Portfolio diversification

I look at my current portfolio, do some analysis and think these are the few diversification I will make over the next few months ( or the year maybe) -

1. I have a decent exposure to debt - but that is primarily in the form of my provident fund which earns me 8% ( think that's what it is now). No short term debt ( have some , but a convoluted Overdraft on that is what is my working capital for a lot of expense I am incurring now). so should I increase my debt portion? not sure I want to do it. I will need some cash as backup and they will primarily go to create a OD with some debt backing them
2. Commodities - this will be the next big thing in India ( it already is) - but I don't trade commodities. ( here my attraction is in the agri related commodities and not ferrous/ non ferrous metals). Agriculture has lagged in our economy for far too long. Given the fact that 60% of the population is dependent on it and we need to secure our food security, I expect movement on this area , more out of force than genuine concern. Its a 2-3 year play and should be very rewarding. I am still not sure how to play this, but will keep you posted
3. Gold - I think this is an asset class I will need some exposure to. I can do it either thru physical gold, Gold ETFs and through a hybrid fund like DSPML which invests across the gold value chain. I am not sure if physical makes sense, but will evaluate the other two.
   
4. Commercial real estate - I think this will create a cash flow scenario. Also , when I say commercial real estate, its basically a small office/ shop version - This will need me to put down some capital and leverage hard. I am hoping the real estate will fall further to allow me to pick some up. This will need lots of cash, I might just have to team up with a few friends ( assuming they are willing). Here once the REITS come in, I should be able to build an exposure, but I think that is atleast 13 -15 months away in India.
   
5. Some other slightly weirder ideas - like financing a moveable asset like a mini truck, or some small microfinance institution, or something.
   

Keep in mind that I don't have huge sums - I am assuming here, I will find like minded people and find the right opportunities. I want to take slightly larger risks, diversify the cash flows and see if I have to guts to take the opportunity given by the Indian economy to the build capital for myself.

Anyways, My dear reader, thanks for visiting me. Some of you are regulars I know, some land up through some search engine. Keep coming back, leave a message to let me know who you are, ask if you want me to write about something you feel I am capable of having an opinion worth airing...Keep me in business. Wish you a very happy and prosperous happy new year.

Investing in mutual funds – building a balanced portfolio

I have in the past blogged about going about investing here. I will jump a step and write about building a balanced mutual fund portfolio. I will address the debt side of mutual funds in a separate post on building your debt portfolio, so this post refers to only equity funds. Some steps I think are critical –

1. Get the funds right – Portfolio theory and investment theory says, diversification helps – the same applies for a mutual fund portfolio too. So you should plan to build one. And Remember this is going to be long time bound, non exciting, non sexy action which will make you cringe when the guy in the next cubicle is boasting of his 70% profit. But trust me, if you are not a gun in stock picking and don’t have time, go for mutual funds. A well balanced portfolio needs to have these funds I think

a. Core equity funds – Here you should have two sets of funds : one a bottoms up stock picking type with a large cap bias and will usually be stable in their returns and move with the Sensex or Nifty. The second should be a good growth fund that bets on the growth stocks. Remember although growth stocks tend to be the mid cap/ small cap stories, a growth fund targets returns and not capitalization. This should be a large chunk of your portfolio maybe ~40%. In case you are investing for the sake of tax saving in ELSS funds, then add them here.

b. Index funds / Exchange traded funds based on the index – This will allow you to ride the market direction with a lower expense load. Choose from a wide range of index funds or ETFs available. Keep in mind that if the core equity fund you chose has a largely the same companies as the index fund then you are losing the benefit of an exchange fund and losing on the expense. This should be ~20%-25% of your portfolio

c. Contra fund – This takes bets on stocks which are currently out of favour with the market. Use these funds to give that occasional punch to the portfolio and this should be about 15% of the portfolio.

d. Thematic / Go anywhere funds – These are funds with a mandate to go anywhere, invest in any story and take concentrated bets or diversify. In a volatile market like India these are funds which, if nimble, will make money due to emerging themes. This should be about 15%of the portfolio

e. Sector funds – These take concentrated bets on a particular sector. Ride the momentum and languish when the sector goes out of flavor. Send in 10% of the portfolio here.

2. Getting the mode of entry right: I would suggest you setting up a SIP on the core equity funds and the thematic funds, while sending those sudden bonuses and one time investments into the contra and sector funds. Remember the latter will increase the risk of market timing.

3. Watch the loads: some funds levy a higher entry load while others link it to an exit load with period of investment. ETFs and index funds have a lower load structure. Remember, loads eat into your returns.

4. Monitor your portfolio regularly: I would suggest a quarterly review, with a rejig once/ twice a year. Don’t touch your MF investments for 3-5 years atleast, see them grow. Use a good portfolio tracker like the one you find on sites like www.Valueresearchonline.com

5. Options – You will find Growth, bonus and dividend options. Dividend will have reinvestment and pay out options. Forget all these, remember, if u don’t need the money, choose growth and if u need the money choose dividend payout. The others don’t matter; they are a vestige of a period long bygone where taxation was an issue. But remember, if you investing in a ELSS fund to save tax, it makes sense to always choose the dividend option, since every investment is necessarily locked out for 3 years. You don’t have an exit option.

6. Forget the NFO’s go for good old tried and tested funds – very rarely do new ideas come to the market, when they do go for new fund offerings, else just invest in funds which have a track record. Although past performance in no guarantee of future, atleast it’s a better option than the new unknown

7. Close ended fund or open ended – the spate of NFO which claim to be better because they are close ended and hence give the fund manager a better control on investments , although true a little bit, is driven by the change in rules for amortizing the expenses. So cut through the crap, go for old funds, open ended and with a track record.

8. Throw your advisor out of the window if the first recommendation he makes is to invest in an NFO, unless he has very strong reasons about what is new about the fund and how there are no such funds available already.

9. Remember the difference between absolute performance and relative performance – All Mutual funds will boast of how they outperformed the market, but they are referring to relative performance to the index they chose to be benchmarked against. So if the index fell by 150% and they fell 149% they will still claim to have done better. And remember to include that load when you are calculating the returns. Me and you are bothered about what is the absolute performance… go back open the 7^th standard mathematics text book and learn how to calculate simple returns if you are not sure..

Happy investing , in a country where financial assets are a piddle , use this mode till you feel comfortable to venture alone in the jungles of the Indian equity market

All about managing money...

Am down with a bad cold and fever.... so some random tidbits/ observations :

1. You make money by taking concentrated bets - if you are convinced about a stock and can lose all the money you are investing in it, then bet a substantial portion of the portfolio in it. Remember - a 100% return on a 10% part of your portfolio is not much if the others are averaging 25% - A study says, most people in the Forbes richest 400 made it there because of the one big idea that worked for them. So spend sometime, research and come up with a few bets u think will work
2. Once money reaches a critical mass - passive income keeps you going if you harness the power of compounding. So while the attraction of being frugal might not seem great, frugality when you still can ( read : no wife, no kids, no huge medical bills, lifestyle diseases) pays well when you want to party later - so make that large sum of money and build capital
   
3. Use Leverage - Debt is a bad thing. I plays on your mind and creates chaos in times when you want to splurge. But then when investing using debt prudently will allow you to add that zing to your effort to build a passive income stream. Set a level , say you will use 20% of your current income to service debt, that should allow you to get 10X of that money to invest, club it with your capital, which is usually 25% margin and voila you have an asset of 12.5X. Remember - don't use this for stock market investing or debt or commodity. Use this for real assets where the return is higher than the cost of debt
   
4. Protect your capital through diversification - Before you think I am joker who has lost it due to fever, ( Pt 1 says - take concentrated bets, and here I say otherwise) - The same study also says that on an average over 3 centuries ( or was it some lower number of years?) only 20% of people remained in the next Forbes 400 richest list. The ones who did diversified. This is simple, once you have capital built, diversify and protect it from cyclicality.
   
5. Don't self medicate - Since you will not operate on your loved one and will seek a doctor, why do you think you can invest on your own? ( Yeah we know you made 100% on the stock market last week, my pet fish can do better in this market bozo!!) - so set aside a part of your portfolio to be managed by the ( so called !!) experts - Mutual fund ( for aam junta like you and me) , Portfolio managers ( for creatures of higher living) and maybe own fund manager ( Read : Azim Premji , Narayan Murthy , Anil ambani etc who can setup a private equity fund from their dividends)
   
6. Don't forget leakages - Shoddy government working, death, taxation and transaction charges are the only certainties in life - cant avoid the first two, don't let the latter two kill the return % ( and you thought love was also a certainty?)
7. Don't forget to have fun - All the bloody money in the world is to let you have the choice to say "No I don't want to do that crap, maybe something else" - so work towards freedom of choice.