoria in the markets. Retail investors continue to be
skeptical. Equity mutual funds saw the largest outflows ever in September
at Rs. 72,000 crores.
(b) The last stage of the bubble is normally a surge in small and mid cap
stocks. The BSE Mid Cap Index is 19.9% below its peak and the BSE Small
Cap Index is 26.7% below its peak.
In the long run, the Sensex movement will depend on Corporate earnings. The Indian markets have traded around 15 to 16 times one year forward earnings. Today we are trading at about 18 times one year forward earnings. So let’s remember the fact that we are trading above our historical averages of the last 15 to 20 years. However, we are still lower than the peaks of 25 times in 2000 and 23 times in January, 2008. With the growth in corporate profits, and subsequent re-rating, this PE ratio should come down.
Hence going forward, the corporate earnings have to be watched very, very closely to ensure that they are not faltering. The positives in the market are:
1. We are domestic consumption driven economy with a young population
2. National Rural Employment Scheme, which results money in the hands of the rural population
3. Oil Sector deregulation
4. GST Reform
5. Direct Tax Code.
6. Fiscal situation improving with higher than expected 3G auction, and regular disinvestment.
IF YOU ARE ALREADY INVESTED IN THE EQUITY MARKET
1. Re-balance you portfolio, to maintain the equity: debt ratio you are comfortable with. Studies have shown that 94% of your returns come from maintaining a disciplined asset allocation
2. If you are mainly in equity, then do book out profits regularly. Do not allow greed to swamp your emotions. If the market then subsequently falls, you can then add to equity again.
3. Fresh investments too have to be in the ratio your asset allocation.
IF YOU ARE STARTING INVESTING IN THE EQUITY MARKET
1. Look for the long term, minimum of 3 – 5 years.
2. Invest through a Systematic Investment Plan or Systematic Transfer Plan.
3. Invest in proportion to your asset allocation, although if you are looking at a long term of more than 5 years, can take a larger exposure to equity.
There is no other investment opportunity that gives you the possibility of 15% + tax free returns, and hence there is no option but to invest into the equity market. However do understand the risks involved on the short term, and plan for the long term.
However, never try and time the market. This can have disastrous results on your returns For example:
1. Since April 2000, the Sensex has given an absolute return of 276%.
2. If you had missed the 10 best days, the return would be 216%
3. If you had missed the 20 best days, the return would be 159%
4. If you had missed the 30 best days, the return would be 110%
“Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost by the corrections themselves.”
Peter Lynch – legendary fund manager
Tuesday, August 10, 2010
INVESTMENT IN CHINA
According to British author Sir John Bagot Glubb, the seven stages of an empire’s life cycle are as follows:
1. The age of outburst / pioneers
2. The age of conquests
3. The age of commerce
4. The age of influence
5. The age of intellect
6. The age of decadence
7. The age of decline and collapse.
“The 19th century was the century of UK, the 20th century was the century of the US, and the 21st century is going to be the century of China.”
- Jim Rogers.
“China is going to be an enormous force that will make the Japanese threats of the seventies and eighties look like a water pistol.”
- Jack Welch
HOWEVER IS THIS THE RIGHT TIME TO INVEST IN CHINA?
1. .Valuations
a. China has been one of the weaker markets in 2010.
b. The market is currently trading at 12.3x 2010 earnings (12m forward earnings as at 28 June) with an EPS growth of 24% in 2010, 16% in 2011 and a trailing price to book of 2.4 times. India PE is currently 16x 2010 earning with an EPS growth of 27% in 2010, 9% in 2011 and a trailing price to book of 3.5 times. Hence currently India is more expensive that China.
c. Market is now pricing in too many concerns about future growth.
d. The numbers suggest that China is trading in line with its long-term historical average and at a discount to India.
2. Announcement on RMB
a. The latest announcement on the RMB has been a welcome step in the right direction.
b. This step was long awaited by not only investors but also governments across the world. We feel that this step might not provide any immediate impetus to the markets, but it does give the citizens of China better purchasing power in dollar terms over the next several years as China resumes its managed appreciation of the RMB.
c. The gradual approach is a positive step for exporters who could have been badly hurt had the Government decided to facilitate a one-off appreciation of the RMB.
3. CBRC and the Banking Sector
a. CBRC, the banking regulator in China, has indicated that "Stress Tests" have been undertaken to determine the sensitivity of loan books to the property sector. CBRC has concluded that property prices could fall by up to 30% in China before the banks would likely experience any material adverse effects.
b. CBRC also has strict liquidity requirements for Chinese banks and Tier 1 capital requirements in China now exceed those most developed markets. The capital raisings are a function of the extra-large loan growth seen in 2009 as the banks financed part of the Government's stimulus package.
4. Real Estate sector - prices
a. Real Estate or Property Sector has been hit the most in the current downturn.
b. Many Property companies are currently trading at well below their Net Asset Values.
5. Inflation
a. Inflation currently stands at 3.1% (May 2010).
b. Food price inflation has moderated since 2009, especially pork prices, which is an important meat staple in China.
6. Exports
a. Export data continued to surprise on the upside in May and June. Stronger than expected recovery in exports to USA and Europe and continued strength in exports to other emerging markets are driving growth.
b. Expect exports to developed markets to moderate in the coming months but exports should provide modest positive growth contribution in 2010.
7. Other Positives
a. Strong income growth for many years, and wages rising this year.
b. Almost no household debt, except mortgages.
c. Gradual rising availability of consumer finance.
d. Urbanisation means size of consuming population is increasing.
e. Retails sales rose 16.8% last year up from 2.1% in 2008
f. Urban household expenditure rising 9% YOY for last 3 qtrs.
g. Supportive Government policies/
CONCLUSION
Although our markets are likely to give us great returns going forward, do take a small exposure (of a maximum of 5% of your portfolio) to China. Further, as the Chinese market is also likely to be volatile, make this investment in small installations. Currently the easy ways to invest in China are:
1. Hang Seng ETF through the stock market
Return of 9.3% over the last three months.
2. JP Morgan JF Greater China Equity Offshore Fund
Investments, apart from China, also includes HongKong and Taiwan. Fund was launched in July 2009 and the returns till date is 8.04%. Returns of 10.66% over the last three months
3. Mirae Asset China Advantage fund
This is a pure China fund and was launched in India in October 2009. Return of 11.49% r over the last three months.
Thursday, July 8, 2010
ASSET ALLOCATION – THE KEY TO INVESTING
Studies have shown that Asset Allocation is the key to investment success. 94% of investment success is explained by asset allocation where as the product selection and timing contributes 4% and 2% respectively. And yet most of us spend the majority of our time trying to time the market – a totally futile exercise.
Asset Allocation normally refers to investments in Equity and Debt in a certain proportion. Equity means investments in shares of companies and brings growth to the portfolio. Debt refers to lending and brings regular income to the portfolio. The allocation between equity and debt would depend on the risk you are willing to take and the term of investment. Having an asset allocation would give the following benefits:
1. When the equity market moves up, you would reduce your holding to equity and hence book profits when the market is high – sell high
2. When the equity market moves down, you would add to your holding in equity and hence – buy low.
3. Sticking with the asset allocation would remove the disadvantages of the emotion of “greed” and “fear” in investing.
The easiest way to manage your asset allocation is to invest in balanced mutual funds. A balanced mutual fund invests 65-70% in equity and 30-35% in debt. There are many advantages of holding balanced funds as a means to maintaining an asset allocation:
Asset Allocation normally refers to investments in Equity and Debt in a certain proportion. Equity means investments in shares of companies and brings growth to the portfolio. Debt refers to lending and brings regular income to the portfolio. The allocation between equity and debt would depend on the risk you are willing to take and the term of investment. Having an asset allocation would give the following benefits:
1. When the equity market moves up, you would reduce your holding to equity and hence book profits when the market is high – sell high
2. When the equity market moves down, you would add to your holding in equity and hence – buy low.
3. Sticking with the asset allocation would remove the disadvantages of the emotion of “greed” and “fear” in investing.
The easiest way to manage your asset allocation is to invest in balanced mutual funds. A balanced mutual fund invests 65-70% in equity and 30-35% in debt. There are many advantages of holding balanced funds as a means to maintaining an asset allocation:
1. The fund is rebalanced every month, it would be difficult to maintain that kind of discipline
2. When the market crashed the way it did in 2008, you did not have to add your own funds to equity to rebalance your portfolio. The fund automatically rebalanced.
3. When you book profits to rebalance your portfolio, there would be capital gains implication – especially with the new Direct Tax Code. When the fund rebalances there is no capital gain implication. You would have to pay capital gains only when you sell your balanced fund.
The Sensex has been very flat over the last 6 months, and going forward, unless the situation in Europe improves, this year is likely to be a flat year. Balanced category has outperformed the Sensex in all periods. The more volatile the market, the more likely that the balanced fund would out perform the Sensex.
If you wish to know which balanced funds to invest in contact me at malgonkar@vsnl.com or at veena@veenamalgonkar.com
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