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Why Avoid Small Cap Mutual Funds

July 10, 2011 2 Comments

Mutual funds are largely retail investment products.They are more suitable for saving money rather than make it grow at astonishing rates.They are largely targeted at middle class investors.However wealthy investors too continue to invest in mutual funds.The advantages of getting professional investment management and not having to deal with researching stocks , trading and tracking a portfolio is too much to give up. However mutual funds investing exclusively in small cap companies are not very popular with more sophisticated investors.This is because mutual funds are not the best way to invest in small cap companies.

Consider this: There are 62 funds in Value Research’s Mid and Small Cap category. Of these, no more than six are either exclusively or primarily focused on small-cap stocks. These funds have had a patchy performance with a large amount of volatility and have been unable to give attractive returns even over relatively long periods of time. Of course, volatility is a given in any small cap portfolio because smaller companies tend to react violently to any change of mood. However, the whole idea is that the investment manager will eventually be able to build a decent base of investments in a set of small-cap companies that are on their way to growing out of the category and into being mid-cap companies. Here lies the problem. If a knowledgeable and expert investor were to do this directly, he would probably identify a handful of companies and then would slowly build positions in them.

Rakesh Jhunjhunwala On Investing Your Way To Wealth

June 11, 2011

Mr. Rakesh Jhunjhunwala, combines diverse skills as a equity trader, visionary investor and incubator of new businesses through private equity.He is the first dollar billionaire from India to have made all his money by investing–primarily in stocks.Converting Rs 5000 to a billion dollars is no mean feat.Moreover since he deals exclusively in Indian stocks and often in publicly traded companies, whose shares we all have access to,it’s well worth spending time learning how to invest one’s way to wealth from him.

Firstly,Rakesh believes that the choice of asset class is important . As he says”If you bought gold in 1970 and sold it in 1980, you bought the Nikkei Index in 1980 and sold it in 1989 and then bought the NASDAQ [till before the dot-com bust], you would have made 33% compounded returns in three decades.”Personally, under the guidance of Mr Radhakrishna Damani, he made a lot of money shorting stocks at the time of the Harshad Mehta scam post 1992.As he says,”My decision to aggressively invest in the asset class of Indian equities at the right time was a very important determinant of my success.”As Rakesh believes that the mother of all bull runs is still to happen in India ,for people like us,sticking to Indian securities as an asset class might not be such a bad idea! Read more of this post

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Some Assumptions To Check Before Investing

February 19, 2011 4 Comments

The human brain is fascinating in the way it can use a rough form of inductive logic to help us make sense of our very complex world.But the human brain is not infalliable.Mental heuristics in the form of common sense,educated guesses,rules of thumb,intuitive judgments,etc.can help us find a good enough solution fast, when an exhaustive analysis is impractical.But at the same time such heuristics can lead us to over-generalize and make mistakes.Here is a checklist of some common traps to avoid falling into while investing:

Correlating GDP growth and market performance. High GDP growth rates don’t always translate into stockmarket outperformance. This may be due to three reasons—(a) unlisted companies may contribute to a large part of GDP growth; (b) while the listed companies’ net profit may grow, dilution of capital through periodic issuances will adversely affect earnings per share (EPS) and return-on-equity (RoE), thereby, impacting stock prices; and (c) the nature of stockmarkets, which serve as leading indicators, resulting in prices surging ahead well ahead of the actual GDP growth and, then, plateauing out for a long period once the growth actually materialises. Read more of this post

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Company Deposits – Caveat Emptor

January 20, 2011 1 Comment

When inflation is high and interest rates on term deposits and bonds are low, or when fixed income instruments start offering equity like returns during liquidity crunches, company fixed deposits become tempting. Here are a couple of things to consider to rein in your greed.

1.No one became a billionaire via company deposits, unless he owned the company taking the deposits, so hold your horses.Company deposits can be tax inefficient, so think twice before sticking your in money here.

2.A company FD is an unsecured debt so if a company is liquidated, FD holders are paid after debenture holders and commercial lenders. By then there might not be enough to pay back the principal, much less interest. Liquidation proceedings take time so even whatever little money might be returned to you will take a while to come. So avoid companies with accumulated losses. Read more of this post

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Running The Interest Rate Race

January 19, 2011 2 Comments

In inflationary times fixed income instruments may not be such a great idea , especially if the interest rates are just not that high.But there is no way we can avoid these instruments.

1.We need them to add steadiness to our portfolios especially when the stock markets show volatility.

2.We need them to park the money we plan on using within a definite time horizon.

3.We need them again when we have to route a steady stream of payments into another investment and want to simultaneously avoid both the risk of a capital loss due to a short term investment in a mutual fund and the low returns of a liquid fund.

In such a situation we just need to find the highest possible interests which our funds can earn in a given time over and above the rate of inflation while simultaneously reducing the risk of capital loss. Read more of this post