Investment Lessons from ‘The Godfather’

For film buffs and critics alike, ‘The Godfather’ embodies what celluloid magic is all about. Over four decades after its release, the movie continues to capture the imagination of audiences like no other, reaffirming its status as a classic.

But there's a lesser-known aspect of 'The Godfather'. Apart from being a source of inspiration to aspiring actors and filmmakers, the film has a lot to offer to investors as well. Following are investment lessons from ‘The Godfather’:

Barzini is dead. So is Phillip Tattaglia, Moe Greene, Stracci, Cuneo. Today I settled all family business

A laser-like focus on objectives and ruthless discipline in their pursuit, are defining traits of Michael Corleone’s personality. Be it protecting his family or safeguarding his business interests, Michael is decidedly aware of his goals and will do whatever it takes—sacrifice his career in the armed forces, join the ‘family business’ and even eliminate his rivals—to achieve his goals.

Similarly, investors would do well to set goals before they start investing. Goals can range from near-term ones such as creating a holiday budget, to long-term goals like a retirement kitty. Apart from making investing focussed, setting goals also helps in tracking progress. Thereby deviations (if any) can be easily rectified. Furthermore, being disciplined (read: curtailing wasteful expenditure, and investing regularly in line with a plan) will help investors stay on course to achieve their goals.

Some people will pay a lot of money for that information; but then your daughter would lose a father, instead of gaining a husband

Michael, a fugitive on the run in Sicily, is enamoured by a local girl. When confronted by her indignant father, Michael calmly reveals his true identity. Also, he lays out the options available, and the trade-off therein.

Likewise, while investing in market-linked instruments, investors must be unambiguously aware of the risk-return trade-off. For instance, a small-cap stock can deliver substantially higher return versus a large-cap stock; however, the potential upside comes at a price—higher risk, if the investment doesn’t play out as expected. Similarly, sector-focused mutual funds can outperform diversified funds, but they expose investors to higher risk. Hence investors must accurately understand the risk-return trade-off before making an investment decision.

Where does it say that you can't kill a cop?

When the Corleone family is under attack, Michael comes up with a seemingly outlandish plan that includes killing a corrupt police officer. His sound rationale wins over his sceptical associates. Essentially, Michaels’s willingness to think out-of-the-box wins the day.

At times, investors can be guilty of being orthodox in their choice of investment avenues. For example, some invest only in bank fixed deposits and small savings schemes because of habit rather than choice. By refusing to consider other apt options, investors run the risk of not meeting their investment goals.

For instance, an investor in his twenties who is saving for retirement 30 years hence, shouldn’t hold a portfolio comprised of only fixed deposits and bonds. Equities and mutual funds must find place therein. Remember, risk in itself isn't bad; rather, investing without being aware of it, and/or failing to correctly assess it, gives rise to thorny situations.

It's not personal. It's strictly business

Every character quoting this legendary line tries to convey that a given action should be seen as a business decision i.e. in a dispassionate manner. In other words, it has nothing to do with personal feelings. The 'not personal' part holds good for investments as well.

At times, investors get 'attached' to their investments. This is especially true of stocks and mutual funds that have had a successful run. The trouble starts when the investment avenue is no longer equipped to perform as it has in the past. Then there are misguided investments which fail to deliver, but investors hold onto them, hoping to ‘get even’.

This approach to investing is unwarranted. An investment is simply a means to an end i.e. the investment objective. If a thorough evaluation suggests that the investment is no longer equipped to play the part that it was supposed to, investors must salvage the situation by exiting the investment at an opportune price and time.

Tom Hagen is no longer consiglieri 

While expanding his operations, Michael sacks his adoptive brother/long-time associate, Tom Hagen from the post of consiglieri (adviser). Stating that Tom isn’t a wartime consiglieri, Michael replaces him with someone adept at strong-arm tactics, since the situation demands it.

Barring a small section of investors who can manage their own investments, others need assistance in the form of investment advice. Investors have a variety of options—distributors, advisers, robo-advisory firms—to choose from. Quality of investment advice can and does have a bearing on investment results. Hence, investors must perform rigorous due-diligence before engaging an adviser. Also, there is a case for reviewing the adviser’s performance at regular time intervals.

I'll make him an offer he can't refuse

In Godfather parlance, this iconic line represents a veiled threat. Refusal to comply with the offer can lead to dire consequences.

In the world of investments, there are periods when markets are frothy and irrational exuberance is the order of the day. In such periods, it is not uncommon for investors to encounter investment propositions that claim to offer a win-win proposition. For instance, an investment that offers high return with virtually no downside. That’s when investors must remember that if the 'offer' sounds too good to be true, then it probably is.

When Investors Are Intolerant Of Their Advisers’ Views

Let me clarify at the outset: I’m neither weighing in on the ‘intolerance debate’, nor do I have an opinion on what to do with awards :) Recently, I ran into an acquaintance who is an investment adviser. Expectedly, the conversation veered towards markets, clients and investment avenues. The gentleman had a rather peculiar complaint. He said “my clients engage me for investment advice, and I am paid a fee for the same; oddly, some of them simply expect me to reinforce their views”. To further complicate matters, his dissenting views were not only met with resistance, they even led to investment decisions being delayed.

This phenomenon is more common than one would imagine. Over the years, I have encountered several investors whose expectations from their investment advisers are no different. At the risk of hazarding a guess, perhaps such investors have an opinion on where to invest, and need advisers for validating their views. Conventional wisdom suggests that the adviser is an expert on investment-related matters; furthermore, he is engaged to help investors achieve their investment goals. Hence, it makes sense to be receptive to his views. 

I’m not suggesting that investors should blindly follow everything their adviser recommends. Not at all. I have always maintained that investors must actively participate in the investment process. An integral aspect of the same is to be informed and to thoroughly discuss the adviser's views and recommendations.  That said, expecting an adviser to simply reinforce the investor’s preconceived notions defeats the purpose of engaging an adviser. Investors and advisers who find themselves in such a scenario have much to mull over.

On their part, investors must evaluate if they are capable of handling investments on their own. If the answer is affirmative, then such investors are better off dissociating from their advisers.

Now for the more tricky one—investors who need investment advice, but are unwilling to accept any from their adviser. There is a need to assess why the relationship isn’t working. It could be a case of losing confidence in the adviser on account of failed recommendations, or perhaps the investor realising (with the benefit of hindsight) that his views on investing are not in sync with those of the adviser. Sadly, this conundrum doesn’t have a one-size-fits-all solution. However, investors owe it to themselves to go to the root of the problem and resolve it. 

The relationship between an investor and his adviser must be symbiotic. While the adviser is expected to pitch in with independent and credible advice that is apt for the investor, the investor must diligently act on the advice, and compensate the adviser as per agreed terms.  An investor-adviser relationship operating on the extremes—either the investor following the adviser blindly, or the investor being cynical of everything the adviser recommends—is bound to fail. The key lies in finding a common ground.

On a parting (and lighter note), apparently my acquaintance has decided to practice intolerance by discontinuing dealings with his unreceptive clients.

Investment lessons from Rocky Balboa

Years ago, when I first saw “Rocky”, I was hooked onto it immediately. Since then I have watched the entire series umpteen times, and it has never failed to impress. While few would dispute the entertainment (remember I am a fan), the Rocky fable also offers some handy investment lessons. Read on.

It's about how hard you can get hit and keep moving forward

At its core, the Rocky saga is a tribute to the indomitable human spirit. That makes it the greatest underdog story of all times. Let’s not forget that Rocky is a boxer who is on the wrong side of age with a bad eyesight. But what he lacks in physical attributes, he more than makes up for in determination. To quote Adrian: “All those fighters you beat, you beat them with heart not muscle”.

Likewise while investing, it is undeniably important to be well-informed of the nitty-gritties of the economic environment, market conditions and investment avenues. But alongside the aforementioned, investors must also possess the ability to be resilient at all times. For instance, they should succumb neither to temptation (take on undue risk to make a quick buck in frothy markets), nor to panic (in down markets when fundamentally robust investments are trading in the red). Investors who can detach themselves from the noise in the markets and resolutely stay the course are often best placed to succeed over the long-haul.

Nobody's ever gone the distance with Creed. All I wanna do is go the distance

Throughout his boxing career, Rocky is unambiguously aware of his goal. Also, his unwavering focus and willingness to do all it takes to achieve the goal are noteworthy. For instance, when he first goes up against Apollo Creed, he simply wants to last the entire match, but in the rematch he focuses on beating Creed. Against Clubber Lang, it’s about regaining his confidence and the title. For taking on Ivan Drago, Rocky choses to train in testing conditions in Russia.

At the risk of using a cliché, investing without a goal is a bit like a journey without a destination; you never know where you will land up. Before investing, investors must decide what their goals are i.e. what they intend to accomplish and how much monies are require for the same. This in turn will help them figure out their investment horizon, avenues to consider and even the sum of money to be invested. Having pre-set goals also helps evaluate if investments are panning out as expected, and if not, corrective action can be taken.

Because I’m a fighter. That’s the way I’m made

In the Rocky series, the protagonist dabbles in vocations ranging from a thug for a loan shark, trainer to a restaurateur. However his true calling is to be a boxer and that’s where he is at his best. This is a classic example of identifying one’s true self and then sticking to it.

On their part, individuals must identify what kind of investors they are. They should find out how much risk they can take i.e. are they fine with risking money invested in a trade-off for higher-than-average returns? Or, do they put a premium on preserving capital, even if it means foregoing returns? Likewise, investors should try to determine if they are comfortable trading around, or is a long-term oriented buy-and-hold approach more apt for them? Such insight into their psyche will aid investors devise an investment philosophy that they are most comfortable with. It is no less important for investors to consistently adhere to their philosophy.

I wanna thank Mickey for training me

Admittedly it’s Rocky who wins all those glorious bouts in the ring, but he is always backed by a strong team. To begin with, he is mentored and trained by Mickey; subsequently it’s Creed and Duke who take on training duties. Let’s not forget that Adrian and Paulie are omnipresent in Rocky’s corner. Simply put, it pays to have a strong team.

There’s a plethora of investment advisers and financial planners who can help investors manage their monies. Then there are investment-focused publications and websites which can also aid investors. Investors would do well to make the most of the available resources. Expectedly, investors must ensure that the chosen adviser is competent, experienced, has a proven track record and always acts in their best interests. Likewise, before relying on a website or publication, investors must verify its credibility.

It ain’t over till it's over

In his career Rocky goes up against some formidable opponents–Creed, Lang, Drago, and Mason Dixon to name a few. Have you noticed how each opponent is more fearsome than the previous? Sure, Rocky does beat most of them, but nonetheless, each time a new opponent shows up, and the Rocky saga continues.

It's no different with investments. The investment process never comes to an end, not even for investors who may have an ideal portfolio in place. Factors such as changing market conditions, and investors’ needs and finances necessitate a constant review of the portfolio. For instance, often when one need is fulfilled, a new one crops up. At times, existing needs change with passage of time. Hence, investors must understand that investing is not a one-off activity, rather it’s an ongoing activity that they must devote adequate time to.

Of exit loads, fund houses and distributors - 2

Yesterday...
All my troubles seemed so far away,
Now it looks as though they're here to stay,
Oh, I believe in yesterday...

(Yesterday – The Beatles)

This iconic song pretty much sums up the mood among several mutual fund distributors. For distributors habituated to attractive compensation structures and easy money, the new-look mutual fund industry has come as a rude shock. In one deft move (scrapping entry loads), the regulator changed the rules of the game. Further, the provision for uniform exit loads plugged the loophole that some would have liked to exploit.

Newspaper reports suggest that fund houses’ pleas to roll back/modify the entry load provision has been rejected by SEBI. Some fund houses have decided to compensate distributors by paying them an upfront commission in any case. Distributors on their part are tweaking their business models. Fee structures are being charted out; new value-add offerings are being introduced. Terms like ‘unbiased’, ‘independent’ and ‘research-driven’ are now liberally used in communication. Clearly, the mutual fund industry is in unchartered territory and ‘wait and watch’ is the new mantra.

Despite the gloomy picture being painted by most, it would be safe to state that the scenario isn’t as bad as it is made out to be. In fact, things could become markedly better for all the participants i.e. investors, fund houses and distributors.

Conventionally, distributors have worked on the ‘assets under management’ model i.e. more investments their investors made, higher was their pay-off. Broadly speaking, the latter came from the entry load, the trail commission and ancillary compensation/benefits provided by fund houses. While entry loads have been done away with, distributors can now demand compensation from investors directly. Also, unlike loads, this compensation is not regulated. It has been left to be mutually determined by the investor and the distributor.

Distributors argue that investors are unlikely to be willing to compensate them. There is some merit in that argument. Investors habituated to filling mutual fund forms and writing cheques for the investment amount, might resist the new arrangement initially. However, once they are convinced of the value that the distributor adds to the investment process, the resistance will subside.

The importance of quality advice and service cannot be overstated. The distributor has a vital role to play in aiding the investor achieve his financial goals. Making an investment plan, successfully managing and tracking an investment portfolio are no mean tasks. And once the distributor effectively communicates how his services can aid the investor, there’s no reason for the investor not to come on board.

Sure, distributors who fail to add value and work in the investor’s best interests might see their business dwindle. But that would only be a fair and natural consequence.

From the fund houses’ perspective, it’s an opportunity to have access to serious, long-term money. It isn’t entirely uncommon to see ill-advised investors invest monies simply to ride the rising markets. With quality advice being made available to investors, we could see the rise of a breed of informed investors who are willing to stay invested for the long-haul. Investors who don’t panic when markets experience downturns; instead they see the same as an opportunity to make investments at attractive prices. Now wouldn’t fund houses love to have such investors investing in their funds? Also, it would be fair to assume that fund houses will handsomely compensate distributors facilitating serious investors and long-term monies, for their efforts.

As for the investor, it's options galore. Some distributors will operate on the ‘transaction’ model i.e. use technology to offer investors a low-cost platform for making investments, others will bank on providing quality advice and then there will be those whose USP will be personalised service. In most cases, there will be an overlap. From the investor’s perspective, the importance of being aligned with the right distributor has never been higher. Investors will have to thoroughly evaluate the proposition offered by each distributor and select the one that best works for them.

For instance, if a distributor boasts of his research set-up, quiz him about the same, the size of his team and their experience. If a distributor claims to be independent, enquire how he ensures that his independence is not compromised with. If ‘low-cost investing’ is the platform on offer, find out how the same compares with other distributors. The onus to conduct a thorough due diligence and make an appropriate choice lies with the investor.

It won’t be surprising if investors choose to be associated with multiple distributors; for instance, the advice could be sourced from one distributor and transactions made with another.

As mentioned earlier, the mutual fund industry and its participants are in unchartered industry. However, despite what the naysayers would want you to believe, it need not be all gloomy. Remember the adage about – it’s not the cards you are dealt, but how you play them. The ‘how you play them’ part could hold the key for the mutual fund industry, going forward.

Here comes the sun,
Here comes the sun,
And I say it's all right,
Little darling, it's been a long cold lonely winter,
Little darling, it feels like years since it's been here,
Here comes the sun, here comes the sun,
And I say it's all right...

(Here comes the sun - The Beatles)

Investment tips from 'The Godfather'

For film buffs and critics alike, The Godfather pretty much embodies what celluloid magic is all about. Even 37 years after its release, the movie continues to capture the collective imagination of audiences across the world. Its characters, lines and performances are a part of folklore. Debates and discussions on what makes the movie tick continue till date. The film's enduring appeal to generation after generation only reaffirms its status as a true classic.

But there's a lesser-known aspect to The Godfather. Apart from being a source of inspiration to aspiring actors and filmmakers, the film has a lot to offer to investors as well. Following are 3 investment tips from The Godfather:

1. "Where does it say that you can't kill a cop?"

When the Corleone family is under attack, Michael Corleone (Al Pacino) comes up with a seemingly outlandish plan to eliminate his family's enemies. And that includes killing a corrupt police officer. Despite being scoffed at by his associates, Michael rationalises his plan by suggesting that they feed the media with stories of the police officer's corrupt practices and his links with the mob, and thereby defame him. Essentially, Michael shows the willingness to think out-of-the-box and take risk, without being irrational.

Likewise, the willingness to be unconventional and take on risk is vital for successful investing. Often, investors are guilty of sticking to certain avenues simply because they have always done so. For example, it is not uncommon to find investors who refuse to venture beyond bank fixed deposits and small savings schemes; the only explanation for their choice being, we have always invested in these avenues. By shutting the door on other options, investors might deprive themselves of the opportunity to meet their investment objectives. Of course, this should not be read as a recommendation to throw caution to the winds and invest in every untested investment avenue on offer.

All investors need to do is, be open to the idea of investing in avenues that offer a suitable investment proposition and be willing to take on acceptable levels of risk. For instance, a 25-Yr old investor who is saving for his retirement 35 years hence, can't hold a portfolio comprised of only fixed deposits and bonds; despite the higher risk, equities and mutual funds must find place therein. Remember, risk isn't bad; investing without being aware of it or failing to properly assess it, is what gives rise to thorny situations.

2. "It's not personal. It's strictly business."

This recurring line from the film has been used to great effect on each occasion. Every character who quotes this legendary line tries to impress on others that a given act or plan of action should be seen as a business decision. In other words, it has nothing to do with his personal feelings. Hence, the need to view the act in a dispassionate manner. The 'not personal' rationale holds true for investments as well.

At times, investors have a tendency to get 'attached' to their investments. This is especially true of market-linked avenues like stocks and mutual funds that have had a successful run. The trouble starts when the avenue is no longer equipped to perform as it has in the past. Similarly, there can be a situation wherein an investor gets invested in an avenue that fails to deliver. In both the situations, investors might be tempted to hold on to the investment; while in the former, it's the 'attachment' at work, in the latter, it's to get even.

Such an approach to investing is certainly unwarranted. An investment is simply a means to achieve a goal i.e. the investment objective. If a thorough evaluation suggests that the investment is no longer equipped to play the part that it was supposed to, investors must salvage the situation by getting rid of the same at an opportune price and time.

3. "Tom Hagen is no longer consiglieri."

When Michael decides to expand the family's operations, he decides to make certain changes. The significant one being that his brother/long-time associate, Tom Hagen (Robert Duvall) is sacked from the consiglieri's (advisor) post. His explanation for this rather drastic move is quite simple - Tom is not a not a wartime consiglieri and that things could get rough. Simply put, Michael prefers someone adept at strong-arm tactics over his brother, since the situation demands it.

An investor should routinely evaluate his relationship with the investment advisor/financial planner. The onus to ensure that investments are made and managed in the best interests of the investor, lies with the advisor. In effect, the investment advisor's integrity and competence are consistently tested.

Let's consider the emerging scenario in the mutual fund industry. With entry loads being scrapped, investors will be required to individually compensate advisors for services rendered. There can be a situation wherein an investor believes that his advisor isn't able to justify the fees demanded or perhaps his service standards aren't up to the mark. Should such a situation arise, investors shouldn't hesitate to terminate their existing relationship. Investing is serious business and there should be no room for incompetence or a slack attitude on the advisor's part.

Finally, be wary when someone "makes you an offer, you can't refuse". In The Godfather, this phrase refers to a veiled threat; refusal leads to dire consequences. In the world of investments, one can draw a parallel to investment propositions that claim to offer a win-win proposition. For instance, an investment that purports to expose investors to low risk, yet promises to deliver high returns. Remember, if an investment proposition sounds too good to be true, there's more than a fair chance that it is.

HDFC Top 200: An underrated achiever

Did you know that even investments can be exciting? Typically, asset classes or investment avenues that have hit a purple patch make the grade as exciting ones. Especially, the ones that have gone from obscurity to prominence in a short time span. They are written about in the media and instantly recommended by investment advisors. For instance, a fund that has delivered a trail-blazing performance and is perched at the top of the rankings. Even providers of financial services enjoy their fifteen minutes of fame; say a fund house that holds the largest asset size in the industry. Don't get me wrong. There is nothing wrong with an asset class, an investment avenue or a financial service provider being lauded and discussed, because it has delivered. In fact, it's only to be expected.

The trouble starts when one reads too much into the 'exciting' bit and makes investment decisions based solely on the same. Also, since most of the fanfare can be attributed to a recent showing, it is difficult to distinguish a 'flash in the pan' from a 'sustainable' performance. And for serious investors, the latter is certainly a more important evaluation parameter.

Then there are funds which don't qualify as exciting ones. Make no mistake, that's not the same as being non-performers. On the contrary, these can be funds that go about playing their part to perfection, but in an understated manner. They often deliver with enviable levels of consistency. Their performance over longer time periods and across parameters can be impressive. Despite this, there is never a frenzy surrounding them. It is not uncommon for such funds to be labelled as 'boring'.

Sadly, most investors fail to realise that in the context of investing, boring can be good. This is because, boring translates into predictability. And predictability means fewer unpleasant surprises. If you are building an investment portfolio to achieve certain objectives, boring funds of the aforementioned variety should account for a lion's share of the portfolio. The fact that a fund isn't in the limelight or isn't perceived as exciting is no reflection on its prowess. A competent performer stays the same irrespective of the attention it garners. HDFC Top 200 Fund (HT2F) is one fund that falls in the category of underrated achievers.

Originally an offering from Zurich India Mutual Fund, the fund became a part of HDFC Mutual Fund subsequent to the former's takeover in 2003. A diversified equity fund, HT2F's investment proposition is quite simple. It largely invests in stocks of companies featuring in the BSE 200 index. An interesting aspect of the fund is that it combines the active and passive styles of investing. It holds around 60% of its portfolio in line with the BSE 200 index. The fund has also benefited from the presence of its fund manager, Prashant Jain (Executive Director & CIO-HDFC Mutual Fund). Incidentally, Prashant Jain was earlier associated with Zurich India Mutual Fund. The fund's long-standing association with the fund manager has served it well.

Now for the performance. For a fund that has been in existence for well over a decade (inception in 1996), HT2F's track record is impressive to say the least. As on July 14, 2009, over the 3-Yr and 5-Yr periods, it had delivered 17.5% CAGR and 31.2% CAGR respectively; the corresponding figures for BSE 200 were 9.9% CAGR and 21.8% CAGR. Over the last 12 months, the fund posted a growth of 22.3% vis-à-vis just 3.1% for its benchmark. HT2F's NAV rose by 21.6% CAGR over a 10-Yr period as compared to 13.8% for BSE 200. And that is no mean achievement!

Any analyst worth his salt will agree that a fund's mettle is truly tested during a downturn. In recent times, after peaking in January 2008, domestic stock markets went into a downward spiral that lasted until March 2009. Over this (approximately 14-Mth) period, between it highest and lowest points, the BSE 200 shed 64.9% on an absolute basis; HT2F scored over its benchmark by losing 54.8%. In effect, the fund has fared better than its benchmark in both the upturn and downturn. HT2F is no laggard when it comes to competing with peers. Its showing vis-à-vis comparable peers (funds that predominantly invest in the large cap segment) is equally noteworthy.

Despite this, there is no perceptible buzz around the fund. No one is raving about its performance. This is hard to explain. For some obscure reason, HT2F lacks the 'X' (read exciting) factor that is much needed to draw attention.

What investors must do
For one, it would help if you don't let the hype or 'lack of it' affect your investment decisions. Always remember, investing need not be exciting; conversely, as mentioned earlier, boring can be good. You must check with your investment advisor/financial planner if a competent and proven, yet seemingly humdrum fund fits in your scheme of things. And if it does, by all means get invested.

(NAV data sourced from www.hdfcfund.com; data for BSE 200 sourced from www.bseindia.com)

Much ado about 'no entry load'

All right. So, the Securities and Exchange Board of India (SEBI) has decided that mutual funds will no longer be permitted to charge an entry load. And all hell has broken loose! Newspapers are carrying articles with comments from 'experts' and 'senior officials' at fund houses running down the move; a lot of emphasis is being laid on how this step will hurt the mutual fund industry. But is that correct? Can a step that is evidently pro-investor be detrimental to the industry?

Let's take a look at what SEBI has proposed. Following is an extract from a press release posted on SEBI's website:

"There shall be no entry load for the schemes, existing or new, of a Mutual Fund. The upfront commission to distributors shall be paid by the investor to the distributor directly. The distributors shall disclose the commission, trail or otherwise, received by them for different schemes/ mutual funds which they are distributing or advising the investors."

The guideline suggests that the practice of fund houses deducting an entry load (from the sum invested) and paying the same to distributors (investment agents/advisors) as upfront commission will be discontinued. Instead, the investor will have to compensate the distributor for the services rendered. Also, distributors shall be obliged to reveal the total commission they earn from various mutual funds.

So let's see, what's causing all the hoopla? Have distributors been deprived of their livelihood? Does the regulation suggest that henceforth distributors will have to treat selling mutual funds as a philanthropic activity? No. So why all the fuss? Here's why. Thanks to this step, distributors have been made accountable. They can no longer operate with a "the more I sell, the more I will earn" mindset. With an assured income of 2.25% or thereabouts from the entry load, aspects like quality of advice and service were rarely granted any importance. However, that modus operandi is now history. Several distributors will have to kiss a tearful goodbye to the 'easy money' route. And this is where all the agony stems from!

Any distributor who is confident about the quality of services he offers, should welcome this step. Nowhere does the guideline suggest how much income the distributor can demand from the investor. So if the distributor provides quality advice that is consistently in the investor's best interests and backs it with top-notch service, he could potentially demand more than the 2.25% that was available to him via the erstwhile entry load. Hardly a reason to complain!

Now for the second part of the guideline - disclosing all commission earnings. Again, distributors only have themselves to blame. Having built a reputation for selling mutual funds that offer them the highest commission, mis-selling continues to be common practice in the mutual fund industry. SEBI is simply trying to incorporate greater transparency in the investor-distributor association. Distributors who do not engage in any malpractice have no reason to fear. They should be able to justify why they are recommending a given fund vis-à-vis another.

Some fund houses are apparently aggrieved since they believe that the mutual fund industry will suffer, since distributors will gravitate towards insurance products offering better commission. Hence fund houses will end up with lesser assets to manage. Of course, a smaller asset size translates into lesser income for the fund house.

Here's a counterargument - if the mutual funds on offer are attractive enough and can aid the investor in achieving his investment goals, he will demand them and thereby create a demand. And the onus to ensure that funds are attractive lies primarily with the fund house. Also, if a fund house feels that distributors deserve to be better compensated, it is free to cough up additional benefits out of its own pockets. Remember the regulator only stipulates how much expenses can be charged to the fund (i.e. borne by the investor). Any fund house/AMC which believes that distributors are being short-changed, should feel free to reward them out of its own coffers.

Time and again, fund houses have failed to act in the best interests of the investor. Their partisan attitude towards distributors and indifference towards investors has been disappointing to say the least. Let's hope this time around better sense prevails and they don't create any roadblocks in the implementation of this directive.

As for investors, they couldn't ask for more. First, they were given the opportunity to invest directly with the fund house, thereby bypassing the distributor and avoid paying an entry load. Now with the guideline to scrap the entry load, they can negotiate with the distributor and arrive at a fair price for the latter's services. The onus to make the most of this opportunity lies with investors.

Kudos to SEBI for taking a stand for investors!

Distributors and fund houses - keep your chin up. This round goes to investors!

Do you have a contingency reserve in place?

Does your investment advisor/financial planner recommend that you have a contingency reserve (or fund) in place at all times? Also, does he help you evaluate the adequacy of the same at regular time intervals? If not, then there might be a case for re-evaluating your association with the investment advisor/financial planner.

Simply put, maintaining a contingency reserve amounts to saving for a rainy day. Alongside creating portfolios to meet goals like retirement and children's education, having a contingency reserve in place is equally important. As the name suggests, this is a pool of money set aside to provide for unforeseen events. While the concept of maintaining a dedicated reserve for the aforementioned purpose isn't exactly a recent phenomenon, its need has certainly become more pronounced now, thanks to the layoffs, pay cuts and enterprises shutting shop.

A contingency reserve ensures that you can go about with your day-to-day activities even in the event of an unexpected (and unpleasant) situation arising. In effect, it ensures that you don't have to compromise on your lifestyle, even in difficult times.

How much money will I need
Like investing, creating a contingency reserve is also a personalised activity i.e. it has to be tailor-made for you. What you need to do is determine how much money you need to meet all your expenses on say a monthly basis. This will include making an estimate of all expenses i.e. grocery bills, utility bills (electricity, telephone, petrol, rent and EMI), outlay towards children's tuition fees, among others. Activities like dinners in restaurants, weekend getaways, movies and shopping sprees at malls should also be provided for. You might also want to incorporate a certain amount for medical emergencies, given how expensive hospitalisation and medical treatment can be (remember, medical insurance doesn't cover all ailments). While theoretically the list can be endless, you need to arrive at one that is right for you. It should comprehensively cover all the areas that you would need to spend on in the normal course, and thereby ensure that your lifestyle is not dented.

The next step is to determine the period for which you would like to make a provision. Again, this choice needs to be made, based on what works for you. Suppose you arrive at Rs X as the sum that you need to spend every month; furthermore, you believe that 6 months is the period for which you would like to have a 'safety net'. In that case, you should have a contingency reserve of Rs 6X.

How to create a contingency reserve
It's possible that you may not have the requisite sum (Rs 6X) available at your disposal, to begin with. That's fine. Set aside what you have and keep adding to it in a disciplined manner until the target is achieved. It is important that the contingency reserve be invested in appropriate avenues. Safety and liquidity are two factors that must be accorded high priority. Hence, the sum can be stored in a separate (more on this later) savings bank account; a portion of the reserve can even be held in cash. The intention is ensure that the earmarked funds can be accessed at a short notice and also, that they are not exposed to any risk.

The contingency reserve is sacrosanct
It is vital that you respect the sacred nature of the contingency reserve. In some cases, the sum being set aside can be quite substantial. There will be temptations to dip into the reserve and use the monies for purposes, other than the intended ones. For instance, if equity markets are surging, a substantial sum of money lying unutilised in a savings bank account may stick out like a sore thumb; there will be temptation to invest those monies in the markets. When it's the festive season, attractive discounts are commonplace. You might be tempted to use the reserve to capitalise on the same. Don't succumb to such temptations. It would certainly help to hold the contingency funds in a separate bank account. Thus the likelihood of the funds getting used up for extraneous purposes will be reduced.

Finally, at regular time intervals, it is important that you review if the contingency reserve is adequate. An upgrade in your lifestyle could mean that the contingency reserve has become inadequate. In such a scenario, replenishing the same at the earliest should be given priority.

In a time of crisis, not having a contingency reserve could force you to either compromise on your lifestyle or divert monies from other needs. In either case, it would be an undesirable scenario. Several individuals are vulnerable to the "it will never happen to me, so why provide for it" syndrome. While it would be nice to be never faced with a crisis, banking on the same might amount to wishful thinking. Remember, the rationale for a contingency reserve can be traced to the time-tested tenet of - prevention being better than cure.

Do your mutual funds stand the test of character?

'In times of adversity, true character is revealed' - that's an adage relevant not only to humans, but also investment avenues like mutual funds. Any analyst worth his salt will vouch for the fact that in rising markets, it is hard to distinguish the men (proven and invest-worthy funds) from the boys (also-rans). Buoyed by conducive market conditions, even mediocre funds can deliver an extraordinary performance. Often the mantra is - take on above-average risk and ride the wave.

But when the tide turns (as it has over the past 12-14 months), a fund's mettle is truly tested. The last few months have been particularly interesting. With the markets hovering around the 8,000-point mark, despondency had all but set in. And then came an uptick that took everyone by surprise. Speculation regarding 'the worst being over' and 'the commencement of a recovery' was doing the rounds. But alas, the victory celebrations seem to have been interrupted by the impending election results and the possibility of another hung parliament.

If you are an investor, it can be safely stated that these aren't happy times. The uncertainty is certainly not helping. But all is not lost. On the contrary, this is an opportune time to evaluate your mutual fund portfolio.

The evaluation needs to go beyond the obvious i.e. how a given fund fared on the downside. Sure, the latter is important and will play a significant part in the process. However, an equally vital evaluation will pertain to identifying the fund's 'true character'.

Each fund has a professed investment style; in mutual fund parlance, this is referred to as the fund's positioning. Say Fund A in your portfolio may be positioned as a mid cap fund. Now is the time to determine if the fund manager has walked the line and adhered to the stated investment style i.e. irrespective of the market conditions, does the fund continue to be invested in mid cap stocks in line with its investment objective/positioning.

There will be a case for raising a red flag if you come across the professed mid cap fund making substantial investments in the large cap segment, simply because the latter has been less impacted during the downturn.

Then there are funds which state that they will be fully invested at all times i.e. they will refrain from taking cash calls. This investment style often flows from the philosophy that fund houses are custodians of investors' monies for investment purpose as opposed to holding cash (making investments in current assets).

The red flag scenario: A fund house which believes in holding portfolios that are fully invested at all times, performs a volte-face and holds a substantial portion of its portfolios in cash to minimise the brunt of falling markets.

Hybrids i.e. balanced funds and monthly income plans (MIPs) are often referred to as tools of asset allocation, on account of investments in both equities and debt. Theoretically, by diversifying across asset classes, hybrids are better equipped to safeguard the investor's interest when a given asset class hits a rough patch. When equity markets run into rough weather, a balanced fund can score over a conventional equity fund on account of its debt holdings.

Now is the time to find out if the hybrids in your portfolio are playing their part as required. Failing to do so (say a balanced fund that insists on being largely invested in equities akin to a conventional equity fund) defeats the purpose of investing in a hybrid.

Why it is vital to conduct the aforementioned exercise
Wondering why it is vital to conduct the aforementioned exercise (incidentally, the above list is not a comprehensive one; these are some among several tests that can reveal a fund's true character). Another question could be that some of the 'red flag' scenarios were aimed at protecting investors' interests. Hence the same should not be held against the fund house. Here's why this argument doesn't hold good.

A fund is not an 'end', it is simply a 'means' to achieve an end. In other words, the fund should find place in a portfolio because it can play a specific part. And the part played by the fund is inextricably linked to its nature/unique characteristics. Should the fund deviate from its defined character, there's a fair chance that the portfolio might fail to deliver on expected lines and in turn, the investor may fail to achieve his financial goals.

What you must do
As an investor, you must ensure that you are invested in funds that have a defined character and a reputation of not having deviated from the same. Furthermore, once the investments are made, a review of the funds' performance (including adherence to their stated investment style) must be made. The financial planner/mutual fund advisor will have a critical role to play in the review process; expectedly, the same must be conducted on an ongoing basis over a period of time. The advisor will be equipped to distinguish minor aberrations from significant deviations. And given the challenging investment scenario we are faced with at present, the resolve of even the most resolute fund houses and fund managers is likely to be tested. Hence, the importance of conducting a thorough review now!

5 investment tips from Batman

Surprised to read about Batman and investments in the same sentence? Don't be. Not many would associate a comic book character with investing. However, there's a lot that investors can learn from the Dark Knight and his modus operandi.

Here are 5 investment tips from Batman.

1. No super powers, but he's still a super hero!

Interesting, isn't it, Batman has no super powers. Unlike his fellow caped crusaders, he can't fly; neither can he spin a web and swing across buildings. In effect, he is a super hero with no super powers. All he relies on are his physical and mental skills like a mere mortal. And yet, he emerges a winner every time.

Similarly, investors must appreciate that they don't need to be 'investment gurus' to achieve their financial goals. All they need to do is, invest in a disciplined manner and keep things simple at all times. For instance, investors should be unambiguously aware of their investment objectives i.e. what they want to achieve via their investments. Also, they must understand the characteristics of the investment avenues deployed i.e. the pros and cons. Having a contingency plan i.e. a 'plan B' is vital as well. There's no reason investors can't succeed, if they stick to the basics of investing and adopt a diligent approach.

2. The omnipresent Batsuit and Batmobile, among other gadgets

Ever noticed how Batman uses a plethora of gadgets. But primary among them are the Batsuit (with the utility belt) and the Batmobile. No matter what the situation, the aforementioned always have a role to play. While other gadgets keep appearing in an intermittent manner, these are the mainstays of his arsenal.

Investors must ensure that they have a solid core portfolio in place. It can be comprised of various avenues like mutual funds that have stood the test of time, bonds/instruments backed by a sovereign guarantee. Gold must find place in every portfolio from an asset allocation perspective. Although not in the domain of investments, the importance of being adequately insured cannot be overstated. A term plan is an ideal way to acquire a substantial insurance cover at a low cost. Opting for medical insurance is pertinent too. Once a solid core portfolio has been built, other avenues can be included in the portfolio, depending their suitability for the investor.

3. Robin and Alfred to the rescue …

Despite the fact that he's a bonafide super hero, Batman is never short on allies. For example, for advice, he turns to his mentor Alfred, who also doubles up as his butler. And, when its time for action, Batman's protégé Robin isn't far away. Commissioner Gordon and Lucius Fox have a part to play in Batman's crime-fighting escapades too.

For investors, the most important ally is the investment advisor/financial planner. This individual should act as the bridge between investors and their financial goals. He is required to have a fair degree of expertise as far as investments go and must consistently work in the investor's interests. Investors on their part must ensure that they are always associated with a competent and committed investment advisor.

4. Batman preys at night

Unlike other super heroes who operate in broad daylight, Batman preys at night. In fact, he uses the cloak of darkness to his advantage. In other words, he steers clear of the herd mentality and adopts an approach that is suited to him. That makes Batman, a bit of a contrarian vis-à-vis his peers.

It is not uncommon for investors to get swayed by trends and popular opinion while making investment decisions. Over the past few years, avenues like tech stocks/funds, ULIPs (unit linked insurance plans) and NFOs (new fund offers), among others have at various points in time, captured the investor's fancy. Several investors have been guilty of getting invested without fully understanding the investment proposition on offer or evaluating the suitability. Typically, this phenomenon can be attributed to herd mentality i.e. investors got invested simply because everyone around them was doing so. It is important for investors to make investment decisions based on what is right for them, rather what everyone around them is doing.

5. The baddies keep coming back …

Batman has to contend with an impressive list of super villains - the Joker, the Penguin, Two-face, the Riddler, to name a few. Sure, Batman beats them every time, but they keep coming back. And the eternal battle between good and evil continues like an ongoing saga.

It's no different with investments. The process never really comes to an end, not even for investors who may have that ideal portfolio in place. Changing economic environment and risk appetite are some of the factors that necessitate a constant review of one's investment portfolio. A fulfilled need will be replaced by the emergence of a new one. Investors would do well to appreciate that investing is not a one-off activity. This in turn, reinforces the need to devote adequate time to the investment exercise.

Clearly, there's a lot that one can learn about investing from the Dark Knight. From an investor's perspective, the key lies in utilising these pointers to achieve his financial goals.