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Tuesday, April 21, 2009

A Correction and some Observations about Mutual Funds and ETFs

About index funds and ETFs

This discussion is not about the correction that has been seen in global stock markets this week. In an article about two index funds, I had discussed about ICICI Pru Index Fund Retail and UTI Sunder. My broker pointed out that UTI Sunder is not an index fund but an index ETF. That means you require a demat account to purchase or sell units of the fund. The oversight is regretted.

Index ETFs are supposed to track the index closely. But due to the very low volume of transactions in the UTI Sunder ETF, unit prices move abnormally higher or lower even on small transactions. Investors may be better off with Nifty BeES, which tracks the Nifty more closely and has decent volume of transactions as well.

About SIPs

I often receive queries about SIP (Systematic Investment Plans) in mutual funds. My bias against SIP has been documented in this post. However, SIP works if used during sideways consolidation patterns - like the one we had in the Sensex for the past 6 months.

If you have the self-discipline, then keep the investment date flexible. Signing up for a SIP plan with a mutual fund every month or every quarter locks you into specific dates. You won't be able to take advantage if there are sharp market turns in between.

About Debt MFs

Some times investors ask me if they should put money into a debt mutual fund instead of a fixed deposit. I am old fashioned and have never invested in debt MFs. I like the assured return in a FD, even though the return is taxable. A quarterly interest payout from FDs provide a regular cash inflow - which a debt MF may not be able to match.

About Sector Funds

These are more risky and volatile than diversified equity funds. Unless you have a very good reason, avoid sector funds. There were a plethora of infrastructure fund offerings during the bull market. Many performed spectacularly. But their fall has been equally dramatic.

The only exception would be if you really know every thing about a sector, let's say the banking sector, that needs to be known but do not have sufficient cash to deploy in more than one stock. In that case, an investment in a banking sector fund may work for you.

About Gold ETFs

Buying and storing of gold - whether bars or coins or jewellery - has been a tradition with many Indian families. With the advent of gold ETFs, the hassle and risks in storing physical gold can be avoided.

According to some gold analysts, the bull period in gold has not ended. It is about to get even bigger and stronger. I've never bought gold or gold ETFs. But with the current uncertainty in the global economy, a small investment - not more than 5% of total investment portfolio - may not be such a bad idea. I'm looking at UTI's gold ETF for possible purchase.

If any reader has a better idea, I'd be more than happy to hear from you.

13 comments:

Rishi said...

Subhankarji,

How about investing in fixed deposits offered by public companies directly? They offer a competitive interest compared to fixed deposits by bank. They also offer an additional % if one is a employee, senior citizen or a shareholder of the company.

Thanks
Rishi

Subhankar said...

Hi Rishi

This can be a good idea only if you are very sure about the company management. Thousands of investors - yours truly included - have been duped by unethical managements who had no capability or intentions of repaying the money.

I'm once-bitten twice-shy, and settle for PSU bank fixed deposits.

Alpa said...

Hi Subhankar,

While looking at Gold ETFs you may want to look at Gold BeES as trading volumes are significantly higher then UTI Gold ETF and corpus also is much larger.

High probability of debasement of developed currencies augur well for Gold. Only short term negative is potential IMF sale

Thanks

Alpa

Thanks ALPA

Subhankar said...

Hi Alpa

Appreciate the feedback. I'll have a look at Gold BeES, and at gold charts.

Eswar Santhosh said...

I agree with you about Company deposits.

My only deposit is currently a Post Office MIS, whose monthly returns are directed to a Recurring deposit. In "those" days, this was the best returning instrument. Even at today's rate, a CAGR of 9.67% for my age (Long way to go before becoming Senior Citizen to enjoy "special rates" :-) :-)) looks good to me.

I am invested in lot of debt funds as well - for the pure convenience they offer in terms of purchasing and redeeming them at will online. May be when I grew a little older and wiser, I may opt for Fixed deposits with PSU banks :-)

GoldBEES : Some brokerages do not even charge brokerage for this. There is some arrangement between Benchmark MF and the brokers. But, some doubts have been raised about whether they hold actual Gold to back up for the units.

On the other hand, would any Govt in the world want the resurgence of Gold to the world's only currency tag? I doubt it. May be they will do "something" to keep their useless paper currencies valuable?

Subhankar said...

Yes, Eswar, monthly income from PO MIS going into a recurring deposit is an excellent idea.

I have maxed out my investments in PO MIS (they have a limit of Rs 3 lakhs per individual and double or triple that amount for two or three joint holders). So, no choice but to invest in FDs - which were giving better returns till Mar '09.

Convenience of transacting online has to be matched with the risk of inadequate systems and security in most Indian sites. I had much less hesitation in transacting online in the USA (in spite of my age!).

Appreciate your inputs on Gold BeES.

Rishi said...

Hi Subhankarji,

Another investment avenue, NPS, the New Pension Scheme offered by the PFRDA.
Here is an article about NPS
http://www.valueresearchonline.com/story/h2_storyview.asp?str=100166

I hope the chosen AMCs will do a better job of managing the investors fund.

Thanks
Rishi

Rishi said...

Hi Subhankarji, Alpaji, Eswarji,

Is the gold held by the AMCs protected against theft or other natural calamities? Do the AMCs have an insurance? If they have an insurance wont the cost would become an expense at the hands of investor?
What happens if the a few percentage of gold is lost? How would the AMC account for it?
I remember reading a offer document stating[please forgive me for not mentioning the name of the funds, as i dont remember] the above mentioned threats as risks against physical gold.

Thanks
Rishi

Subhankar said...

Hi Rishi

Thanks for the info about the NPS scheme. Will take a look at it.

Hi Alpa, Eswar

Would you like to take a crack at clearing Rishi's doubts?

Eswar Santhosh said...

Rishi,

* One of the best sources of information regarding Gold ETFs is http://www.quantumamc.com/schemes/goldetf.html

* Coming to your question, I quote directly from the same page

"Investments by the fund will be made in physical gold which would be stored by the custodian and also accompany adequate insurance cover."

Goes without saying that Insurance cover would be part of the expenses.

* To answer your question on accountability for loss, here's what the offer document states --

"The salient features of the Custodial Agreement and responsibilities of Custodian would inter-alia include:"

"4. Responsibility for loss of / or damage to the physical gold and securities due to fraud, bad faith, negligence, willful
neglect, default, or willful default on Custodian's part or on the part of its approved agents."

Custodian for Quantum ETF is Deutsche Bank. And most probably, custodians would be banks for other schemes as well.

BTW, I have no association with Quantum MF or Ajit Dayal except that I read his Honest Truth columns regularly :-)

Subhankar said...

Hi Eswar

Appreciate your prompt and detailed response to Rishi's queries.

Hi Rishi

Eswar has pretty much addressed your concerns. Both of us owe him special thanks!

Rishi said...

Eswarji,
Thanks a lot for the detailed, prompt explanation and link.

Subhankarji,
Thanks to you too, for encouraging discussion on your blog.

Cheers
Rishi

Subhankar said...

You're welcome, Rishi.

As you've probably found out by now, commenting and discussing on this blog can be 'reward'ing as well!;-)