Au Revoir!

Au Revoir!

When I started writing this blog, it was my endeavour to demystify the concept of Mutual Funds so that even a layman can reap the benefits it offers and build his wealth. Now, when the time has come to draw down the curtains, I sincerely believe that I have succeeded in my task. The mysterious monster of Mutual Fund has been reduced to mundane existence with the mantra for mutual fund investing having been passed on to le monde at large.

We undertook a long but pleasant journey - initiation of the idea of Mutual Funds, clarification of the concepts associated with it, savouring of the fund flavours, the raison d’etre for traversing the mutual fund route, working our way up with our wealth-building winners, purchase, redemption, SIP and finally the factors that should figure in the choice of the right financial advisor. This culminates in the successful completion of the matrix.

Armed with this treasure trove of knowledge about Mutual Funds, you can now embark on a safe and profitable journey in the world of mutual funds. Happy investing!

Now that we have come a full circle, it is time to bid adieu but I shall be back with a BANG in September with regular features of topical interest on Mutual Funds. I shall come up with articles on a fortnightly/monthly basis during the intervening three months.

How To Choose a Financial Advisor

How To Choose a Financial Advisor

At the outset, answer this question, ”Am I comfortable with brand names or independents?” When you start scouting for a financial advisor, there will be big names that crop up. They can be impersonal and corporate mandates can drive sales of proprietary products. Conversely, independent financial advisors, who are self-employed and unaffiliated with major companies, are unencumbered by corporate policies and may have more flexibility in terms of their product offerings. You want to be sure that you are going to get someone who works with people like you, listens to your needs and concerns, will be honest and will look out for your best interests. Get names from people you trust. Ask people whose judgment you respect (friends, neighbours, family, or colleagues) for the name of their financial advisor. If the endorsement is enthusiastic, then one may be enough. If not, get three names and begin the selection process by phone. First impressions count. If your first impression is positive, arrange for a meeting with the advisor.

A few vital concerns that you must consider while choosing a financial advisor are:

Background and experience

Try to learn as much as possible about the advisor's background and experience. What is his educational background? Does he have qualifications in specific areas of study and professional licenses to provide services? How long has he been doing this? There is something about the passage of time that tends to shake out the incompetents. As an industry undergoes its normal ebbs and flows, those participants who cannot acclimatise are weeded out, either voluntarily or otherwise. And those are exactly the persons you do not want advising you.

The Advisor's practice

Find out about the advisor's practice. Has the advisor worked with clients whose situation is similar to yours? How many clients does the advisor currently have? What is the product basket offered? Does he have resources in terms of research and support? Does the advisor have minimums for investment assets, net worth, or income? Does he maintain client confidentiality?

Investment pattern compatible with yours

As an ideal investment goal, let your advisor’s personal portfolio of investments reflect your own. The advisor should work with you to set target rates of return, focus on risk in selecting your portfolio and rebalance your portfolio periodically. Keep regularly abreast of your advisor's financial activities.

A mode of payment that avoids conflict of interest

The issue of advisor compensation should be explored and fully understood. How is the advisor compensated (hourly, retainer, percentage of assets, commissions)? Are there financial incentives for the advisor to recommend certain financial products? The advisor should be compensated on a fee-only basis rather than by brokerage commissions. Advisors who work on commissions are more likely to recommend frequent transactions in your portfolio. A fee-only advisor has fewer conflicts of interest and is more likely to have your best interests in mind.

A feel for working with the Advisor

You should try to get a feel for what it would be like to work with your advisor. What is the process once you hire the advisor? How often would you meet the advisor?

Verification of the basis for confidence

It is sad, but misplaced confidence is a primary cause of financial disaster for many investors. Of course, it is mostly preventable. Just as a leopard does not change its spots, persons with unsavory backgrounds tend to repeat. So, how does this translate? Consider no advisor on whom you have not obtained a) an exemplary personal credit report, b) a clean record for disciplinary actions and lawsuits, and c) personal recommendations from at least three current clients of adequate duration.

Have you ever made a decision based on a "gut" feeling or instinct? While all the items listed above are of supreme importance in finding the best financial advisor for you, the value of the gut test should not be overlooked. Does the advisor seem to be client-centered? Does he appear interested and whether he can serve you efficiently and effectively given his experience and expertise? Does the advisor seem to be overly anxious to have you as a client or does he express a desire to determine if the two of you will be a good "fit?" Does the person seem to have time for you, regardless of how much money you have to invest? Does he or she really listen to you and seem to respect your opinions? Does the person use financial jargon or explain investments to you in clear terms? While harder to measure and define, these intangibles are important in the selection of a financial advisor who is right for you.

The foregoing, though admittedly a skeletal view of the financial advisor selection process, provides the crucial ingredients. Gauge your level of comfort with the advisor as you are looking for a long-term relationship. Never hesitate to ask whatever is on your mind; however foolish the questions may sound. Always remember that it is your money and your future.

Do You need a Financial Advisor ?

Do You need a Financial Advisor ?

When it comes to Mutual Fund investment, do you feel like a rudderless ship without a plan or a map? Or do you feel that you have a pretty good sense of where you are going? Maybe, you are somewhere in between. How do you know whether you should hire an expert or do it yourself? You may be capable of doing the job yourself if you are willing to do some homework. But unless you have the time, ability and desire to manage your portfolio, a good financial advisor can be a tremendous asset—if not a necessity. He can help you know where you are going so that you can end up where you need to be. Most of you would not think twice about hiring an attorney or finding a good medical doctor. A good financial advisor should fit into this same category.

The necessity for a Financial Advisor stems from the following factors.

Accords top priority to understanding you and your goals

Financial advisors make it their business to learn who you are, where you are with your Fund investment program and where you want to go. From this getting-to-know-you process, your advisor can offer customised investment strategies for

• enhancing your after-tax return opportunities,
• funding your children's education,
• funding your daughter’s marriage,
• planning for your parents' financial needs in later years,
• retirement planning.

Your financial advisor can help you create a long-term investment plan that fits both your objectives and your budget requirements ... right down to how much you need to invest per month to reach your goal.

Recommends funds tailored to your individual needs

Mutual funds offer professional management, diversification and liquidity. But how do you choose among the hundreds of funds out there? Your financial advisor can help you see how well a fund's objectives, track record and management style match your specific needs and goals by keeping you informed about

• how much aggressiveness the fund's managers will assume to achieve their objectives,
• the fund's performance compared to other funds with similar objectives,
• how the fund has done in bullish as well as in bearish markets,
• the fund's performance vs. its respective investment indices over different time periods and
• the types of securities the fund invests in and how those securities can affect its performance

Aids you in the allocation of your assets

Against the backdrop of your objectives, time horizon and risk tolerances, your financial advisor assists you in allocating your money to the different funds so as to enable you to savour the different fund flavours and achieve the desired diversification.

Reviews and rebalances portfolio regularly

Just as you do a health check periodically, according to changing lifestyle and age, it is prudent to meet with your financial advisor regularly. Plan a comprehensive appraisal of your mutual fund investments with your financial advisor at least once in three months. Armed with a thorough understanding of your financial goals and objectives, coupled with their understanding of financial products and markets, your advisor would be well positioned to bring suitable new investment opportunities to your attention. He can keep you abreast of changes to the investment and tax environment that may affect your plans, and recommend any necessary adjustments. So when you do make a change in your investment portfolio, there is a logical reason behind it. That way you will be sure your money is invested wisely every step of the way.

Offers customization with convenience

What does it take to develop a personalized investment program, monitor your investments and keep track of all the paperwork, too? More time than your busy schedule may allow. Your financial advisor offers a professional approach to your customized investment program that may not demand a lot of work or time on your part—and a level of knowledge and expertise that may be difficult for you to achieve on your own.

Your portfolio is more than just a list of Mutual Funds. It is your financial future. If you do not have the time or inclination to closely manage it, a well-chosen advisor can be a terrific ally in achieving long-term financial freedom.

When to Say Good Bye to your Mutual Funds? - Part - III

When to Say Good Bye to your Mutual Funds? (contd.)

Comparative evaluation of the fund in question is the final trigger that goads you to say good bye to your fund.

Consistent underperformance

It is important to base your decision on relative performance. You should compare the fund’s performance against the most appropriate peer group - other funds which have similar investment objectives or strategies. Comparing "apples to apples" is the only fair way to see if a fund is doing well or underperforming. Moreover, if your growth fund lost money in any year, it may not be such a bad thing if the index lost more than that. But the key is to look at long-term returns. In the short term there could be a genuine reason for under-performance - some of the investments may be from a long-term perspective; certain sectors may have been under-performers; contrarian investments take time to catch market fancy, etc. But if the performance of the fund continues to be consistently below par over long periods of time, then it may be worthwhile considering switching over to a better performing fund. If possible, you should also try and assess the reasons for poor performance. Exceptionally poor comparative performance should be a signal to sell the fund.

Increase in fund expenses

Increase in fees to the manager represents a reduction of income to you and is unlikely to be offset by higher returns. When a fund expense ratio rises significantly, particularly in bond and money market funds, look at moving to a lower-cost alternative where expenses will not be a principal factor in the fund’s performance. For many funds back-end loads tend to be higher when you liquidate your units earlier rather than later. So you need to determine if liquidating your units now is optimal.

Change in taxation policy

A change in the tax policy could become a reason to sell and reinvest somewhere else.

You invested in the balanced funds since your risk profile is such that you can take around 50:50 equity to debt exposure.. But when the tax laws changed wherein a fund would classify as an equity fund only if the equity component is more than 65%, the balanced funds would have to increase the equity component to 65% so that they continue to enjoy the lower tax applicable to equity funds. But with 65% equity it becomes riskier. Hence, it could be time to exit.

If your fund has suffered significant capital losses and you need a tax break to offset realized capital gains of your other investments, you may want to redeem your mutual fund units in order to apply the capital loss to your capital gains.

Selling a mutual fund isn't something you do impulsively, without a great deal of thought and consideration. Remember that you originally invested in your mutual fund because you were confident in it, so make sure you are clear about your reasons for letting it go. However, if you have carefully considered all the pros and cons of your fund's performance and you still think you should sell it, do it and don't look back