Keep Investments on Track

By Dhirendra Kumar | May 6, 2009

In an exclusive show on All India Radio, titled Market Mantra, Dhirendra Kumar, CEO, Value Research, answers listeners’ queries to help them make better decisions on how they invest their money. Here are the excerpts:

I want to invest Rs 5,000 through a systematic investment plan (SIP) now and I would need that amount after 10 years. Where should I invest?
If you invest Rs 5,000 per month, even in a bank deposit or a recurring deposit, it would translate into more than Rs 10 lakh in the next 10 years. For maximizing returns in 10 years, I would suggest that you should choose a balanced fund. It is a fairly conservative way of getting an equity exposure. Choose one or two good balanced funds and invest regularly and review your investment every year.

I have invested in Kotak Mahindra Techno Mutual Fund. Now, I don’t know if I should sell it or retain it?
This fund has been struggling since its launch. This was the last technology fund that was launched near the end of the tech boom. I think the outlook for technology is average. Current expectation is that there will be some gain and some loss which would balance the whole thing, making it an average story. If one has to follow an average performance then why not do so through an equity diversified fund. That is why I would suggest that you should sell this fund and invest with K-30 or any other good diversified fund.

According to newspapers American banks and the country itself are in dire straits. Can we figure from this that the recession is a blessing in disguise for us as it will ensure more investments head for Indian shores and in due course our economy will be very strong?
There is a possibility of this happening. Because there are people with hopes like this, stock markets are climbing fast in recent weeks. There is nothing else that we can ascribe this upward movement to. Nothing has happened fundamentally either at the micro or macro level to which we can ascribe such huge movements. But the bail-out packages that are being unveiled all over the world, worth $ 4 trillion or so, will help ease liquidity around the world. And there is hope among the people that a small or maybe substantial part of it will definitely come to India.

I invested in IDFC Dynamic Bond Fund in January. After that there have been two rate cuts and still the fund has not performed well, at least as per my expectations. Going forward how do you look at the bond market?
Since January most intermediate and long-term bond funds have not been able to deliver any results simply because the rate-cut was well anticipated, and prices of bond funds actually went up. And what we saw in the last quarter of 2008 was perhaps the best period for the bond market in the past 10 years. You would have faced a situation of losses of 5-to-10% which by now (19/4/2009) would all have been recovered.
Going ahead, I think that the market is not going to be every easy either. There are conflicting signals, the rates might go down, but the government borrowing programme is proving to be a big unbalancing factor. So, that makes the whole outlook for bond markets very hazy. I would say that if you are completely risk-averse then go for the very short end of the market , or if you have a one-year time horizon, then you may perhaps stay with this fund. The reason thereof is that the 10-year yield has oscillated between 6-7% quite a few times in the past three months.

I invested in JM Agri & Infra Fund two years ago. However, its poor performance is frustrating. What should I do, sell it or retain it?
When the fund was launched the market was upbeat. The period that followed saw a decline which has taken it to a level we have never seen before. I am not very hopeful about the JM Fund company. The CIO has gone. This fund has quite a bit of struggle ahead in managing the money. Problem is that, every time this fund will perform a little better, it will face redemption pressure. Also, the profile of the portfolio comes into play -- it’s into mid- and small–caps. At a time like this, a rise in the markets would bring some gains.
I think it is about time to square up your losses. This is the time to reduce losses a little bit and bid good bye.

My father has passed away recently and we are unable to track his broker. Can you help us?
The easiest way is to track funds through bank accounts. You will see all the debits from his bank account to respective funds.
Unlike a stock brokerage account, if he was dealing in them then all his securities would be in one or two demat accounts with a brokerage firm. Unlike them, all mutual fund investment are done independently and you don’t need to figure out who the broker is.
You need to check from his account statement as to which fund company the money was credited to. That would help you figure out all his investments -- because the debits from his account will show the precise name of the fund and the date of investment. This information will be good enough for you to be able to get his account statement -- the status update.

I invested in JM Financial Mutual Fund. Now there is some trouble and Nimesh Kampani was facing the possibility of being arrested. So, I wanted to know, in this situation, how safe are my investments?
Your money is safe. But the investments you have made have gone down in value substantially because of the decline in the market. Mutual funds as a structure are safe, but you are not safe from the market risks you are exposed to. I think there is a big question mark on the performance of the fund and that is reason enough for you to be worried about your investments. You will have to take a call on that.
I don’t think there is any possibility of Mr. Kampani landing into any trouble and also, JM Fund is unlikely to get affected by that. The reason for that is simply because the money you invest lies in a bank account and from there it moves to a custodian account and all the securities are kept in a trust. So, going by the legal structure, your money is safe. I don’t think you should be guided by anything happening to Mr Kampani.

Which policy of the LIC is good enough to invest in?
I don’t think insurance should be looked at from an investment point of view. If you have dependants then find out about LIC's term insurance plan. For investment purposes either go through mutual funds or if you would like to participate directly, then make your own portfolio. Using insurance for investment purpose is not a good idea.

I would like to know about arbitrage funds?
Markets are always volatile. Sometimes we like the volatility and sometimes we don’t like it. Arbitrage funds are very low-risk by nature, but that also means you are never going to get any substantial returns out of them. The reason for that is because arbitrage funds function in a defined way. They try to capitalize on the pricing of a future contract existing in the market. Fund managers try to simultaneously capture these opportunities.
If there is a future contract for a specific stock or the index, the fund manager will buy the security and sell the future contract. This is the only kind of transaction that happens. These funds look very sophisticated, but by their design, the returns they have always given are positive, but very low. They are comparable to risk-free funds, which give very low returns too. These funds are able to generate better returns when markets are extremely volatile. But don’t expect double-digit returns in a year’s time.

I have invested in 2 funds three months ago. One of them is Reliance Diversified Power Sector Fund and the other was Sundaram Capex Opportunity Fund. Right now, the profits are good. So, should I redeem or wait for the corrections or continue holding them?
I don’t know. The truth is, it is extremely difficult to help you time the market perfectly. If you have a very specific objective, if you have achieved a goal, if you have invested Rs 1 lakh and it has become 1.5 lakh and you can buy something which you plan to, then go ahead and do it, because there is nothing better than that. If you are able to reach your goal a little ahead of time so much the better. But if it is a long-term investment, then the biggest challenge with your money, after you pull it out would be, what to do with it?
The market started rising sharply six weeks back. I was thinking that four weeks back, it was totally unreasonable for the markets to rise. They are racing ahead too wildly without a reason even though all kinds of bad results were pouring in. My column in Hindustan Times, published every Monday, highlights my bleak outlook. Today, again we see the markets are up. If you seek my guidance, then I am more likely to misguide you, but what I know is, once you pull out your money then it becomes extremely difficult to bet again. My approach is that these kinds of funds are a little more risky than a generic fund. I would suggest that you should moderate your approach from a diversified power sector fund to Capex opportunity fund -- at least they will be diverse.