Manager selection: Why it`s relevant for individual portfolios?

Manager selection is important for institutional investors. This refers to the professional expertise offered by investment consulting firms to select portfolio managers who can optimally manage assets for the institutional investors. We believe that manager selection plays an important role for individual investors as well.
Manager selectionPlan sponsors typically hire investment consulting firms to help them select portfolio managers. Suppose a pension fund (plan sponsor) has to invest USD 50 billion in various asset classes including equity and bonds. Further suppose that the pension fund proposes to invest USD 15 billion in equity, spread across three investment styles - large-cap value, mid-cap growth and small-cap blend. The investment consulting firm`s mandate would be to select portfolio managers in each style universe.

Suffice it to know that the process is very rigorous. It involves three-steps - performance measurement, performance attribution and performance appraisal. Take the large-cap value universe. The investment consulting firm will first measure the performance of all large-cap value managers. Next, the firm will compare each manager`s performance with the large-cap value index.

The performance attribution analysis helps in explaining the factors that helped the portfolio managers generate returns in excess of the benchmark index. Suppose a large-cap value manager generated 16% return while the large-cap value index generated only 10%. The consulting firm will seek reasons as to how the portfolio manager was able to generate the excess return.

Finally, performance appraisal refers to a process where the consulting firm asks the question: Was the excess return due to luck or skill? Can the portfolio manager generate excess returns in the future as well? If the answer is in the affirmative, the investment consulting firm will recommend that the pension fund invest in the portfolio manager.

The question is: How is this three-step process relevant to individual investors?

Fund selection
Consider an individual investor who wants to take exposure to mid-cap stocks. She has a suite of funds to select from, thanks to the proliferation of funds and fund complexes in the country. The problem is more severe when an individual investor wants to buy diversified funds. How should an investor choose such a fund?

Individuals typically use personal finance Web sites that ranks funds according to their past performance; investors tend to select a fund that has been a top-performer in the last three years and five years.

The point is that past is not an indicator for the future. This does not mean past performance is not a useful measure to forecast future alpha. But buying a fund based only on its past performance may not always help the investor; for the fund may just as well perform poorly in the future.

Consider the evidence. The top-performing diversified fund over a five-year period lagged the leaders in its peer universe over a ten-year period. The phenomenon is no different for funds in other style universe such as mid-caps.

This is not all. The top-performing diversified fund over a five-year period returned 28% while the bottom in the list returned 0.50%; even the Nifty index returned 20% during the same period. This suggests that a wrong selection of fund could lead to negative alpha returns. Both these factors suggest that fund selection goes beyond mere ranking of fund returns.

Conclusion
Individual investors should strive to reduce the error of choosing an active manager who has generated excess returns through luck; for luck could well run out in the future. This is possible if investors engage in manager selection as institutional investors do. Such a process would increase the possibility of the investors achieving their stated investment objectives, through optimal passive and active exposure.

Go online for hassle-free tax filing!

Like the inevitable Monday morning blues, the annual tax blues are here to haunt us again. The deadline (July 31) for filing income-tax returns is fast approaching and you may be dreading that mandatory visit to Aayakar Bhavan.

Don`t you bank online? Don`t you pay bills online? Why not file your returns online?

E-filing of returns is becoming quite popular, going by statistics from the Directorate of Income-Tax. For the assessment year 2009-10, about 48 lakh returns were filed online out of which ITRs 1-4 applicable to non-corporate assesses (like salaried individuals, HUFs, partners in a firm and those carrying on proprietary business or profession) amounted to 38.5 lakhs. So save that half a day`s leave, forget the long queues and become a part of the statistic for this year.

With all the data and documents in place, e-filing is expected to take only about 30 minutes of your time. For the tech-savvy who knows a bit of taxation laws too, incometaxindiaefiling.gov.in is the Web site you should hit.

At your doorstep
For others lost in the ocean, do a Google search. You`ll find umpteen e-return intermediaries who can help fulfill your obligation to the taxman for a fee.
There`s more to cheer for corporate employees as these service providers may be available on your own premises.

``With assesses like corporate employees, we work in an online-offline model,`` says Nitin Vyakaranam, co-founder of Artha Yantra, a financial advisory firm, which runs taxyantra.com. Explaining this model further, Navin Kumar, co-founder, eLAGAAN says that one can exercise a choice between using the return preparation software ( to crunch the numbers) and then filing the returns manually or use their software and later proceed to file their returns electronically.

Once you have decided to e-file your returns, you have two options. If you have digitally signed your ITR, the process gets complete with the generation of the ITR V (acknowledgement) form.

Digital Signature
But intermediaries like Nitin and Navin don`t recommend a digital signature for individuals as it is slightly expensive, has limited validity and almost no other use. In that case, you can still file your returns electronically.

On the successful uploading of your return, you must take a print out of the acknowledgement, fill it and send it across to the Central Processing Centre at Bangalore within a specified time period after transmitting the data electronically.
The CPC will then send an e-mail acknowledging the receipt.

Electronic filing scores over manual filing in four areas. One, it helps many who go on short stints abroad (in the course of their employment) file their returns on time even though they may not be physically be present in India. Two, intermediaries may serve as a digital storehouse for your income and tax records, freeing you of the burden.

Nitin recalls cases of people who have come back to him after three years asking for copies of these statements for obtaining a loan or a visa. Three, the processing of refunds is faster for electronically filed returns.

Four, both agree that e-filing is safe. eLAGAAN boasts of a 256 bit encryption when most banks, they say, use a 128 bit encryption.

Explaining that the manual filing of tax returns done all along has anyway been unsafe as far as confidentiality goes, Nitin says that safety is not as big an issue as convenience.

Year-long facility
Finally, for those who miss the deadline too, e-filing, and hence, e-return services, is available throughout the year.

Only that a filing beyond July 31 would mean that you cannot revise your return if necessary. You would also have to pay interest in case there are tax arrears and may miss out on carry-forward of certain losses.

Five steps to financial fitness

Saving money is one of those tasks that is easier said than done. How much money will you save, how will you do it, and how can you make sure it stays there? Here are five questions to ask yourself to help you get financially fit and achieve monetary success.

What are your financial goals?
Understanding why you want to save money is a fantastic way to start. With your vision in mind it will be easier to make those tradeoffs at the till. (Is that extra pair of shoes really worth it?) Create milestones to make the path look easier and track your progress regularly to know if you need to make any adjustments to get to your goal.

Where`s your money going?
Many of us have no idea where we spend our money. In fact, as long as there is enough in the bank to cover the expenses we`re fine. Unfortunately, that`s not a great way to ensure you are making the most of your wages.

Understanding where you spend is a key step in financial fitness as it helps you determine the percentage of your money that is being spent on necessities and how much is being spent on the non-essentials.

Once you know where your money is going, you can start thinking about what changes you need to make in order to get to your desired financial state.

How much can you spend and where?
Budget. There are few words that are less exciting to hear.

We all know how difficult it is to create a budget and it`s often even harder to stick to it. But now that you know what you are saving for and you know where your money goes, it will be easier to set a budget that works for your lifestyle.

Create a list of things you are likely to spend on each month and make sure to track each rupee you spend. Give it a shot for three to four months and before you know it, you`re on your way.

Are you sticking to the plan?
Tracking your expenses is a key factor in making your budget work. Keep a tab on how much you are spending across each of your budget categories and see which ones you are overspending in.

Understand why you are overspending and make adjustments accordingly. Revisit your expenses often to be sure you are on track and don`t forget to focus on the goal.

Are you rewarding yourself?
It`s not an easy path towards financial fitness. It requires a lot of discipline and rigor. Don`t forget to reward strong performance. Every milestone you reach means a small success, so treat yourself along the way (within budget, of course!).
This will help you keep your motivation levels up and makes the exercise a little more fun.

We hope that these simple tips do help you in your march towards financial fitness.

What has changed with ULIPs?

Unit-linked insurance products or ULIPs are perhaps the most widely discussed and written about financial products in recent times, and not all for the right reasons. First, there was the battle over who would regulate them, and then came a series of regulatory changes to reform the product.

The changes over the past few months have come one at a time, but in rapid succession. They have far-reaching implications for investors who are considering ULIPs. Here is a look at all the recent changes in the ULIP structure and their implications for investors.

Despite all the changes announced, these products still have a long way to go on transparency and disclosures relating to their investments. Though ``insurance`` is only incidental to ULIPs and the ``investment`` component is the key to returns, many insurance companies are unwilling to divulge adequate details on the historical portfolios and investment strategies of the ULIPs they manage.

Changes to costs

Cap on recurring charges: Their high expense structure has been a bone of contention with ULIPs.

The IRDA has sought to remedy this in two ways. First, it fixed caps on the overall costs that can be charged to ULIP investors under two slabs, one for a tenor of up to 10 years and another for tenors of 10 years and above.

It specified that the net reduction in yield (return) to investors from a ULIP should not be more than 3 percentage points for terms up to 10 years and 2.25 percentage points for ULIPs of 10 years or more, effectively capping the total expenses insurers may charge their investors. Then, this was modified, based on the experience of policies lapsing in the initial years.

The difference between the gross and net yield for ULIP-holders is now capped at 4% from the end of fifth year, and this cap progressively declines to 3% by the tenth year. This will mean a lower cost structure for investors, even if they seek exit from ULIPs after the fifth year.

For instance, if you invest for five years in a ULIP that earns a 10% gross return, if you withdraw after the lock-in period; the net yield would drop by four percentage points to 6%. These changes are effective from Jul. 1, 2010.

Surrender charges trimmed: One of the key features that curtailed the liquidity aspect of ULIPs was the high surrender charge levied by insurers for premature closure.

If policy-holders stopped paying premiums after two years, the surrender charges would amount to as much as 30-40% of the first year premium. The surrender charges would thus reduce your overall returns substantially. IRDA has now introduced limits on surrender charges to rationalize them.

If the policy is surrendered in the first year, the charge would be 20% of first year premium or Rs 3,000, whichever is lower, for an investment amount up to Rs 25,000. For an investment above Rs 25,000, the charge would be six% of the premium subject to a maximum of Rs 6,000.

The surrender charge progressively reduces to Rs 1,000 in case of former or Rs 2,000 in the latter, if the policy is surrendered in the fourth year. As per the new guidelines, there would be no surrender charges from the fifth year. The implication of this is that investors wishing to exit a ULIP after the five-year lock in would not suffer any additional surrender charges, only the overall expenses mandated by the IRDA.

Commission: The high commissions paid to insurance agents have been often highlighted by critics of ULIPs. The IRDA`s new regulations seek to address this through the cap on overall charges and also through disclosure requirements.

With effect from this month, the advisor`s commission in a ULIP will be automatically disclosed in the benefit illustration (the document that spells out the various charges deducted from the unit-holders premium and quantifies the net yield to the customer). It is now mandatory for the advisor to take the signature of the investor on this document.

Increase in mortality: The insurance component in a ULIP is usually quite small; however, IRDA has now sought to raise this component by specifying that ULIPs should carry a life cover for a minimum ten times of their annual premium (this was five times earlier).
Changes and liquidity

Extended lock-in period: All investments in ULIPs carry a three-year lock-in period. This will be increased to a five years from September 1, 2010. This will clearly weed out the mis-selling of ULIPs as short-term products to investors.

Given the buoyant equity market investors are often persuaded by their advisors to invest in ULIPs on the premise that these are three-year products.

With funds locked up for five years, only investors serious about building a long-term investment portfolio would consider buying ULIPs. Incidentally, ULIPs should be bought only that way, because of their front-ended expense structure.

Investors should also be conservative in deciding their premia as they are committed to the investment for several years at a time.

If they fail to pay the renewal premium and discontinue the policy in the first five years, no payment will be made till expiry of the lock-in period. Hence investors not sure of a regular income should set their premium conservatively.

For excess income, one can always add on single-premium policies.

This ensures that you will not surrender the policy within five years. If a ULIP is prematurely discontinued, your fund value on the date (after adjusting for surrender charges) will earn minimum of 3.5% interest during the remaining lock-in period.

Liquidity: Even while extending the lock-in period on ULIPs the regulator has sought to improve their liquidity by introducing norms for loans against ULIPs.

In any ULIP where the equity accounts for more than 60% of total portfolio, investors can be granted loans not exceeding 40% of the investment`s net asset value (NAV). Where debt accounts for more than 60% of the portfolio, the loan can be up to 50% of NAV.

Returns: While the above changes to ULIP costs may help improve effective returns to investors, the IRDA has also laid out special provisions for pension products fashioned as ULIPs.

As per the new regulation, a unit-linked pension plan should carry a minimum guaranteed return of 4.5% a year if all premiums are paid. Such ULIPs will also carry a longer lock-in period than others and no partial withdrawal will be allowed during the accumulation period.

However, on vesting date, policyholders can commute (choose to receive as lump-sum) up to one-third of the accumulated value of the fund to his credit.

Pension policy holders should ensure that they pay premium till the maturity period. In the event of discontinuation, the policyholder would be entitled for a lump-sum refund of not more than one-third of the fund value, while the remaining amount would be used to purchase annuity to ensure pension payments. You will pay tax for the pension received for your respective slab and it will bring down the net yield on the product.

How ULIPs performed

All the above measures may help lift the effective returns to investors from ULIP products. But how have equity-oriented ULIPs performed so far? Details on ULIP performance or portfolios are not as easy to come by as those for mutual funds.
However, an analysis of equity-oriented ULIPs (80-100% invested in stocks) shows that over a one-year period, 56 of 62 schemes managed to outperform such indices as BSE Sensex, CNX Nifty and BSE 100.

Over a three-year period, 21 of 28 schemes, and for a five-year period 9 out of 13 schemes, comfortably edged past BSE Sensex.

Over three- and five-year periods, the category average clocked compounded annual returns of 10% and 22.7% respectively, against the 5.5% and 19.2% recorded by the BSE Sensex (Nifty returns are 6.3% and 18.1%).

However, investors should note that their effective returns from ULIPs may be 3-4 percentage points lower than the NAV-based return (as ULIP expenses are adjusted based on the unit balance and not the NAV).

COMMON AND MUST TO KNOW TRADING RULES

• Always have a trading plan. Never trade without a trading plan (a trading plan consists of a trading system which is made of few components)
• Never trade without a StopLoss (Repeat 10 times).
• Never ever hold on to a losing position. Never average/add to a losing position. (Repeat 10 times).
• Let your profits growing. Add to your winning trades.
• Trade on Rumors and Exit at news. But be care ful while following this strategy.
• Never discuss your trading position to anyone else.
• Control your emotions. You cannot control the market but definitely control yourself.
• Never try to become a perfectionist or Best. Try to become ‘better than others’ and ‘above average’.
• Follow your trading system. Let the system prove itself right or wrong; before changing it.
• Never ever over trade (repeat 10 times).
• 
  So, what you are intraday trader, Learn basics of stock market. Learn the intermediate and long-term trend etc.
• If you are starting new or re-starting; begin with paper trading.
• Don’t think of earning regular salary/income in markets while trading. Because trading is not a job it’s a business.
• Cut the losses small and let the profits grow.
• Learn to understand the ‘general condition’ principle’ argued by Edvin Lafarve in book ‘Reminiscence of a Stock Operator’.
• Learn to both; buy-n-trade and short-n-trade. But try–More buy-n-trade in bull market and sell-n-trade in bear phase.
• Don’t be greedy. Remain reasonable. Don’t try to make killing once in every week. You can expect it only once in months.
• Clearly decide what you expect from trading.
• Tell yourself and accept the risks of trading.
• Never bet your life-savings in markets.
• Learn from the successful traders. Learn from unsuccessful traders more.
• See how successful traders do it. But note that every person has to accommodate success rules as per his own attitude and composure.
• Money management plans and risk management are as much important as much the trading system (which will decide the accuracy of your trades)
• Remain alert that you don’t slip into speculation while trading.
• Never turn a trading position into investment position because you don’t want to take mental hit of booking loss.
• Maintain proper record of your activity. Also maintain a daily diary of your progress/lessons/experience in trading.