The benefits of mutual returns

Closing out the portfolio of one of his clients who was leaving the UAE early this month, Krishnan Ramachandran had mixed feelings — sad at losing a calm and disciplined investor, but satisfied that the person had more than doubled his investment in the last eight years. The return was achieved despite all the global turmoil when the markets were not at their best, especially over the last three years. \"He was a serious high net worth investor who was investing meticulously every month or every quarter,\" says Ramachandran, chief executive of Dubai-based Barjeel Geojit Securities, a financial conglomerate with $460 million assets under management, catering mainly to the region\'s Indian expatriate investors. \"Whenever he had surplus he would put it in the market, either in funds or directly into stocks. And the kind of positive returns he had at the end was much better than what he would have otherwise made on a bank [fixed] deposit or any form of related investment in that period of time.\" That is the kind of behaviour Ramachandran is urging of other Indian expatriate investors, small or big: to set aside their surplus savings on a regular basis for investment in Indian mutual funds, which provide attractive investment opportunities. Low penetration This year, the Indian equity index witnessed a correction of more than 20 per cent (technically entering \"bear\" territory) and is still down more than 15 per cent. This has made even seasoned investors nervous. But three- and five-year returns offer a much healthier picture. That means an investor should put their money in for the long term. \"We have found that, anybody who has invested in a market for about four to five years has always made money,\" Ramachandran says. \"We have identified funds that would balance out returns over a period of time. Even today mutual funds have returned over 12-13 per cent on a five year basis.\" The penetration of mutual fund in India is hardly five per cent of the total investing population. \"This segment is bound to grow and in the next five to 10 years, investments in India will catch on big time irrespective of what situation we are in today,\" says Ramachandran. The manager also advises prospective investors to start early. He has noticed most people begin at around 35, and even then, it is sporadic. \"Closer to 40, when people start worrying about future, that they come and ask for solutions for their financial future,\" he notes. Ramachandran acknowledges that at this age, they are settled and saving more, but he points out, that if they had started early, it would have helped them to build a better portfolio which would have secured them higher returns. Indian mutual funds have different offerings catering to various kinds of investors. Many Indian investors have adopted a conservative stance. Today, the debt market segment of India\'s mutual fund universe, comprising various fixed income securities, is in demand for the safety, adequate liquidity, and decent returns it provides. \"Three to five years ago, it was the equity wave,\" says Ramachandran, \"Today it is the debt wave.\" Traditionally, Indians have and still continue to favour bank fixed deposits more than debt funds. With the interest rate hiked 15 times to the current 8.5 per cent, a bank deposit is yielding between 8 and 9 per cent. But Ramachandran points to fixed maturity plans, which are providing pre-tax yields of anywhere between 9.75 per cent to 10.25 per cent, after deducting all costs. Also, there are several hybrid structures in the form of monthly income plans (MIPs) which typically invest 70 to 80 per cent in debt and 20 per cent in equities. Over a four to five-year period, Ramachandran says, \"you will make good returns — anywhere between 14 and 15 per cent — because they get the upside of the equity on the cycle and the debt.\" Such plans have given higher returns when the equity markets were \"doing really well.\" For first time equity oriented investor, Ramachandran would put them in a more diversified equity fund and avoid sectoral or small and mid cap funds. A diversified fund is typically one that has exposure to large, mid and small cap shares. Such a fund typically gets into the more actively traded stocks of the index, such as those based on the BSE 200. \"But once you get into that it doesn\'t mean that you have to get into such investments all the time,\" says Ramachandran. He advises investors to gradually get into thematic funds, and small cap and mid cap funds. \"These investment types are necessary whether you are conservative, moderate or aggressive,\" says Ramachandran. \"The percentages [of each type of caps in your portfolio] may change, but they are very important because returns are higher than a large cap. We have known mid/small caps to give in excess of 30-40 per cent returns at certain points of time.\" Timing is important Mid/small caps, he notes, give \"very good\" returns when the market is booming, but they also correct sharply in a weak market. He cautions investors about thematic funds, whether it is banking, infrastructure or pharmaceutical. \"They look very good at one point of time, but today when you look at infrastructure funds, they are probably one of the worst performing funds,\" says Ramachandran. \"One should also time investing in these funds.\" For instance, between 2005 and 2007, there was a wave of infrastructure funds and they soon reached saturation point and collapsed. Pharmaceutical funds also went through this cycle. \"Thematic funds are good investments. In fact, given their focus, they have given high returns at specific points. But you must get in at the right time — which is a very difficult thing to do,\" he says. \"You need to review portfolios with such funds on a constant basis.\" He cites the example of the banking sector, which was doing well until last year. This year, it is going through a correction. \"This doesn\'t mean that sector is to be written off,\" says Ramachandran. \"At some appropriate time we should get in again. Banking has to perform if you believe in the India growth story. Without performance of banking nothing is going to happen. Hopefully next year we will see banking stocks and funds doing quite well.\" After the global financial crisis of 2008, the mentality of investors has changed, feels Ramachandran. \"Today when we call and say book your profits, most often they do,\" he says. \"They realise that what they have missed out last time, hanging on when they should have exited.\" To determine the quality of a fund, here are a few points to keep in mind: 1-    Find out how long the fund has been in existence 2-    Check the size of assets under management (AUM), as well as the management expertise of the fund house 3-    Be on the lookout for consistent performance over the years. In many of the successful fund houses, you will find managers and people associated for long periods of time, according to Krishnan Ramachadran of Barjeel Geojit Securities. \"The people are the same. So when there is a lot of churn happening within a particular fund house, you also tend to notice variations that can happen. That\'s because each person\'s perception is very different.\" But what eventually determines the investment portfolio is the sort of returns that has been generated. \"For us, it doesn\'t mean that we always choose the fund which is, for example, providing a return of 18 per cent and ignore another which has a return of 15 or 16 per cent. Today it [the second fund] may be a laggard, but it\'s matter of time before it becomes a competing fund.\" Cost Ratio What you need to invest Fees/Charges Typically, for equity class of funds the expense ratio varies between 1.80% to 2.10%. This depends on the assets under management for a scheme. The higher the AUM the lower the costs and vice versa. For Debt / Bond funds the cost ratio varies from 0.60% to 1.50%n Distributors typically earn between 0.50% to 0.75% in the first year and will be eligible for a trailer fee from the subsequent year onwards. Documentation to start investing: To start investing in an Indian mutual fund while living in the UAE, you need a PAN (Permanent Account Number) card. Then you need to go through a KYC (Know your Client) process, which includes your Pan card and proof of address. The PAN card typically takes about three to four weeks to be processed and KYC process is about a week once you get a pan card. Somebody with a PAN card can start investing almost immediately. Once you start investing, most of the fund houses will send you a periodic statement. Financial brokerage houses such as Barjeel send a consolidated statement to their clients every month or every quarter. There is a software that lets you plug in your portfolio and keep track of it. If you were to invest...Dh1,000 a month in funds with 12% and 15% respectively, your returns could be: (Amount in AED) Investment Period 12 % 15 % 1-    5 Years 81,669 88,574 2-    10 Years 230,038 275,217 3-    15 Years 499,580 668,506