There is an old adage "Never fall in love with your stock pick", which I believe is true for mutual fund investments too. But one should be very clear about the pros and cons of redeeming your mutual fund units and the returns that you would end up with. This article is an attempt to make clear the consequences and the situations when you actualise your notional gains. Here are a few consequences you need to have in mind when selling mutual fund units.
Exit Loads
It is important for you to understand the back end load structure of the fund you have invested in before signing the redemption slip! I have always maintained that equity is a long-term initiative and as an investor you need to give it the time to give you the best benefits. But for some unforeseen reason, if you have to redeem earlier, you would have to ensure that the back-end/exit load charged by the fund does not have negative consequences on your returns. For instance, if your are redeeming from a fund which has returned 22 per cent in one year and has a 2 per cent exit load for redemptions within 2 years from date of allotment, your net return would be 19.26 per cent (after an exit load of 2 per cent and 0.25 per cent STT).
Tax structures
Any redemption in the taxman's eyes is considered as a profit or loss making activity. Till you redeem, your gain or loss would only be notional, but the moment you redeem, it becomes actual. You would also need to remember that the taxation structures are different for equity- and debt-based investments.
Outlined below are a few situations when you may consider redemption of your investments in a particular fund:
a. Consistent underperformance
Underperformance by a mutual fund is a relative term. Since a fund is a portfolio of stocks by itself, generally underperformance of a set of stocks is offset by superior performance by a few others. Equity is a long-term investment and it is important for you
not to get worried about lack of performance for a period less than a year. But if your fund is underperforming for more than two years, then it may be time for you to move on. You can always check the fund's performance against a relevant benchmark or track it based on certain performance measures.
b. Change in Fund Manager
You put a certain amount of trust on the ‘person' who manages your fund based on his/her track record, especially where you are not sure of the ‘institutionalised' and proprietary processes the fund commits itself to. Therefore, where you are not sure of the level of institutionalisation of decision-making processes, and feel that a change in the fund manager would mean change in the style of the fund, you may want to re-evaluate your holdings. It may be worthwhile to hold on for maybe a year or so, to track the change in style or performance.
c. Change in the fund's investment strategy
Any investment decision you make would be close to your heart. You would certainly not put your money in a fund if you don't believe in the theme / story behind the investment strategy. But there have been occasions in the past when the fund has changed its investment strategy. In cases where the fund's investment strategy is different from the original goals, you may want to re-evaluate your investment in the particular fund. For instance, when a large cap fund (which is meant to give stability to your portfolio), starts investing in mid or small cap stocks, the risk profile of the fund would obviously change. You would then have to re-evaluate your holding in the fund—if your risk appetite is not for a mid or small cap portfolio, then you might want to liquidate your holding and look at other funds which would suit your needs.
d. Changes in your investment strategy
It is not just the fund that changes its course. You might do it too! Some typical reasons for changes in your investment strategy are:
Changes in your risk appetite: Typically, most first time investors would end up picking a large cap (or blue chip) fund which offers consistency. But once you have tasted success, it is very normal for people to take slightly higher risks to move on to a flexi cap fund. So every time you rebalance your portfolio, you might want to do away with one fund and maybe pick another.
To stick to your original asset allocation pattern: If you want to ensure safety of your investments and to maintain the same risk profile, it is important for you to check your asset allocation pattern. If you choose to maintain your asset allocation pattern, you might have to end up liquidating from one fund and investing in another.
The need to rebalance your portfolio: You can't have a single portfolio all your life.
You would have to re-jig your portfolio once in a while to ensure that your returns are optimal. And as your requirements change, you would need to change your investment avenues, which would prompt shifting your funds between different schemes.
Taxation: Investments in mutual funds can provide significant tax breaks. You may choose to make ‘notional' capital losses or ‘significant' capital gains to offset short-term
gains / losses in your other investments. If you choose to make a capital loss to offset any other capital gain, one may end up having to redeem their investment from a fund.
Redemption of mutual fund units can actually be used to your benefit in creating (or preserving) wealth and should never be done impulsively. You would have invested in a fund with confidence. Unless you are doubly sure or there is an explicit requirement, it is not right to exit on impulse before your objectives are achieved. However, if you are sure that your goals and the funds' goals do not match, it is only better to look for a different fund which would suit your requirement best!
Thursday, March 29, 2007
Tuesday, March 27, 2007
PayMate, the world’s largest mobile payment eco-system!
With over 3000 merchants in India already accepting this SMS payment option, in just a few months PayMate has already created what may be termed as the world’s largest and most broad-based SMS payment eco-system. Merchants offering PayMate include online & voice portals, utilities, multiplexes, restaurants and leading retailers. PayMate can be accepted by just about any business which collects payments from its customer through any medium, physical or virtual. With PayMate is a SMS based mobile payment solution whereby customers can pay real-time, simply and securely. It’s an absolutely free service for customers which works on any handset or operator without the need for any GPRS connectivity or SIM/ handset upgrade. Once registered with the bank for this service, all the customer does is authorizes a transaction with his/ her 4-digit PIN and the amount is debited to his/ her existing credit card or bank account to which the mobile is linked. PayMate can be used to transact online, over the phone, across the counter or just about anywhere. To add to this convenience is the fact that customers never need to divulge any personal or card details when paying. All the customer needs is his/ her mobile phone to pay anywhere, anytime. For a merchant this means reaching out to customers on their mobile, faster payments and an alternate convenient and secure mobile payment gateway. More so, for a merchant to enable PayMate requires no infrastructure or installation cost whatsoever. PayMate plans to grow its merchant base exponentially in the coming weeks by promoting the service to merchants before going into an aggressive 360 degree consumer campaign .
Here are some of the things you can potentially pay for via a single SMS
• Online shopping / payments
• Restaurants and shopping bills
• Any Direct to Home service (groceries, fast food)
• Travel bookings (flight, hotel, cab)
• Movie tickets
• Monthly subscriptions (magazine, satellite radio, cable, broadband) Utility bills
• Insurance premiums
• Mobile bills and top-ups
Ajay Adiseshann, Founder & MD, PayMate says “We have had an extremely positive response from our merchants and banking partners and now hope to scale up our merchant exponentially. However, the true challenge lies in consumer adoption wherein we are working with our partners to promote PayMate as a convenient and alternative payment gateway”.In addition to being a SMS payment platform, PayMate has also designed SMS meta-engines by which customers can shop from start to finish on their mobile. Such engines are available for flight tickets, movie tickets, hotel bookings, cab hire, pre-paid mobile recharge and more. PayMate plans to promote these engines themselves to consumers as well as offer them to merchants as plug and play applications on their respective short-codes.
SOURCE: ET 26th March
Here are some of the things you can potentially pay for via a single SMS
• Online shopping / payments
• Restaurants and shopping bills
• Any Direct to Home service (groceries, fast food)
• Travel bookings (flight, hotel, cab)
• Movie tickets
• Monthly subscriptions (magazine, satellite radio, cable, broadband) Utility bills
• Insurance premiums
• Mobile bills and top-ups
Ajay Adiseshann, Founder & MD, PayMate says “We have had an extremely positive response from our merchants and banking partners and now hope to scale up our merchant exponentially. However, the true challenge lies in consumer adoption wherein we are working with our partners to promote PayMate as a convenient and alternative payment gateway”.In addition to being a SMS payment platform, PayMate has also designed SMS meta-engines by which customers can shop from start to finish on their mobile. Such engines are available for flight tickets, movie tickets, hotel bookings, cab hire, pre-paid mobile recharge and more. PayMate plans to promote these engines themselves to consumers as well as offer them to merchants as plug and play applications on their respective short-codes.
SOURCE: ET 26th March
Short history of hedgefunds
Many think of hedge funds as the current flavor of the month in investing and capital markets. But scholars trace the funds' roots back to a tale told by Aristotle in which the philosopher Thales bet on a bumper olive crop. Thales cannily wrangled with the owners of olive presses until he gained the exclusive rights to use the equipment in the upcoming harvest. Like today's hedge fund advisers, he used a contrarian trade to profit mightily.
Other experts attribute the invention of today's lightly regulated capital pools to a eureka moment by Alfred Winslow Jones nearly sixty years ago. In 1949, Jones, an academic and journalist, penned an article in Fortune about new fashions in financial forecasting.
Captivated by the subject, he dropped journalism and decided to try finance himself. He created A.W. Jones & Co., a partnership of four friends, and invested $100,000 in stocks, using a mix of long and short positions buttressed by a healthy dose of debt. He also implemented a scheme to make the manager’s fee 20 percent of profits, purportedly aligning his incentives with those of investors. That incentive structure remains typical of hedge funds today.
A year after he formed the fund, it earned 17.3 percent, and during the next decade it outperformed every mutual fund by 87 percent, according to Alexander Ineichen's Absolute Returns: The Risk and Opportunities in Hedge Fund Investing, which also mentions the tale of Thales.
The Early Years Seventeen years after Jones's groundbreaking article, Fortune journalist Carol Loomis wrote about her precursor's success, referring to his strategy as a "hedge fund." Soon after Loomis’ article, hedge funds seemed to be pop up everywhere.
In 1968, the Securities and Exchange Commission counted 140 investment partnerships that it considered hedge funds, according to research by economists Barry Eichengreen, of the University of California at Berkeley and Donald Mathieson of the International Monetary Fund in a report on hedge funds.
Early forays into the field were typified by short selling, which put hedge fund managers. But inexperienced hedge fund managers soon grew tired of hedging their bets and began wagering more heavily on long investments and less on short ones, thus exposing themselves to the stock market. When markets started to slide, so did many hedge funds. According to Eichengreen and Mathieson, assets managed by the 28 largest hedge funds had declined by 70 percent in 1970. Many were liquidated, and the total value of the remaining hedge funds at the time was $300 million.
Because little was heard from the funds during the late 1970s and early 1980s, many came to regard them as a relatively new phenomenon. But in the mid-1980s, now-famous investors such as Julian Robertson and George Soros were still at it: attracting capital, out-running the markets and using high-return instruments and unregistered funds to make eye-popping profits. "All these high-worth individuals started saying, 'Get me into a hedge fund, get me into a hedge fund,'" says Stephen Brown, a finance professor at New York University's Stern School of Business who has written widely on hedge fund performance.
With more publicity came more hedge funds. "A lot of trading desks and commodity-trading advisors began converting themselves into hedge funds," says Brown. With that came new interest in foreign investment, as funds focused on currencies and interest rates. By the early 1990s, global macro investments comprised more than 60 percent of the hedge fund industry, according to Oliver Schupp of the Credit Suisse/Tremont hedge fund index. Although hedge funds are barred from advertising or soliciting business, high-profile success by investors such as Soros attracted global attention.
The Roaring '90s Not all of the attention was positive. In 1992 Soros’s Quantum Investment Fund shook the markets when he wagered $1 billion on the devaluation of the British pound. The speculative move drove Britain to pull out of the Exchange Rate Mechanism (Europe’s pre-euro system for stabilizing exchange rates), spiking interest rates by 5 percent in a matter of hours. The U.K. Treasury later estimated that "Black Wednesday," as it was known, cost Britain £3.4 billion, or about $6 billion in 1992 terms.
Soon after, Soros was demonized by the prime minister of Malaysia for causing the Asian Financial Crisis. Calling him a 'rogue speculator,' Prime Minister Mahathir Mohamad said: "We have worked 30 to 40 years to develop [our] economy and here comes someone with a few billion dollars and, in just two weeks, he has undone most of our work." Hedge funds were also blamed for the run on Thailand’s baht. “The baht is the only Asian currency for which the hedge funds collectively took significant short positions,” say Eichengreen and Mathieson.
As the IMF worked to stabilize Southeast Asia’s economies, America’s most alarming hedge-fund crisis was brewing in one of its own suburbs. In 1998, Long Term Capital Management (LTCM), a hedge fund in Greenwich, Connecticut, was managing $120 billion on just $4.5 billion in capital, according to an IMF report. The fund, which specialized in betting that interest-rate spreads would narrow, dealt in bonds, swaps, options, stocks, and derivatives. As creditors closed in, LTCM lost 90 percent of its equity in a span of two days.
The Federal Reserve Bank of New York, fearful of the risks that LTCM’s collapse could represent for the global markets, orchestrated a rescue plan with 14 other financial institutions to cushion the hedge fund’s fall. At the time, William McDonough, of the Federal Reserve Bank of New York said an intervention was necessary because an "abrupt and disorderly liquidation would have posed unacceptable risks to the American economy." Eichengreen and Matheison referred to it as an "out-of-court bankruptcy-type reorganization" in which creditors took over the fund and tried to salvage it.
Despite such striking lows, the hedge fund industry swelled considerably in the 1990s. According to Hedge Fund Research, the industry grew (in terms of unleveraged managed assets) from $38.9 billion in 1990 to $536.9 billion in 2001. Since the equity bubble burst in 2000, most funds employ a mix of long-short, event-driven, and multi-strategy approaches, while interest in emerging markets and funds of funds has also grown, says Hoffman, of Credit-Suisse/Tremont. According to the Hedge Fund Association, there are now about 9,000 hedge funds making up an industry worth $1.1 trillion.
The Future of Hedge Funds Although such growth has excited investors, the crises of the 1990s are still fresh in the minds of regulators. The meltdown at Amaranth, a hedge fund that lost 65 percent of its value last September before closing shop, reminded regulators about the risks posed of mismanaged hedge funds. The SEC has tried without success to require hedge funds to register and conform to tighter regulations. "Being more forthcoming would do a lot to allay the perception of systemic risk,” says Brown of NYU.
But hedge funds have resisted lifting the veil, and so far the mystique has paid off. These days several mutual funds are offering products that sound remarkably like hedge fund strategies. Investment banks such as Goldman Sachs and Merrill Lynch have launched "synthetic" hedge funds that attempt to replicate hedge fund returns by using historical hedge fund data while tracking up to 15 indexes of equity, commodity, and bond prices.
Academics have also weighed in, attempting to "clone" hedge-fund performance by using mathematical models to provide hedge-fund performance with common financial instruments. The goal: matching the reward with less risk and lower fees. Even Aristotle could not have foreseen such advances. Perhaps if Thales had such tools at his disposal, he wouldn't have bothered with the olive business.
Other experts attribute the invention of today's lightly regulated capital pools to a eureka moment by Alfred Winslow Jones nearly sixty years ago. In 1949, Jones, an academic and journalist, penned an article in Fortune about new fashions in financial forecasting.
Captivated by the subject, he dropped journalism and decided to try finance himself. He created A.W. Jones & Co., a partnership of four friends, and invested $100,000 in stocks, using a mix of long and short positions buttressed by a healthy dose of debt. He also implemented a scheme to make the manager’s fee 20 percent of profits, purportedly aligning his incentives with those of investors. That incentive structure remains typical of hedge funds today.
A year after he formed the fund, it earned 17.3 percent, and during the next decade it outperformed every mutual fund by 87 percent, according to Alexander Ineichen's Absolute Returns: The Risk and Opportunities in Hedge Fund Investing, which also mentions the tale of Thales.
The Early Years Seventeen years after Jones's groundbreaking article, Fortune journalist Carol Loomis wrote about her precursor's success, referring to his strategy as a "hedge fund." Soon after Loomis’ article, hedge funds seemed to be pop up everywhere.
In 1968, the Securities and Exchange Commission counted 140 investment partnerships that it considered hedge funds, according to research by economists Barry Eichengreen, of the University of California at Berkeley and Donald Mathieson of the International Monetary Fund in a report on hedge funds.
Early forays into the field were typified by short selling, which put hedge fund managers. But inexperienced hedge fund managers soon grew tired of hedging their bets and began wagering more heavily on long investments and less on short ones, thus exposing themselves to the stock market. When markets started to slide, so did many hedge funds. According to Eichengreen and Mathieson, assets managed by the 28 largest hedge funds had declined by 70 percent in 1970. Many were liquidated, and the total value of the remaining hedge funds at the time was $300 million.
Because little was heard from the funds during the late 1970s and early 1980s, many came to regard them as a relatively new phenomenon. But in the mid-1980s, now-famous investors such as Julian Robertson and George Soros were still at it: attracting capital, out-running the markets and using high-return instruments and unregistered funds to make eye-popping profits. "All these high-worth individuals started saying, 'Get me into a hedge fund, get me into a hedge fund,'" says Stephen Brown, a finance professor at New York University's Stern School of Business who has written widely on hedge fund performance.
With more publicity came more hedge funds. "A lot of trading desks and commodity-trading advisors began converting themselves into hedge funds," says Brown. With that came new interest in foreign investment, as funds focused on currencies and interest rates. By the early 1990s, global macro investments comprised more than 60 percent of the hedge fund industry, according to Oliver Schupp of the Credit Suisse/Tremont hedge fund index. Although hedge funds are barred from advertising or soliciting business, high-profile success by investors such as Soros attracted global attention.
The Roaring '90s Not all of the attention was positive. In 1992 Soros’s Quantum Investment Fund shook the markets when he wagered $1 billion on the devaluation of the British pound. The speculative move drove Britain to pull out of the Exchange Rate Mechanism (Europe’s pre-euro system for stabilizing exchange rates), spiking interest rates by 5 percent in a matter of hours. The U.K. Treasury later estimated that "Black Wednesday," as it was known, cost Britain £3.4 billion, or about $6 billion in 1992 terms.
Soon after, Soros was demonized by the prime minister of Malaysia for causing the Asian Financial Crisis. Calling him a 'rogue speculator,' Prime Minister Mahathir Mohamad said: "We have worked 30 to 40 years to develop [our] economy and here comes someone with a few billion dollars and, in just two weeks, he has undone most of our work." Hedge funds were also blamed for the run on Thailand’s baht. “The baht is the only Asian currency for which the hedge funds collectively took significant short positions,” say Eichengreen and Mathieson.
As the IMF worked to stabilize Southeast Asia’s economies, America’s most alarming hedge-fund crisis was brewing in one of its own suburbs. In 1998, Long Term Capital Management (LTCM), a hedge fund in Greenwich, Connecticut, was managing $120 billion on just $4.5 billion in capital, according to an IMF report. The fund, which specialized in betting that interest-rate spreads would narrow, dealt in bonds, swaps, options, stocks, and derivatives. As creditors closed in, LTCM lost 90 percent of its equity in a span of two days.
The Federal Reserve Bank of New York, fearful of the risks that LTCM’s collapse could represent for the global markets, orchestrated a rescue plan with 14 other financial institutions to cushion the hedge fund’s fall. At the time, William McDonough, of the Federal Reserve Bank of New York said an intervention was necessary because an "abrupt and disorderly liquidation would have posed unacceptable risks to the American economy." Eichengreen and Matheison referred to it as an "out-of-court bankruptcy-type reorganization" in which creditors took over the fund and tried to salvage it.
Despite such striking lows, the hedge fund industry swelled considerably in the 1990s. According to Hedge Fund Research, the industry grew (in terms of unleveraged managed assets) from $38.9 billion in 1990 to $536.9 billion in 2001. Since the equity bubble burst in 2000, most funds employ a mix of long-short, event-driven, and multi-strategy approaches, while interest in emerging markets and funds of funds has also grown, says Hoffman, of Credit-Suisse/Tremont. According to the Hedge Fund Association, there are now about 9,000 hedge funds making up an industry worth $1.1 trillion.
The Future of Hedge Funds Although such growth has excited investors, the crises of the 1990s are still fresh in the minds of regulators. The meltdown at Amaranth, a hedge fund that lost 65 percent of its value last September before closing shop, reminded regulators about the risks posed of mismanaged hedge funds. The SEC has tried without success to require hedge funds to register and conform to tighter regulations. "Being more forthcoming would do a lot to allay the perception of systemic risk,” says Brown of NYU.
But hedge funds have resisted lifting the veil, and so far the mystique has paid off. These days several mutual funds are offering products that sound remarkably like hedge fund strategies. Investment banks such as Goldman Sachs and Merrill Lynch have launched "synthetic" hedge funds that attempt to replicate hedge fund returns by using historical hedge fund data while tracking up to 15 indexes of equity, commodity, and bond prices.
Academics have also weighed in, attempting to "clone" hedge-fund performance by using mathematical models to provide hedge-fund performance with common financial instruments. The goal: matching the reward with less risk and lower fees. Even Aristotle could not have foreseen such advances. Perhaps if Thales had such tools at his disposal, he wouldn't have bothered with the olive business.
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