Beta

Beta compares a mutual fund’s volatility with that of a benchmark and is supposed to give some sense how far you can expect a fund to fall when the market takes a dive, or how high it might climb if the bull is running hard. It is calculated using regression analysis beta as the tendency of a security’s returns to respond to swings in the market.

A fund with a beta greater than 1 is considered more volatile than the market whereas less than 1 means less volatile then the market.

Imagine that your fund gets a beta of 1.15 — it has a history of fluctuating 15% more than the benchmark if the market is up, the fund will outperform by 15%. If the market heads lower or dips, the fund will fall by 15% more.

Alpha

Alpha is an advance instrument designed to take beta one-step further. It takes the volatility (price risk) of a mutual fund and compares its risk-adjusted performance to a benchmark index. The excess return of the fund relative to the return of the benchmark index is a fund’s alpha.

A positive alpha of 1.0 means the fund has outperformed its benchmark index by 1%. Correspondingly, a similar negative alpha would indicate an underperformance of 1%.

Sharpe Ratio

It tries to quantify how a fund performs relative to the risk it takes.  For Example take a fund’s returns in excess of a guaranteed investment (a 90-day T-bill) and divide by the standard deviation of those returns. The greater the Sharpe ratio, the better a fund performed considering its riskiness.

R-Squared (R2)

It reveals what percentage of a fund’s movements can be related to movements in its benchmark index. An R-Squared of 100 would mean that all of the fund’s movements are perfectly explained by its benchmark. 

Standard Deviation

Standard deviation shed light on historical volatility. It is applied to the annual rate of return of an investment to measure the investment’s volatility.  It measures how far a fund’s recent numbers stray from its long-term average.  For example, if Fund A has a 10% average rate of return and a standard deviation of 5%, most of the time, its return will range from 5% to 15%.

Concluding, I would like to say that using the above mentioned tools one can provide some balance to the risk-return equation. If we use honestly the tools then we will better understand our investments, and perhaps will give us a truly full picture of our portfolio.           

Source: Investopedia.com

Mutual fund is a pool of money invested in accordance with the common objective stated before the investment to the investors. It provides the right opportunity to investors who lack ideas, expertise and/or time – to profit from the equity markets.  A variety of schemes are available to investors, including Debt-Oriented schemes, Equity Schemes, Balanced Schemes, Equity-Linked Savings Schemes, Money Market Schemes, Sector-Specific Fund, Index fund, etc. An investor in MF generally chooses the scheme as per his investment objective, risk profile, time horizon, etc. Here one can choose a fund depending how much risk he/ she is willing to take and when he/ she wants the money back. Ever since the equity markets have been enclosed by volatility, it is advised to invest through SIP route for the long-term investors.

In this article, we will discuss what is SIP and what are the benefits of SIP? SIP or systematic investment plan is a simple and time honored investment strategy for creation of wealth in a disciplined manner over long term period. It aims at a better future for investors by giving a good rate of return as compared to one time investor in volatile market by lowering the average purchase cost. It is evident from the recent slowdown that the Mutual fund invested trough SIP route has prevented the pitfalls of equity investment and is enjoying the high returns, if compared.  So it makes all the more sense today when the stock markets are volatile.

Below are some of the benefits of SIP.

Power of compounding:  If money is invested at an early age one can make money work with greater power of compounding with significant impact on wealth accumulation. The below table shows the impact of the power of compounding with different rates of return and at different time periods.

Rupee cost averaging:  It is not so easy to predict the movements of the market. Timing the market constantly is a difficult task for everyone. An automatic market timing mechanism that eliminates the need to time one’s investments is Rupee cost averaging. Here one does not have to bother about the ups and downs of the share prices or about the interest. Because investment of a regular sum is done at regular intervals with fewer units being bought ordinary stocks  and more units in Blue Chips stocks, which often gives good returns. Though SIP does not guarantee profit, but one can invest through it as it goes a long way in minimizing the effects of investing in volatile markets. 

Convenience: It is very easy and convenient to operate through SIP route as it could be done by simply providing post dated cheques with the completed enrolment form or give ECS instructions. The cheques can be deposited on the specified dates and the units credited into the investor’s account. The SIP facility is available in the Principal Income Fund, Monthly Income Plan, Child Benefit Fund, Balanced Fund, Index Fund, Growth Fund, Equity fund and Tax Savings Fund.

SIP features: If one would like to earn a good return from its principal then he should have a disciplinary approach. The disciplinary approach is a vital to earning good returns over a longer time frame.  Once invested through sip route, investors are saved from bothering to identifying the ideal entry and exit points from volatile markets.

Conclusion: Though SIP resolves a dilemma often facing investors due to ups and downs in the market price but investor finds it difficult to decide when to invest in the equity scheme. The success of investors SIP hinges on the performance of his/ her selected scheme. If the investor is able to make wise decisions and make the best of the Indian volatile market, SIP is definitely a powerful tool to create wealth over time.

At the onset let me clarify through this article that both options are different vehicles to reach the same destination i.e. successful investing in financial markets. Both options are subject to the risk of investing in equity markets and the returns achieved in both cases are subject to the performance of underlying stock markets. The vehicle that you select is largely dependent on your capability to assess various investment options, your risk appetite and the time that you can dedicate to this activity. If you are knowledgeable about investing, have lump sum money to purchase stocks of companies in different industries to allow for diversification and have the time to research stocks, then may be investing in individual stocks is a good starting point

Individual stocks or Equity shares are a type of security that signifies ownership in a company. Investors who own equity shares of a company are entitled to ownership rights, like voting for selection of directors on Board, share in profits of the company in the form of dividend or bonus shares, if Board of Directors and majority of the shareholders agree. The major difference of Equity investment from all other investment avenues is that it offers higher risk return trade off than any other investment avenues.

On the contrary mutual fund is a trust that pools the savings of a number of investors who share a common financial goal. Here an experienced fund manger invests the collected amount in capital market instruments such as shares, debentures and other securities. Availability of huge research base, desired knowledge and experience allows a fund manager to react to any sudden developments in a timely manner. An equity mutual fund is a diverse holding of stocks that are managed on behalf of its investors. It allows investors to take advantage of a diversified portfolio without investing a large sum of money.
Besides its pro’s it is surrounded by the con’s as well. In case of Mutual Fund investment, Investors don’t have any control of where their money is invested. Moreover they cannot customize their investments.

Below written are some of the key factors that would help you in deciding whether to invest directly in the stock markets, or through equity based mutual funds.

The first priority goes to time factor. Investing directly in the stock markets is a time consuming activity and while choosing a stock lots of research needs to be done, even continuous review is also required during the entire holding period. On the contrary, investing via the equity mutual funds route is far less time consuming as compared to direct equity.
Second key factor is investing skill. Apart from the time factor, a successful investing demands a lot of skill, experience, knowledge of several market trends and cycles.
The third key factor, which helps you in deciding whether to invest directly in the stock markets, or through equity based mutual funds, is upside Potential. Diversification in many stocks may be beneficial in bear phase but at the same time it may have a holding down effect on the assets that are part of the portfolio. Diversification is not a characteristic of individual stocks and as a result the level of upside potential of stocks is far higher as compared to mutual funds.
The last but not the least is tracking of investments. Equity mutual funds disclose their portfolio on monthly basis and due to their diversification capabilities they invest in many companies, which make the tracking of the investments more difficult.
Here I am forwarding an example of the performances of banking stocks versus banking funds, which will enable you to have the clear scenario.

Scheme Name- 1 Year return
Reliance Banking Fund – 48.42
UTI Banking Sector Fund – 27.52
BSE Bankex – 24.40

Bank- CMPAs on 09.04.07- CMPAs on 09.04.08- 1yr gains (%)SBI- 932.53 1693 81.55
ICICI Bank- 858- 836.6- 2.49
HDFC Bank- 971- 1379.85- 42.11
PNB- 456- 518- 13.60
BOB- 225.24- 293.65- 30.37
From the above comparison tables we can conclude that the investor who has picked a good scrip say SBI at the right time has earned the fairly good returns as compared to other scrips (ICICI Bank, HDFC Bank, PNB or BOB) and on the contrary the investor who opt for mutual fund has been awarded with a moderate return.

Conclusion
Take whatever route you desire, ultimately it is the investment skill that counts, whether personal or that of mutual fund manager. But mutual funds are an ideal investment allowing small investors to benefit from diversification with a small amount of money. Choosing the right fund is a decision on how much risk investors are willing to take against their expected return on their investment. On the contrary direct investment is a lot more exciting since money is made and lost by the minutes. If you have a small pool of funds it is easier to beat the market if you can spot some good value stocks. If the pool is large then given the poor depth of the markets beating the index is not always easy. Whatsoever suits you the certain fact is disciplined investment in equity markets is always worthwhile be it directly or through mutual funds.

In the last two year the mutual fund industry has shown a rapid growth, the asset under management in mutual fund industry has shown a growth of more than 33% per annum.  India is a developing economy and second fastest growing economy in the world with the GDP growth of 9.2% per annum, it provides numerous opportunities to the fund manager to invest in the under valued stocks. Govt. of India is planning to invest the pension funds of the govt. employees in the stock market, through the route of mutual funds. Number of foreign AMC’s are in the que to enter the Indian markets like Lazard Group, The UK-based investment bank, is expected to enter the Indian asset management business through Lazard India and Mirae Asset Management, the largest mutual fund house in Korea, is in the process of getting regulatory approvals from SEBI to launch its asset management operation here.
The saving rate of Indian is the highest saving rate in the world around about 23-25% of the income, as now most of the investors are aware about the mutual funds and willing to invest in mutual fund according to their risk taking capacity rather to put them into bank fixed deposits. ‘B’ and ‘C’ class cities are growing rapidly. Today most of the mutual funds are concentrating on the ‘A’ class cities. Soon they will find scope in the growing cities.
India is the largest consumer of gold in the world and India contributes 35-40% of the world total demand for physical Gold. In India people buy most of physical gold from investment point of view, and in the current year the concept of gold Exchange Traded Fund (ETF) knock the door of Indian mutual fund industry, three mutual fund companies already launched the Gold ETF and other fund houses are in a que for launching it. Due to the launch of gold ETF, most of the investors may invest in the golf ETF not in the physical gold, which will help the mutual fund industry to grow further. Investment in the ETFs was first come into effect from America, in the beginning years the concept of the gold ETFs were failed due to low trading volume but now more then 60% trade in the American stock exchange has come from the ETFs. SEBI allowing the MF’s to launch commodity mutual funds.

Why one should invest in Gold ETFs
· Plummeting US Dollar
The Greenback is trading at the historically lower level against the Euro due to major slow down in US economy. Flaming crude oil prices, which are at multi year high, are also pressurizing dollar to see the further decline. Hence, both of these factors are supporting gold prices. Furthermore, decision of fed rate cut by the federal reserve of US has already sent dollar at the bottom, which ultimately gave much awaited strength to gold.  Magical movements in gold have attracted the attention of investors. As a result, people have started to park their money in ETFs’ also.
There is a negative correlation between US currency and the gold prices, when the dollar weakens on the foreign exchange market over an extended period then the US$ gold price will generally rise during the same period; and when the dollar strengthens over many months the US$ gold price will usually fall. 
Dollar weakness and safe-haven buying amid unstable equities and an ailing US economy sent the precious metal to new 27-year highs last week.
· Supply Constraints
Despite the significant increase in the gold price since 2000 and the bullish demand scenario, world gold supply has remained static, as the sale of gold by central banks has been falling. Net official sector or central bank sales in the first six months of 2006 are down 60% year-on- year and full-year total net sales are forecasted to dip below 400 tonnes. Mine production in the first half of 2006 fell by 1.5% year-on-year to 1,168 tonnes. So, gold supply is forecasted to remain static or increase only very modestly but demand is set to continue rising which will lead to rise in the price of gold and it will add to the returns of gold ETFs.
· Rising crude oil prices:
There’s always been a strong relationship between crude oil and gold. Oil price is an important driver of the gold price. Currently, crude oil prices are running on the high time high, it has crossed $90 per barren. There is a positive correlation between the crude oil prices and the prices of gold. An increasing oil price results in increasing inflation, negatively impacting the global economy, particularly oil-dependent economies such as the US. Apart from increased transportation, heating and utility costs, higher oil prices are eventually reflected in virtually every finished product, as well as food and commodities in general. Furthermore, there is evidence that global oil production is peaking and the flow will soon be in permanent decline. Gold moves up in tandem with inflation. In other words, gold is a natural hedge against rising inflation. It is known fact that gold prices hit the roof during the second oil shock in the late seventies and in the current situations too.
· Increasing investment and jewellery demand:
The US, which accounts for 10 % of world gold demand, is also one of the markets where public taste in gold jewelry is enjoying a renaissance. The renewed interest in gold also extends to Japan, a market that showed a 19% increase in demand. The Indian market – the world’s largest for gold demand is also higher following the marriage and festival period. The Indian wedding season runs from December to May and with about eight million marriages each year, typically generates a noticeable spike in global gold demand.

Among the all tax saving instruments the ELSS is the best investment for saving the tax.

Equity Linked Saving Scheme (ELSS):
The ELSS schemes are tax saving schemes that invest their asset in equities. The ELSS schemes offer a tax rebate to the investors under specific provisions of the Indian Income Tax laws. Investments made in ELSS and pension schemes are allowed as deduction under section 80C of the Income-tax Act, 1961. A sum of up to Rs 1 lakh invested in them during the financial year will qualify as a deduction from the income of the individual. Tax-saving funds are a key part of any portfolio. The act also provides opportunities to investors to save on capital gains. Investments in the ELSS schemes have a lock in period for three years. Such investments, therefore, can work for unit holders for a fairly long time, long enough for the NAVs to appreciate. The returns however are not guaranteed as they ultimately depend on the market. These funds, however being basically equity schemes carry high risk unlike a PPF or a NSC, where your investment grows at a steady pace. With equity funds, you risk losing your capital, let alone not earning a return. But the PPF and the NSC both have a long term lock in period as compared to the ELSS.
Investors should compare the tax-saving funds with the other choices before them, including NSC or PPF etc. However, it is to borne in mind that lock-in period under the scheme is the lowest in the ELSS when compared with the PPF and NSC. While the said schemes are debt oriented in nature, the ELSS schemes are equity oriented in nature and the risk associated with it is also high.

Advantages of investing in an ELSS
Ø Potential for capital appreciation through equity exposure.
Ø Benefits under section 80C of the Income Tax Act.
Ø No tax on Capital Gains for investments made in these schemes.
Ø Dividends are tax free in the hands of the investor.
Ø Shorter lock-in period of 3 years compared to other tax saving instruments.
Ø 3 year lock-in period also has the benefit of minimizing volatility.
Ø Allows regular investments of small amounts through the SIP route.
Ø Historically, equity linked savings schemes have provided better returns as compared to other tax saving instruments over periods greater than 1 year.

Disadvantages of investing in an ELSS
There is no assurance or guarantee of returns

 
Life Insurance Premiums:
Contribution made by an individual for the life insurance, whether in the traditional money back plan or modern ULIP plan qualifies for tax deduction and the minimum lock in period for the ULIP plan is three years but the charges under the ULIP plan is higher than ELSS. Through the maturity amount is tax-free.

Public Provident Fund (PPF):
PPF is the best tool for saving the income tax; it generates compounded eight percent tax-free incomes for the investor. But the only shortcoming in the PPF is that it has a lock in period of 15 years and the maximum amount, which qualifies for the tax deduction is Rs.70000\- only.

National Saving Certificate (NSC):
NSC is a fixed return scheme and provides for tax saving benefit too! Returns are at compounded half yearly 8% for duration of only 6 years. Here, investors are required to make a single deposit and the interest is returned along with the principal amount on maturity. NSC investors enjoy tax saving benefits. But the interest earned through NSC is subject to taxation.

On the whole ELSS is the best investment for getting the tax deduction, whether in terms of lock in period or in terms of returns and the tax-free returns, though investment in the ELSS is little risky. Since tax-saving funds invest in the stock markets, they are prone to high volatility in the short to medium term. In the long-term (over three years), although it is generally stated that the investor will be compensated for the risk he is taking by way of a higher return. It should be understood that there are no guarantees, i.e. there is always the possibility that at the end of the three-year period investors may lose part of their capital, let alone earn a return on it. This may seem like an extreme scenario, but it is not. There are several instances in stock market history where returns have been negative or very low not just for a year or two, but for decades.
In the year 2007, tax saving mutual funds has generated marvelous returns. Most of them have generated a return more than 55 percent for the investors in 2007.  Taurus Libra Taxsheild Fund is on the top in the list with the return of more than 110 percent in 2007 followed by Principal Personal Taxsaver Fund with the return of 85.53 percent.
While investing in the ELSS fund an investor should always opt for the growth or dividend payout. An investor should not opt for the dividend reinvestment option because in this option an investor can never get his money out completely, The dividend, which is automatically reinvested by your fund, amounts to your subscribing for additional units and thus qualifies for fresh deduction. But you need to keep in mind that in an ELSS, a dividend reinvestment would mean locking the fresh amount for another three years from the date of such a receipt.
For example:
You invest 10,000 in ELSS scheme with dividend reinvestment in 2007. (You can redeem these units only after a three-year lock in 2010)
Assume-Dividend of 1000 declared in 2008. The dividend units get added to your kitty by way of reinvestment (these units can only be redeemed in 2011)
Assume -Dividend of 1200 declared in 2009. The dividend units get added to your kitty again (these units can only be redeemed in 2012)…and it goes on like that…so a fraction of your investment can go unredeemable.
So, please stay away from dividend reinvestment option while investing in tax saving ELSS.

There are four new fund offers of ELSS in the market
· Lotus India AGILE Tax Fund
· SBI TAX Advantage Fund
· Reliance Equity Linked Saving Fund
· JM Tax Gain Fund

At last an investor should not put all his eggs in the one basket, he should invest in different asset class for achieving the tax deductions.
Age (Years) Life insurance premium EPF PPF / NSC ELSS Total
< 30  10,000 10,000 20,000 60,000 1,00,000
30 – 45 10,000 20,000 25,000 45,000 1,00,000
45 – 55 10,000 30,000 30,000 30,000 1,00,000
> 55 10,000      –  65,000 25,000 1,00,000
The table above lists an indicative asset-allocation plan for individuals across various age groups. As can be seen, as you grow older, the allocation has to change in favour of the low-risk instruments.