Warren Buffet's advice for 2009

• Hard work: All hard work bring a profit, but mere talk leads only to poverty.
• Laziness: A sleeping lobster is carried away by the water current.
• Earnings: Never depend on a single source of income. [At least make your Investments get you second earning]
• Spending: If you buy things you don't need, you'll soon sell things you need.
• Savings: Don't save what is left after spending; Spend what is left after saving.
• Borrowings: The borrower becomes the lender's slave.
• Accounting: It's no use carrying an umbrella, if your shoes are leaking.
• Auditing: Beware of little expenses; A small leak can sink a large ship.
• Risk-taking: Never test the depth of the river with both feet. [Have an alternate plan ready]
• Investment: Don't put all your eggs in one basket.

Why Lehman and Merrill fell ?

• IT all began with the sub-prime crisis. If you lost your money in the market crash of January 2008, here's the route to your loss, in chronological order.
• 2001-2005: House prices in the US begin to rise rapidly. Banks lend aggressively and create a sub prime industry.
• Sub-prime lending refers to lending (at slightly higher interest rates) to people who may not be eligible for a loan under normal circumstances. Maybe they don’t have a regular job or income, or have defaulted in the past.
• Banks traditionally did not lend to such people due to high risk of default. But since these loans were mortgaged against property and property prices were rising continuously, banks started doing so. If customers defaulted, they could sell the mortgaged property.
• 2005: The booming housing market halted abruptly in many parts of the US.
• 2006: Prices are flat, home sales fall.
• February 2007: Sub-prime industry collapses in the US; more than 25 sub-prime lenders declare bankruptcy, announce significant losses, or put themselves up for sale. While they were lending, banks did not factor in the possibility of a fall in property prices. When the Federal Bank (the US equivalent of RBI) started increasing interest rates, the sub-prime borrowers started defaulting and banks started selling off the mortgaged properties. As more and more properties came into the market for selling, the property prices fell.
• August 2007: Many leading mortgage lenders in the US filed for bankruptcy
• March 2008: Bear Sterns falls.
• September 2008: Lehman Brothers file for bankruptcy. Merrill Lynch sells off to Bank of America.
• Between 2001 and 2006, the US financial markets had developed a new product – a bond securitised against the mortgages. In simple terms it means that the mortgage banks borrowed money against the mortgages on the condition that they would repay to lenders as soon as they recovered their mortgages. The lenders in this case were financial institutions (like Bear Sterns, Lehman and Merril Lynch) who in turn sold retail bonds to individuals. Sadly, the repayment never happened. And institutions like Bear Sterns, Lehman, Merrill Lynch and AIG were the casualties. Since the mortgages were not honoured, the banks could not repay these financial institutions who in turn could not repay retail investors.
• Link -http://wealth.moneycontrol.com/yourstartupkit/budgeting/why-lehman-and-merrill-fell-/10621/0

5 Minute Management Course

• Lesson 1 A man is getting into the shower just as his wife is finishing up her shower, when the doorbell rings. The wife quickly wraps herself in a towel and runs downstairs. When she opens the door, there stands Bob, the next-door neighbour. Before she says a word, Bob says, 'I'll give you $800 to drop that towel.' After thinking for a moment, the woman drops her towel and stands naked in front of Bob, after a few seconds, Bob hands her $800 and leaves. The woman wraps back up in the towel and goes back upstairs. When she gets to the bathroom, her husband asks, 'Who was that?' 'It was Bob the next door neighbour,' she replies. 'Great,' the husband says, 'did he say anything about the $800 he owes me?' Moral of the story If you share critical information pertaining to credit and risk with your shareholders in time, you may be in a position to prevent avoidable exposure.
• Lesson 2 A priest offered a Nun a lift. She got in and crossed her legs, forcing her gown to reveal a leg. The priest nearly had an accident. After controlling the car, he stealthily slid his hand up her leg. The nun said, 'Father, remember Psalm 129?' The priest removed his hand. But, changing gears, he let his hand slide up her leg again. The nun once again said, 'Father, remember Psalm 129?' The priest apologized 'Sorry sister but the flesh is weak.' Arriving at the convent, the nun sighed heavily and went on her way. On his arrival at the church, the priest rushed to look up Psalm 129. It said, 'Go forth and seek, further up, you will find glory.' Moral of the story If you are not well informed in your job, you might miss a great opportunity.
• Lesson 3 A sales rep, an administration clerk, and the manager are walking to lunch when they find an antique oil lamp. They rub it and a Genie comes out. The Genie says, 'I'll give each of you just one wish.' 'Me first! Me first!' says the admin clerk. 'I want to be in the Bahamas , driving a speedboat, without a care in the world.' Puff! She's gone. 'Me next! Me next!' says the sales rep. 'I want to be in Hawaii , relaxing on the beach with my personal masseuse, an endless supply of Pina Coladas and the love of my life.' Puff! He's gone. 'OK, you're up,' the Genie says to the manager. The manager says, 'I want those two back in the office after lunch.' Moral of the story Always let your boss have the first say.
• Lesson 4 An eagle was sitting on a tree resting, doing nothing. A small rabbit saw the eagle and asked him, 'Can I also sit like you and do nothing?' The eagle answered: 'Sure, why not.' So, the rabbit sat on the ground below the eagle and rested. All of a sudden, a fox appeared, jumped on the rabbit and ate it. Moral of the story To be sitting and doing nothing, you must be sitting very, very high up.
• Lesson 5 A turkey was chatting with a bull. 'I would love to be able to get to the top of that tree' sighed the turkey, 'but I haven't got the energy.' 'Well, why don't you nibble on some of my droppings?' replied the bull. They're packed with nutrients.' The turkey pecked at a lump of dung, and found it actually gave him enough strength to reach the lowest branch of the tree. The next day, after eating some more dung, he reached the second branch.. Finally after a fourth night, the turkey was proudly perched at the top of the tree. He was promptly spotted by a farmer, who shot him out of the tree. Moral of the story Bull Shit might get you to the top, but it won't keep you there.
• Lesson 6 A little bird was flying south for the winter. It was so cold the bird froze and fell to the ground into a large field. While he was lying there, a cow came by and dropped some dung on him. As the frozen bird lay there in the pile of cow dung, he began to realize how warm he was. The dung was actually thawing him out! He lay there all warm and happy, and soon began to sing for joy. A passing cat heard the bird singing and came to investigate. Following the sound, the cat discovered the bird under the pile of cow dung, and promptly dug him out and ate him. Morals of the story (1) Not everyone who shits on you is your enemy. (2) Not everyone who gets you out of shit is your friend. (3) And when you're in deep shit, it's best to keep your mouth shut!
• THUS ENDS THE FIVE MINUTE MANAGEMENT COURSE

William O’Neil's - Golden Nuggets

Noted to be one of the most important thinkers of the investing world in the last 30 years, William O’Neil is the publisher, chairman and founder of business newspaper Investor’s Business Daily, in the US. He is also the author of best sellers such as 24 Essential Lessons for Investment Success and How to Make Money in Stocks.

O’Neil blends a mixture of quantitative and qualitative strategies in his performance-oriented investing approach. His investment style is to seek out only those growth stocks that have the greatest potential for swift price rises from the moment they are purchased. He summarised his criteria for identifying a stock that’s about to head for the stratosphere in his well-known acronym CANSLIM:

C- Look for companies that have just announced increase in quarterly earnings.

A- Look for companies with at least five years of prior growth, at a compound rate of not less than 25 per cent.

N- The best stocks have a new story behind them, such as new and exciting products or new directors. They are also breaking out to new highs.

S (Supply and demand) - The less stock there is to buy, the more any buying will drive up the price.

L- (Leaders and laggards) - Stick with those stocks that outperform and shed those that underperform.

I– Identify the 3-10 best performing institutional investors. Check out the stocks they are buying as candidates for your own portfolio.”

M- Determine market direction by reviewing market averages daily.

Below are some of the golden nuggets from him:

• “Consider selling stocks that have not risen 20 per cent or more after 13 weeks. And consider holding those that have risen 20 per cent in 4-5 weeks. These may go on to be the biggest winners of all.”
• “Diversification is a hedge for ignorance. I think you are much better off owning a few stocks and knowing a great deal about them.”
• “The whole secret to winning and losing in the stock market is to lose the least amount possible when you’re not right.”
• “What seems too high and risky to the majority generally goes higher and what seems low and cheap generally goes lower.”
• “Even the most successful investors make mistakes. Poor decisions lead to losses, some of which can become quite awful if you are not disciplined and careful.
• You must positively accept that rule number one for the highly successful individual investor is always cut short and limit every loss.”

Link to the article -http://www.thehindubusinessline.com/iw/2008/04/20/stories/2008042050801300.htm

Common Investment Mistake

A common investment mistake for many people is they underestimate how long they will live. Today people are living longer on average compared with years gone by. Even if you do not agree with the fact that the average mortality rate is increasing, more people are reaching 80yrs old than ever before. You might be one of them. In which case, you need to think of having an investment strategy that takes into account your longer expectation of life on this earth and the lifestyle you want to live.

Not only do you need to consider how long you might live, but also you need to allow for the unexpected. You could be involved in a road accident or some other freak event that caused you to suffer loss of some physical function like a kidney or lung or an eye and your ability to earn money.

Yes, there are breakthroughs in medicine that are enabling people to overcome many of these life-threatening and debilitating diseases and physical loss as a result of an accident. Yes, in general people are better nourished and you can obtain fantastic supplements, like what I use, that enable you to have a much healthier life and not suffer from the ill effects of aging. But there is always the unexpected.

When the unexpected happens, suddenly the cost of everything goes through the roof. There is no time to shop around for the best price or the best service or the best product. An emergency situation means high priority and consideration of cost goes out the door.

One woman I heard about was having cancer treatment with Mayo Clinic. This left her with a debt of $80,000, which was money she did not have. What is frightening about her story is she still had the cancer and could no longer continue to get treatment. So this woman in her early 40s had to pay a large debt off for treatment that did not heal her condition. How do you think she felt? Fortunately, the products I take helped her condition, but she still has the debt.

When it comes to investment, it is prudent to consider investing so that you will have sufficient income to give you the standard of living that you are accustomed to for at least 100 years. This way you will be able to have peace of mind and financial stability for your entire life. You also have to allow for unexpected illnesses and accidents that could require costly medical treatment and nursing facilities. Often it is in the last 5-10 years of their lives that people are finding they need to be under the supervision of medical staff.

You can avoid this common investing mistake of not having sufficient funds as you grow older, by expecting to live longer and planning your investments to provide sufficient income for your entire life.

One of the ways you can invest in your future is to become involved in a network marketing company, which can offer you the prospects of continued growth and income throughout your life.

One woman I know retired at the age of 60 back in 1990 but then got involved with a nutritional product. Today, she is full of live and energy and is one of the top achievers in the company. Ill health and hospitalization have not been something she has had to worry about, but what has amazed her is how much more of her life she was prepared to throw away when she retired. Today she has more freedom, more money and more energy to enjoy life than she could have imagined back in 1990.

Yeh Sub-Prime Shub-Prime Kya Hai

You know a word has entered into the popular lexicon when they leave the preserves of blue chip investment banking offices and become the stuff that people in the Mumbai local train discuss. Suddenly news and television headlines are screaming "sub-prime" at us and everything from inflation downwards is blamed on this phenomenon.

So what is the sub-prime mortgage issue about, and what exactly happened in the US? Will India ever face a similar situation?

What is a sub-prime mortgage?

A sub-prime mortgage is a loan offered by a lender to a borrower with a poor credit history (meaning he has defaulted on his financial commitments in the past) against the security of his house property. Such borrowers are called sub-prime borrowers. Since the risk of default is high, these loans are offered at relatively higher interest rates compared to loans offered to people with an impeccable repayment track record. However these sub-prime mortgage loans are relatively much cheaper than completely unsecured loans to the same profile of borrowers. What was the US sub-prime crisis all about?

The US real estate industry witnessed a boom between 2001 and 2005, with property prices soaring to historic highs due to low interest rates and other factors. Some of the weaker borrowers, who were either on the verge of defaulting on their financial commitments or had already done so, owned house properties whose values had risen dramatically on paper. So lenders looking at increasing their margins were quick to spot an opportunity and lent money to such borrowers on the basis of this increase in the paper value of their homes and these loans were either used to repay the old loans or for other expenses. All was fine till the housing party crashed.

The US property bubble collapsed, and interest rates began to rise. The rising rates led to a spate of defaults by borrowers, as a result of which several US sub-prime mortgage companies had to declare bankruptcy.

The result was that the shares of lenders dealing in sub-prime mortgages took a tumble. That?s not all. The effect spread to the entire financial markets because these lenders had raised monies on the basis of such loans and were now not able to pay them back. And the ripple turned into a wave, affecting a wide section of the markets, and then spread overseas. The sub-prime situation in India

The US sub-prime crisis had a short-term impact on the Indian stock market and on credit instruments with overseas investments. Collateral damage in India was extremely limited, as Indian entities do not own structured finance instruments. But could such a crisis emerge in India?

In India, the market is more non-prime rather than sub-prime. Borrowers falling in this category may have never defaulted, but have low incomes or may not have proof of such incomes (like a small shopkeeper, who may not be able to show his income on paper). These people may have borrowed earlier, but from local moneylenders and not banks or formal institutions.

These non-prime borrowers in India belong to the economically weaker sections of society, with monthly incomes of around Rs 5,000?Rs. 10,000. They may pay interest rates as high as 45-50% on loans up to Rs 50,000, the reason being that default rates are always higher for such unsecured loans. In fact, there are lenders in the unorganized sector who may charge interest rates as high as 4000% per annum!

But despite the mind-boggling interest rates, non-prime borrowers still prefer their local moneylender to a bank.

Why? Let?s understand with the help of an example. A vegetable vendor borrows Rs 90 from a local lender in the morning and returns Rs 100 to him in the evening ? which works out to an interest rate of 4000% per annum. The advantage for the vendor here is that he has continuous access to cash flows. A bank does not usually lend for such short periods as a day, which may not suit the vendor?s needs.

There?s another psychological reason. When a vegetable vendor borrows Rs 90 and repays Rs 100 at the end of the day, he feels he pays only Rs 10, instead of 4000% per annum. A longer-term loan with an interest rate of 40-50% from a bank may feel too much for him. Even a daily loan at an interest rate of 4,000% from a local lender may seem preferable! And when it comes to repaying the loan, the vegetable vendor will repay the local lender, because he knows that if he doesn?t, he won?t get money the next morning to buy vegetables. His access to continuous cash flow will come to a halt. Also, the local lender may use muscle power to get his money back.

As a result, large banks find it difficult to penetrate the non-prime market, and may prefer to leave it to the smaller banks and NBFCs.

The percentage of defaults in this segment have now climbed to double digits for banks and NBFCs active in this market, and has become a major cause of concern. And they are finding that sending recovery agents to recover loans may be harmful for their reputations. In fact, recent reports suggest that ICICI Bank is likely to exit the non-prime personal loan business because of the high reputation risk the business poses.

In India, it is still difficult to get a loan even against a security (home, etc), if a prospective borrower has defaulted earlier. Owning immediately encashable security like jewellery or stocks might make it a little easier, but not much.

If borrowers lend indiscriminately, and lenders default in a big way, a crisis is certainly possible. But that looks unlikely for now in India.

Lakshmi Mittal is the richest Indian at $51 billion

These are heady times for India's richest. Thanks to a roaring Mumbai stock market, with a benchmark index up 53% in the past year, and a strong rupee that appreciated 12%, for the first time, all India rich-listers are billionaires. In aggregate, their wealth surged to $351 billion, a bit more than double last year's $170 billion, making India's 40 by far the wealthiest such group in all of Asia.

The four richest Indians are worth an astonishing $180 billion. Steel tycoon Lakshmi Mittal, who lives in London, is No. 1 again, worth $51 billion, but Mukesh Ambani, whose Reliance Industries is India's most valuable company, is quickly closing the gap. His net worth jumped $30.5 billion to $49 billion, making him the year's biggest gainer. His estranged brother Anil is close on his heels, up $30.2 billion to $45 billion.

Kushal Pal Singh, worth $35 billion after the listing of his flagship DLF, is now the world's richest real estate developer. Had these four been worth as much in March, when we published our annual list of the world's billionaires, they all would have ranked among the world's 10 richest--three would have been new to the top 10; Mittal was already ranked fifth. Together, the foursome is worth more than the 40 richest Chinese combined. Twenty-nine of the people who returned to the list are richer than last year. The only exception is Rahul Bajaj, who is battling his younger sibling over dividing their empire, and whose fortune was flat at $2.3 billion. Ten newcomers made the cut, including Guatam Adani, who built Mundra Port on India's west coast; Anand Jain, Mukesh Ambani's school buddy; and Gautum Thapar, whose Ballarpur Industries is India's largest paper maker. The red-hot real estate sector churned out a couple more billionaires as well: Niranjan Hiranandani, a surgeon's son, who built a thriving township in suburban Mumbai, along with his brother; and Rakesh Wadhawan, whose July listing of his company Housing Development & Infrastructure made him a billionaire.

A net worth of $1.6 billion was the minimum needed to make the list, up from $790 million last year. That meant folks like longtime member Naresh Goyal, the founder of Jet Airways, dropped off our list, despite his fortune rising 55% to $1.55 billion. Thirteen other billionaire fortunes missed the cut. They include Nandan Nilekani and Senapathy Gopalakrishnan, co-founders of software services giant Infosys Technologies, and self-made billionaire Jignesh Shah, who built India's largest commodities exchange. Also among this group of just-misses were five newly minted billionaires, including pharmaceuticals entrepreneur Murali K. Divi and India's bullish investor Rakesh Jhunjhunwala.

Near Misses

Fourteen with billion-dollar fortunes who didn't make the cut.

Besides being rich, one must be an Indian citizen to make this list. As a result, three non-India residents, including Lakhmi Mittal, are included, but construction magnate Pallonji Mistry, Tata Sons' largest shareholder, who has become an Irish citizen, is not.

Unlike our annual billionaires list, this ranking has been broadened to include family fortunes. For instance, Tulsi Tanti's $10 billion fortune represents his family's entire 70% stake in Suzlon Energy, not just his individual 29% stake that's reflected in the billionaire rankings. Net worths were calculated using Nov. 2 market prices and exchange rates. Privately held companies are valued by comparing them to similar publicly traded companies.

* Source - FORBES.com

How Retail Investors loose money?

The reason is simple - a retail investor is driven by greed or fear. Never logic.

• Retail investors are always the last to enter a bull run
• "Smart money" enters markets long time back when markets are at its bottoms, there is frustration all around and no one wants to discuss markets
• When markets start booming and indices make new peaks, the retail investor "wakes" up. At this stage, he is still not sure and is a fence sitter. Lastly, there is optimism all around. Every one is bullish and talking markets. Stocks which were never traded in a year, suddenly start moving and start reaching "new highs".At this time, the retail investor starts buying as he does not want to miss out the "action"
• The retail investor will display a marked preference for "low priced" stocks because these are "cheap". He will stay clear of index stocks as these are "expensive".This is also the time when "smart money" starts moving out
• When a correction happens, it is usually quite severe-The retail investor does one of two things. He either decides to wait (the optimism is still there) or he starts "averaging" his costs. Averaging is nothing but trying to "catch a falling knife"
• At some time or the other, panic sets in. The retail investor will then sell off all holdings as a distress sale.
• Sometimes the retail investor will do nothing but wait for the markets to rise. When the markets do rise, he will sell off all his holdings at the first available opportunity and thus miss out on the new bull run.
• In a bull run, the retail investor is usually the first to sell off his holding. This investor seldom waits for the bull run to continue.
• Those who have never participated when the rally started will invariably jump in towards the end of the bull runRetail investors rarely follow stoplosses. Circumstances eventually force them to take a bigger lossLastly, retail investors spend an insignificant amount of time researching an investment as compared to buying a mobile or fridge.

How to build a mutual fund portfolio?

One of the most common questions in front of every mutual fund investor.

Some useful suggestions from PersonalFN.com to clear the air:

http://www.personalfn.com/detail.asp?date=5/8/2007&story=1

This article was written by Personalfn for Business India, and was carried in its May 6, 2007 issue with the title, "Building a mutual fund portfolio". The original draft, in its entirety, has been retained here.

With new fund offers (NFOs) becoming the order of the day (there are dozens launched every month) in the mutual fund industry, investors often find themselves stumped while evaluating whether a particular fund should be a part of their portfolio. Add to this the fact that most of the NFOs fail to offer anything significantly different from existing mutual funds. This confuses the investor even further, since he is forever agonising on whether the NFO is truly a great investment opportunity as the advertisement often claims.

At Personalfn, we are flooded with queries from investors on how to go about building a portfolio that will involve minimal tracking and churning and can help them achieve their investment objectives over the long-term.

To be sure, this is not an easy task given the number of mutual funds in the market, many of which seem to be saying (as dictated by the investment objective) and doing (in terms of investments) totally different things.

Out of the varying categories of mutual fund investors (long-term, short-term, risk-taking, conservative), we have considered the category – i.e. risk-taking, long-term investor since a lot of investors belong to it or will belong to it at some point of time in their lives. Among the numerous problems plaguing the mutual fund industry, we have highlighted the ones that are particularly irksome for the risk-taking investor attempting to build a long-term mutual fund portfolio.

Building a mutual fund portfolio is not an easy task. For the benefit of investors, we have split this process in two steps. The first step, outlined below, is relatively easy as it involves eliminating the mutual fund schemes that should not be a part of your portfolio.

Step 1: Process of elimination Reason why we started with the process of elimination is because for some unfathomable reason, investors like to populate their mutual fund portfolios with a lot of schemes. Even more unfortunate is when you ask them why they invested in a particular scheme, there is no answer except the customary – my agent told me it’s a great fund. To investors who believe that more mutual fund schemes is in harmony with the principle of diversification and therefore a virtue, we would like to quote Warren Buffet, arguably the most successful investor of all time. With regards to diversification he says, ‘Diversification is a protection against ignorance. It makes very little sense for those who know what they are doing.’ So the need of the hour for the mutual fund investor is not to go by what his agent is telling him, but question the existence of every mutual fund in his portfolio so that he is left only with the very best and critical funds. The rest of the funds can be redeemed. It is vital for the mutual fund investor to guard against over-diversification; your fund manager (if he is smart) is taking care of the diversification. There is little point in diversifying something that is already diversified.

While eliminating mutual funds (whether they are a part of your portfolio or not), one has to keep some points in mind.

1. Restrain the urge to invest in sector/thematic funds no matter how compelling an argument your agent or the fund house makes. Over the long-term, there is little value that a restrictive and narrow theme can bring to the table. It is best to opt for a broad investment mandate that is best championed by well-diversified equity funds.

2. If there are two or more mutual funds that seem to be doing the same thing (in terms of mandate, style), then you have to ensure that you are left with just the best in that category and eliminate the rest.

3. Since equity funds are long-term investments, it’s a must to evaluate them over the long-term (3-5 years) and over a market cycle. That way you get a fairly good idea about whether the equity fund under review has stood the test of time. Many NFOs launched over the last 2-3 years have done reasonably well leading investors to believe they are well-managed funds, while the fact is that the markets have appreciated sharply over this period. So a fund manager would have to be really incompetent to lose money over this period. It takes a bear phase to separate the men from the boys.

Step 2: Process of selectionIf you have performed the elimination process diligently enough, the second step should come naturally. For instance, if you have ignored all the sector/thematic funds, that leaves you with just the well-diversified ones. Likewise, if you have disregarded the equity funds that have yet to complete a 3-Yr track record, you are automatically left with those who have a minimum 3-Yr track record. While selecting mutual funds, you must keep the following points in mind:

1. The debate on whether large caps or mid caps reward the investor better is an ongoing one and it would be inadvisable to choose one over the other because both have inherent strengths and (if well-selected) can reward the investor handsomely over the long-term. Therefore, there is merit in selecting a well-managed mid cap and large cap fund for your mutual fund portfolio. It also pays to invest in an equity fund that can invest in both large caps and mid caps depending on the opportunity; these funds are therefore referred to as opportunities/flexi cap funds.

2. On the same lines, investors should go for both – well-managed growth style and value style equity funds. This way they can capitalise on opportunities across the board. Growth funds invest in well-managed companies that are fairly valued with a view that they are likely to perform even better going forward. Value funds invest in well-managed companies that are undervalued (temporarily) with the view that they will achieve their fair value going forward.

3. Although, balanced funds have their own set of critics, for one, we are firmly in favour of them. We are further vindicated by the fact that most equity funds to be launched in the recent past have a provision to invest a portion of their assets in debt. The fact is, everyone, including equity fund managers, realises the importance of debt in a mutual fund. So including a well-managed balanced fund in your portfolio is a must.

4. Your selection process must be based on cold research and analysis; your agent, neighbour and colleague are welcome to air their views, but remember at the end of the day it’s your money, not theirs. While researching equity funds, go for the ones that have a 3-5 track record over a market cycle. The performance (or lack of it) of an equity fund during a market downturn should be noted. Usually, investors are enamoured by ‘bull run wonders’, ignoring the fact that it is actually the downturn that is the biggest test for the fund manager.

Speaking of the fund manager, don’t rely too heavily on him either; instead rely on a fund management team. This way, even if the fund manager quits the fund house (which is very common today), the processes of the fund management team can replace him seamlessly.

To summarise, the mutual fund portfolio of a risk-taking investor must include the following funds:

1. Large cap fund
2. Mid cap fund
3. Opportunities fund
4. Growth style fund
5. Value style fund
6. Balanced fund

A lot of what we have said in terms of the research process may appear a little difficult and time-consuming to the investor. That is not surprising, after all investing is a full-time activity and if you give it part-time attention, the results can be disastrous. That is why it is important to engage the services of a competent and experienced financial planner who can help you build a mutual fund portfolio on the lines we have recommended.

Are Markets Really Risky?

There was an American comedian who, whenever someone would ask him, "How's your wife?" would reply, "Compared to what"? The answer to today's big question is the same. Is equity investing too risky for the retail investors? Well, compared to what? The crucial issue is not whether the investor is retail or wholesale, but whether the investments are for the long- or the short-term and what kind of skills and presence of mind does he or she bring to the actual choice of investments.

Practically speaking, risk in the stock markets is a function of time. The longer the timeframe over which you invest, the lower the risk. Today, all this talk of the 'retail investors' losing money in the markets appears to be about individuals who normally do not invest in the markets but have perhaps come into the markets in recent months hoping for some quick gains. There are many such investors and it's possible that they will lose money. Nothing should be done about this. Such 'investors', retail or not, should not be surprised by their losses.

But there are long-term investors too who are feeling nervous at the volatility in the markets. Here, I think people need to define what is meant by risk and what is meant by loss. Most of us feel cheated whenever the market value of any investment declines. We invest Rs 1 lakh and in just a few months it becomes Rs 2 lakh. Then, when it comes down to Rs 1.6 lakh, we start crying about risk because we've lost Rs 40,000. This is not a loss. Such volatility is part of the same deal that gives us the high returns in the first place.

If you define risk as volatility (which most people do), then the stock markets are indeed very risky. But if you define risk as the probability of suffering a loss over a long-term (which is how I think individual investors should define it), then the risk is entirely manageable and largely dependent on the quality of your investment decisions. So how can you make sure that you make good investment decisions? That's simple--take the mutual fund route and leave it to someone with a public track-record of being a good investor.

Think about it for a moment. When someone gets a serious disease, should they go to a doctor? Or should they declare themselves to be 'retail doctors' and start treating themselves? Just because you have money to invest doesn't mean that you have the skill to invest any more that than having a disease means that you have the skill to cure yourself.

I believe equity investing is a highly specialised task that needs skills and judgement that only a few people have. I'm not saying that this is a skill that only professional fund managers have. There are many individual investors who are good at it and there are many professional fund managers who are lousy. However, it's easy-and dangerous-to convince yourself that you have what it takes to make good investments when the markets are booming.

The daily, hyperventilative tracking of the BSE Sensex in the media creates the impression that the stock markets are a high-risk casino where the one must stake all at unknown odds to stand a chance of making money. And actually, if you are a short-term punter that may well be true. However, for someone who has, over the years, invested steadily in mutual funds with good track records, the markets are an almost sure shot way of getting far better returns than any other investment can provide.

@ Investments, Risks, and Time http://www.valueresearchonline.com/story/storyview.asp?str=8874

The ABC of financial planning

If the future always went according to plan, financial planning would be a one-time exercise. But life throws a few curves now and then.

We all have dreams! For buying a new car, that dream house, getting their children married in style, or simply retiring early. All these are also significant financial decisions. Astute long-term planning may make life financially secure, while inadequate or misguided planning could turn it awry. The process of meeting your life's goals, through prudent management of finances is what is often referred to as `financial planning'.

Financial planning provides direction and meaning to your financial decisions. It allows you to understand how each financial decision can affect other areas of your finances. For example, buying a particular investment product might delay your retirement significantly. By viewing each financial decision as part of a whole, you can consider its short- and long-term effects on your life goals. You can also adapt more easily to changes and feel more secure that your goals are on track.

Financial planning covers the various facets of individual's financial needs, which include: Accumulating capital — Cash flow planning and budgeting Protection against risk — Insurance planning and risk management

Investment planning and advice Estate planning: Wills and trusts Retirement planning Tax planning

If you hope to realise your goals, you have to put a sound plan in place and follow it.Here are the six basic steps.

Step 1: Establish your goals. Think long and hard about what you want to accomplish in life — your current status and future potential of your earnings

Step 2: Gather data. Start by collecting all your bank and brokerage statements, insurance policies, real-estate documents, and maybe even your most recent tax returns. List your assets and liabilities. You will also need to gather records of all your sources of income and expenses, and anything else you can think of that is related to your finances.

Step 3: Analyse the data. At this stage, you will create a personal net worth statement and a statement of annual cash flows. You will also analyse the adequacy of your estate plan and insurance coverage. As the picture develops, specific shortfalls or excesses will come into focus, along with areas you need to change.

Step 4: Create a plan. Now you're ready to lay the roadmap that will help you accomplish your goals, given your risk tolerance and time frames. Your plan may call for immediate changes, such as diversifying your investments, shifting your asset allocation, consolidating accounts, optimising your insurance coverage, or drafting wills and other estate planning documents. Your plan may also call for longer-term actions such as altering your spending and saving habits over time.

Step 5: Implement your plan. Here's where the rubber meets the road; implementing your plan may involve opening certain types of accounts or purchasing certain types of securities, policies, funds or other financial and investment-related products. Suitability and performance hold the key here, of course. But remember, you can potentially boost the overall, long-term performance of your investments by keeping costs and expenses as low as possible. Also, take advantage of available tax-free and/or tax-deferred accounts, in addition to your regular taxable brokerage account.

Step 6: Monitor your plan. This involves keeping an eye on the performance of your investments, periodically rebalancing/churning your portfolio. In the absence of a major event in your life, once or twice a year should do it. Changing your plan

If the future always went according to plan, financial planning would be a one-time exercise. But life throws a few curves now and then. So, when you monitor your plan, revisit the goals you set in Step 1 as well, for two reasons:

You want to measure your progress towards your goals and objectives to make sure you are on track. Once in a while, you may find that your goals need to be modified. Get help if you need

The financial planning process is not exactly rocket science. However, given the specialty areas of income-tax, succession planning, retirement planning, insurance and investment planning not to mention how each of these areas can impact the others — it might pay to enlist some professional assistance, at least to get started.

@ ABCs of Financial Planning This article is authored by Rajesh Saluja, CEO, Financial Planning, at Ask Raymond James.

Link - http://www.thehindubusinessline.com/iw/2007/03/04/stories/2007030401061300.htm