Funds

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Mutual funds are the right way to invest in stocks and bonds for individual inve
stors. By following the right principles and rules, it can be both profitable an
d tension-free. Here are five rules for starting out right.
Rule-1: If you can afford to, build your portfolio with at least three 'core' mu
tual funds
The core should represent at least 50 percent of your holdings. Once you've esta
blished the core, you can build around it. But don't get carried away - just a f
ew funds will do. Consider three areas: stocks with a large market capitalizatio
n, small-company stocks, and international stocks.
Large-cap funds should represent 50 to 60 per-cent of a long-term portfolio. If
you have already started a portfolio with a balanced fund, it can serve as a lar
ge-cap core holding.
Mid-cap funds should represent up to 25 to 30 percent of a long-term portfolio.
Picking a good fund in this category is one of the toughest exercises for an inv
estor because few funds are solid long-term performers. When a fund establishes
a great track record, assets explode and the manager often can't find enough goo
d small companies to buy.
International-stock funds should represent 10 to 15 per cent of a long-term port
folio.
Once you've selected your core funds, sit tight. These are long-term, buy-and-ho
ld investments. You should not sell them unless there is a substantial change in
the fund. As your portfolio grows, you can add specialty funds around them.
Rule-2: Start with just one fund if that's all you can afford
A portfolio or group of three or more funds is ideal. But starting with just one
fund is much better than keeping your money in the bank. Don't be intimidated b
y the suggestion that you must be an investment pro with lots of money to invest
.
Think of your single fund as the core of what will someday be a group of funds.
Buy a fund that's a proven winner. Don't experiment.
Plan to buy and hold. You should think of investing as a long-term program.
Here are some funds for a 'starter kit':
Balanced funds:
These funds invest in both the stock and bond markets. Some require the manager
to hold a mix of, say, 60 per cent stocks and 40 per cent bonds. Others give the
ir managers more leeway. But all balanced funds invest in both markets, which ma
kes their returns less volatile. It also keeps these returns somewhat lower than
a pure stock fund's.
Index funds:
Index funds contain a mix of securities that mimics a market index. Because such
a fund bolds securities in the same relative weightings as the index and trades
infrequently, expenses are low. In a good index fund, returns parallel the mark
et. Index funds work well for beginners because there is no portfolio manager to
monitor.
Equity-income funds:
These are among the most conservative of stock fund offerings.
Remember, though, that you look for something different in a single fund than in
a group of funds that make up a portfolio. When you begin to add funds, you'll
need to take extra care to avoid overlap because your single fund probably cover
s a lot of bases.
Rule 3: Don't follow the crowd
By the crowd, I mean the financial press. Mutual fund news is big business for n
ewspapers and magazines.
The result is predictable. What all publications give us now is 'the hot funds'.
By that I mean the funds with the leading performance for the past six to 12 mo
nths. The leading performer is invariably a volatile fund. It can land as easily
on the bottom of the heap as the top.
I've followed the crowd myself. At the end of 1995, when I was doing research to
find out which U.S. fund managers had bought the year's winners in the small-ca
p area for an article in Bloomberg Personal Finance, Garrett Van Wagoner at Gove
tt Smaller Companies headed the list.
Van Wagoner had established a spectacular record at Govett, with average annual
returns of over 50 percent for 1993, 1994, and 1995. When I called him to find o
ut how he did it, he told me he planned to start his own fund, Van Wagoner Emerg
ing Growth, at the beginning of 1996.
Van Wagoner seemed credible. And the 50 percent returns seemed irresistible. I b
ought the fund, only to watch it turn in disappointing results that year. In 199
7, the fund's results were dismal, like those of most small-cap funds that focus
on the technology sector. The point is, I didn't follow my own advice and I did
n't really understand what Van Wagoner was doing to achieve his returns.
So I know from experience that it's understandable to want to get in on the perf
ormance of the hot funds. But too often individual investors get in just in time
for the cool-down.
By the time you read about a fund in a personal finance magazine, it's usually t
oo late to jump on the bandwagon. Remember, too, that a fund that provides a muc
h higher return than the market delivers a much higher risk, too.
Rule-4: Don't try to time the market - invest systematically
The equity market goes up and down in sudden spurts. But the long-term direction
is up. You can stay invested and ride along the upward (sometimes rocky) path,
or you can stay on the sidelines and lose out on much of the long-term return. O
f course, stocks sometimes lose out to bonds or money market instruments in the
short term though they are the inevitable long term winners.
The stock market's pattern is unpredictable. Forecasters talk about interest rat
es, employment, corporate profiles, and confidence in the economy as predictors
of where the market will go. But the truth is, no one knows.
Market timers use various types of technical analysis to examine trends and look
for patterns in the market. For example, many consider the movement of small in
vestors into the market to be a signal that it's time to get out. But these mark
et timers are often predicting doomsday while the market marches merrily ahead.
Just when things seem gloomiest - as, for example, they did in 1973 and 1974 - t
he market takes off. And sometimes, when market timers are predicting a correcti
on, it seems like the good times roll on forever - or almost - as they did durin
g the 1980s.
At the end of 1994, when US stocks finished the year with a gain of just over 1
percent, financial advisers said they fielded dozens of calls from clients askin
g if they should get out of stocks. Then, in 1995, the market exploded in one of
its most spectacular rallies in history, up 37.5 percent for the year, followed
by nearly 23 percent in 1996, and 33 percent in 1997.
Investing is all about discipline: discipline in buying and discipline in sellin
g. The best way to discipline yourself is with a systematic investment program i
n which you make monthly or quarterly investments no matter what is happening in
the market.
Thus, you invest the same amount of money on a regular schedule to buy whatever
number of the fund's units your money can buy. Studies have shown that investors
who do this end up paying less for buying each unit over time than those who pu
rchase all in one go.
Rule-5: Rebalance your mutual fund portfolio periodically
Once you've considered your investment goals and carefully put together a portfo
lio, including different types of funds, is your work finished? Not quite. Even
if you are a buy-and-hold investor (as most individual investors should be), you
r portfolio needs to be tended. Think of it as weeding a garden. You've selected
the plants well, now you must control their growth. For many investors, this pr
oves to be the toughest part.
Why? Because if you pick a winner and it takes off, chances are you feel proud o
f your investment prowess. Why prune it back? Because it's not giving the other
funds you've invested in a space in the sun. When you put together your portfoli
o, you selected different types of funds that would do well in different market
climates.
Left untended, your portfolio will grow toward the market sector with the best r
ecent performance - and that's no guarantee it will repeat its performance endle
ssly. Chances are that as the market climate changes, the other funds may do bet
ter. Thus, the need to rebalance. The way to rebalance is to remove all emotion
from it. Don't try to guess when it's time to sell one fund and buy another or t
o redirect your investment.
That amounts to trying to time the market, which cannot be done successfully. In
stead, pick a date, perhaps the first day of the year, or your birthday, and rut
hlessly prune the winners in your portfolio and add to the losers in order to re
balance your portfolio to its original weightage among the various funds.
================================================================================
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7 steady-rise stocks to buy
Kumar Gautam, Outlook Money
The Indian stock market, spooked for more than a year, got a shot in its arm whe
n the Congress and its allies won the general elections.
Then came the Union Budget that belied hopes and the bellwether indices started
falling, registering the biggest Budget day loss ever.
However, over the following period, as investors and market players figured out
finance minister Pranab Mukherjee's plan, the broad market recovered to its pre-
Budget levels.
But, even in this market, which has gained 13 per cent in the last 10 days, ther
e is value to be found in individual stocks.
Given here are seven of them, selected on the basis of their fundamentals. Over
the medium-to-long term, they should bring good growth to your portfolio.
The selection criteria
A common theme runs through these picks. Their earnings quality is good, althoug
h they may not have the very high growth rates often seen because of the cyclica
l nature of businesses. But cycles can catch an investor on the wrong side too.
The focus is also on a company's performance in the last four quarters -- this i
ndicated its earning ability in challenging times. They have strong balance shee
ts. For example, most of their assets are self-financed and not bought with borr
owings.
Also, they have ample cash to help them ride out difficult times. We have tried
to pick stocks that have valuations lower than others in their industry. This gi
ves a margin of safety: even if a company's earnings falls and its price-to-earn
ings ratio rises, it would still not be too expensive.
Aventis Pharma
Corporation Bank
Cummins India
Honeywell Automation India (HAI)
Opto Circuits (India) (OCI)
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