Union budgets may come and union budgets may go, but some of the basic aspects of investing in mutual funds go on for ever. One such aspect relates to mis-selling of funds by distributors. Budget eve, we thought, would be good time to revisit this very crucial matter. Indeed, horror stories involving mis-selling are fairly common. These range from the simple (how investors were advised to get out of their tried-and-tested fixed deposits and acquire highly-risky sector funds) to the bizarre (how investors were told equity funds will simply double their money every few years).

Mis-selling, it seems, has been perfected by some quarters, chiefly after the arrival of me-too mutual funds and new-age insurance products, each of which is vying for customers’ attention. With most product manufacturers (insurance and asset management companies) offering commissions at preferential rates for certain products at any given point, the practice of mis-selling has become wide-spread.

Those who have invested their hard-earned money in mutual funds must exercise utmost caution before they buy funds simply on the basis of recommendations made by distributors. Are the funds being recommended the most suitable ones for them? Are these the funds that pay the highest commission/brokerage? Is the distributor concerned more worried about securing commissions (or some other consideration in kind, it is not always in cash), instead of recommending the most optimum products? These are questions that must be answered at the very beginning.

As distributors so frequently acknowledge, insurance and mutual funds even today are rarely bought – instead, they are sold. The scenario spurs mis-selling to a great extent. In many cases, the distributors develop the habit of pushing certain products. Investors, it is seen very often, end up as losers because of this. That is because all these products are not quite in line with their risk profiles.

Checking the suitability of a financial product is important. People who save religiously, especially small investors, do find themselves with savings/investment products that are plainly unsuitable for them. This is unfortunate – more so because the practice of recommending wrong products is gaining strength even as we write this.

Will the practice disappear as we increasingly turn into more knowledgeable investors (instead of being merely passive savers)? Yes, but it is difficult to say this conclusively at this stage. The need of the hour is awareness on the part of the consumer. Financial sector reforms will be necessary as well. This will happen when the regulatory bodies take up the issue with greater gusto. A bit of support from the media will also help. The situation, at another level, will turn for the better when distributors change tack and become personal financial advisors who charge for advice.

Naturally, all this will not happen in a hurry. Even as the economy grows and more financial products are launched in an ever-burgeoning market, the incidence of mis-selling will be common enough. Of course, things will change for the better if curbs are imposed more stringently. However, short-term measures will not bring in the changes that we now desire.

Advisory is indeed, slowly but steadily, gaining ground in India. Independent financial planners are becoming a more potent force in our market. Few, however, are actually charging hefty fees for the advice they render. And, as some sections suggest, we really do not expect consumers to pay for advice. Yet, intermediaries expect good customers to appreciate superior quality in term of products, advice and service standards.

An advisor/planner is expected to inspire trust, not take advantage of unsuspecting clients. Maintaining long-term relationships is important for him. Such relationships, as it happens in many real-life instances, are not limited by mere application forms and cheques.

Indeed, planners are known to sustain businesses on the basis of a few time-tested norms – building trust, passing on knowledge, selecting the most optimum products and so on. Establishing and defining a client-planner relationship are crucial factors here. A good planner/advisor must understand his client well. He must also help a client in all sorts of ways, starting from the very basics. In many cases, formal relationships are established through written agreements.

For those who have diligently invested in the hope of securing good returns, there can be nothing worse than a mis-sold financial product. Sometimes it is easier to mis-sell if the investor concerned is too avaricious. The average individual almost always looks for a few extras, the added risks notwithstanding.

If you have been lately hearing bizarre stories about the spurt in funds that track the indices, including the exchange-traded variety, do not feel skeptical. Those stories, for all you know, are probably true for many markets; in India, these funds have recently showed signs of burgeoning. Some quarters here firmly herald their arrival – in grand style.

Dispassionately speaking, however, it still seems it is early days for index trackers/exchange-traded products. Yet it may be safely predicted that investors in this country would be treated to a wider range of these funds in the days ahead. The debate involving actively-managed funds and passively managed indexers, pitted against each other, is also gaining currency in our market.

Remember, costs are a significant element for investors these days, especially with increasing volatility and the opportunities that such volatility bring to the table. “Is my fund very expensive?” – that is a question that investors are constantly trying to answer.

The question is critical because investors know how important it is to keep costs on the lower side. Will investors become more aware of costs? Yes, and in course of time they will be readily able to tell whether a fund is charging too much or actually has modest expenses.

A word about gold ETFs, an emerging category, would not be out of place. Among the ten or so gold ETFs, the top three or four contribute the most, nearly 70-80 per cent of the volumes these days. At another level, if you consider last month’s figures, the leading funds were those offered by Benchmark, Reliance and Kotak. The more popular products, incidentally, include Niftybees, Juniorbees and Bankbees.

Gold, in fact, is expected to remain a big draw for investors in the years ahead. Consider the latest offering by Reliance MF, billed as a “gold savings fund”, and you will realize how keen the asset management industry is on this front. For all you know, other innovations may well be in the works. For the record, this happens to be the first gold FoF (fund of funds). The idea is to provide returns through investments in the gold ETF run by the fund house, which in turns invests in physical gold. There is no need for a demat account in this case. Investors can subscribe to and redeem units directly from the asset management company.

Here, then, is a passively managed option that would enable an investor to save for gold in a convenient manner either as a lump sum investment or through a systematic investment plan. It aims to give investors the opportunity to participate in the bullion market in a relatively cost effective way.

Would straight-laced funds become a relic of yesteryears? Probably not, but index funds/exchange-traded funds would be hot commodities in India sooner than you think. ETFs are already popular in countries like the USA, where they have grown exponentially in the past five or six years. However, this is not the time to get hyper on these products. Most of us should stick to our old-style, actively-managed funds with the hope that the fund managers are a smart set of people who are keen on beating the indices.

We would like to mention here that the raging debate stems from the theory that index-trackers are aimed at traders, while ‘normal’ mutual funds are directed at investors. Our opinion on this issue is simple: This idea is not quite tenable. Yes, index funds/ETFs happen to be ideal for nimble-fingered traders and, yes, they are very often a reasonably-good choice for those who are interested in buying and holding.

Let us, therefore, extend our logic and urge you to test both varieties. Do try to accommodate an indexer or two in your portfolio – at least with the idea of getting a feel of this very dynamic product. At the same time, allocate surpluses to plain-vanilla funds as well. Let both co-exist in your list of holdings, considering, of course, your very unique risk-reward matrix.

We have in the past dealt with a number of crucial aspects of financial planning. Goal setting, risk profiling and asset allocation, for instance, have been discussed at length. However, a very critical issue – portfolio re-balancing – has not been discussed yet, an omission that must be remedied right away.

Portfolio re-balancing is all about re-setting the proportions of each asset class, usually in line with the investor’s original strategy. As seasoned investors would agree, a major element of personal finance is to periodically re-balance investment portfolios which may be made up of a number of asset classes. The latter would include cash, fixed-income instruments, stocks, precious metals and other commodities, real estate and so on.

Investors usually try to diversify and spread their surpluses over a number of asset classes, especially the more popular ones. Volatility is various asset prices is rampant, especially these days when there is plenty of uncertainty. Equities and real estate, for instance, have been quite volatile lately. Re-balancing assumes an added degree of urgency in times such as these.

Let us take up a simple example. Let’s imagine we have an archetypal investor, Ram, who has won, say, Rs 50,000 in lottery. He consults his financial advisor and works out an asset allocation: 60 per cent in equity funds and 40 per cent in income funds. In other words, the break-up is Rs 30,000 (60 per cent of Rs 50,000) and Rs 20,000 (40 per cent of Rs 50,000) respectively.

A year later, Ram would want to ascertain the value of his holdings. Let us assume that the equity part of it has dropped by 9 per cent, while the debt part has increased by 4 per cent. Therefore, the portfolio is valued at Rs 48,100 (or, Rs 27,300+20,800).

For Ram, equity funds now constitute 57 per cent of the portfolio, while income funds account for 43 per cent. Mind you, the original ratio was different. Thus, there is a clear case for re-balancing so that the intended asset allocation stays intact.

The point is, how does an investor go back to where he started from? The individual in our example must offload some debt funds and utilize the proceeds to acquire some equity funds. Ram could use the latest portfolio value, that is, Rs 48,100 and multiply it by the desired allocation (40 per cent) to arrive at a new figure – Rs 19, 240. Yet he has Rs 20,800 in debt funds. So he needs to sell Rs 1,560 (= Rs 20,800-19,240) of debt funds and spend the money on equity funds. Ram would, once again, have a 60-40 equity-debt allocation.

Curious readers, we assume, would want to know why re-balancing is so terribly important. Here are two significant reasons:

Optimisation of returns:

The portfolio, once re-balanced, would stand a better chance at potentially augmenting returns. Remember, the investor concerned is partly selling the asset that has increased in terms of valuation and acquiring the asset that has declined. “Buying low, selling high”, is a commendable strategy.

Sustenance of risk profile:

Changes in asset allocation (which must be based on investment objectives) need to be planned well. Not reacting to revised valuations, which lead to such changes, would not be quite helpful. This is particularly relevant when the investor’s risk profile stays the way it was.

Talking of risk profile and investment objectives, we must remind you that financial goals must be identified early and prioritized according to their order of importance. You need to concentrate on the goals that matter the most and allocate enough resources in order to achieve them.

Naturally, it would help if you have time on your side. Remember, money that is kept today in interest-bearing assets (debt funds, for those who are keen on mutual funds) and invested in growth-oriented assets (equity funds) is sure to grow and compound with the passage of time. Age is a major issue. If you are young enough, there will be more investing years ahead of you than someone who is relatively senior. An older person – and this is a general statement, there is nothing hard and fast here – is more likely to invest in less risky assets.

Choosing the right assets is a primary task for an individual investor. Look for the real reasons for investing: creation of an emergency fund, paying for children’s education or marriage, owning a residential unit, starting a business and so on. Retirement will be an obvious goal too. Rank these objectives in order of importance and you will arrive at a tidy set of priorities.

If you have not done this yet, start the exercise now. Chances are, you will not regret it. Also, as the years go by, your tidy list of priorities will get revised several times. Occasionally, there will be problems. Therefore, save diligently. Every Rupee that you save today may well count tomorrow.

As all consumers know, the availability of many me-too products makes life difficult. The logic is well entrenched in the realm of mutual funds, where there are plenty of competing funds. That often leaves the average investor more than a little confused. Indeed, he is tempted to choose on the basis of certain imprecise elements. The foremost of them is past performance – commonly the most popular yardstick and a burden that often sits heavily on asset management companies.

Should I simply go in for the fund that has delivered the highest returns in, say, three years? That seems to be the most typical question, raised every time an investor needs to choose from among a platter of contenders. And the answer could not have been clearer. No, please do not make a selection merely on the basis of past performance.

The argument could not have been simpler: the availability of a large number of mutual funds makes investment decisions complex and difficult. Yet the Indian investor has witnessed – over the past few years – the arrival of competing funds in almost all categories. The phenomenon is particularly evident (in terms of its being in the public’s mind) in the world of equity funds.

Witness the recent deluge of ‘infrastructure funds’. What, at the end of the day, are these products? To cut a long story short, these are a bunch of diversified equity funds that invest in, well, almost everything. Commodities, industrials, fertilizers, logistics, finance… you name it and, oh yes, an infrastructure fund’s portfolio would surely have it.

Did the market really need a separate category based on the theme termed infrastructure? Did investors deserve such a new theme? Actually, now that we are thinking about it all over again, infrastructure was not a new concept at all. Infrastructure-led growth! That term was heard quite often in the last decade and even earlier. The fact that the government of India has been banking on such growth was quite obvious. So, what’s new about it?

Did the spin-doctors (oh, yes, we do have that breed in the world of asset management) work out a seemingly-novel concept in order to unleash a series of NFOs (new fund offers)? Some would definitely think so. Others, especially the ones who have a stake in the growth of the fund industry’s asset-base, would perhaps argue differently.

The point is, the fund industry needs new products (newer categories too) to fill and sustain the pipeline. A crowded pipeline means so much – marketing hoop-la, a new generation of investors, a whole sub-culture. Considering some of the recent developments, it seems the industry does not care much about product differentiation.

Who suffers, then, from the anomaly? Investors, no doubt. These are the ordinary folks who come to fund houses with a lot of hope. They really need simple products that are genuinely different from the ones that have preceded them. It is time, therefore, to urge the industry to consider mergers of funds. If there are two overlapping products managed by the same fund house, is there actually a need to preserve both? The answer is obvious, isn’t it?

Our argument is based on a number of observations. We bring a quick list here.

• Low level of investor education/awareness is stifling genuine growth of managed assets.
• A general lack of understanding of mutual funds is compounding the situation. There is need for a reversal here.
• Limited focus on increasing retail participation. The industry is for ever worried about institutional investors – the corporates, the trusts, the societies and the like. Retail, the so-called “backbone” of the market, has an uphill task

It is well known that in a country like India, financial literacy is a mighty big challenge. Household savings – the bulk of it, that is – have been moving steadily into bank deposits. Mutual funds must energise themselves in order to receive a higher share of the nation’s collective investible surplus. We are, mind you, referring to retail investors here. Indeed, despite all that has happened, retail investors have never been seriously into mutual funds. Those who have actually invested in funds are most likely to be unaware of concepts like risk-return, portfolio diversification, systematic investment and so on.

What, you would ask, are the benefits that would flow from fund mergers? Well, the number of competing products would reduce, at least within the same fund house. Investors would have to choose from among genuinely differentiated products. However, this does not necessarily mean that choice per se would become easier.

This is the right time to liberate the retail investors from external shackles. That is because fund houses are mostly bothered with securing big-ticket investments, offering tax arbitrage to companies, providing easier access to institutional clients. At any rate, much of the focus is on the top cities.

Garnering more retail participation from the interiors is difficult, given the modest infrastructure that most asset management outfits have at this point. The investor who is stationed far away from the main hubs is indeed under pressure – he has very limited access to organized investment management. His money, whether you want it or not, would rather go to bank deposits than to other destinations.

Should there be such a thing as a totally hands-off portfolio, even when the investor concerned has let professional fund managers take decisions on his behalf? We don’t think so. Far from it – we strongly urge investors to do things on their own and not to take everything for granted.

Now, just in case you do not have the time or inclination, mutual funds are of course your answer. That is because you are allowing experts to buy and sell securities. You only get to hold a certain number of units. Easy and smooth, one would argue.

Yet, investors would be strongly advised to monitor their portfolios’ overall performance, including such specifics as returns, transaction costs, service standards and so on. Each of these components is important; together, they account for the experience that investors gain from the process of allocating surpluses.

For those who merely want to allocate money to well-performing funds, here is a primer (in the form of questions). You need not answer them separately. Just roll them over in your mind and form you own view.

Are you aware of the risks when you invest in funds of your choice?

Are you buying and selling too much, perhaps quite unnecessarily? For all you know, your transaction costs are probably too high.

Is there scope for exiting under-performers? Can you instead allocate more money to the more successful funds?

Are your holdings in line with your optimum asset allocation? Have you done a thorough risk profile before you bought the funds?

Is your fund manager taking too many aggressive calls? Is the collective weight of his bad selections (poorly chosen securities) bringing down returns?

Remember, as an investor, you need to take informed decisions. Therefore, you have to learn at least the basics of investing in mutual funds. The market is never without risks, as even the most seasoned investor will admit. In such a scenario, a good understanding your investments is an absolute pre-requisite.

Putting your money in assets that you do not appreciate is a bad idea. Assuming you have passed that stage – that is, understand your assets and the risks involved – you would be advised to diversify your holdings. Indeed, diversification will help you minimize chances of disaster (read: losses).

Mutual funds, which are a better choice for most, are many in number. There is also a confusing variety to choose from. Yet they provide instant diversification to unit holders. When it comes to mutual funds, here are a few quick issues to raise.

1. Is my fund diversified enough so as to gain adequately from the markets?
2. What are the tax implications? Short term capital gains, incidentally, are often taxed heavily.
3. Am I ready to re-balance my holdings from time to time, depending on changing objectives? That requires you to be vigilant about many things.

Anyone can hire a stock portfolio manager, but managing your portfolio can be very rewarding, as long as you understand the basics. The items above are especially important for new investors, but keeping them in mind will help any investor manage his or her portfolio effectively.

Now that we have put our New Year revelry firmly behind, it’s time to come back to a familiar haunt – personal finance. On this Sunday, we will talk about a specific aspect: disciplined investing and ways to instill discipline in our investing careers.

As in all other things in life, there are no short-cuts here. A disciplined investor can earn financial freedom earlier than one who just enters the world of personal finance in a casual, slapdash manner.

Discipline, for the purpose of this column, will be manifest in the ways in which you approach savings and investment products, especially mutual funds, insurance and fixed deposits. If you are disciplined, you will value such basic elements as systematic investments, asset allocation, portfolio re-balancing and so on.

Now, all these things are easier said than done. We know it quite well, and, therefore, have tried to prepare a checklist of sorts. Aimed at the disciplined investor (as well as one who wants to attain that status), this broad roster will be a useful tool for all.

1.     Know your goals, set your aims, write down your financial objectives

2.     List your income, expenses, liabilities, assets, obligations

3.     Work out systematic investment plans in mutual funds

4.     Buy insurance to cover life, health and home

5.     Diversify your portfolio to ensure investment in major asset classes – equity, debt, gold, real estate

6. Create a corpus for retirement. This will happen sooner or later, and, with improvement in medical science, you may live a long retired life

7.     Try to beat the damaging impact of inflation and taxes

8.     Get the optimum asset allocation in line with your age, status, commitments, dependants and the like

The disciplined individual will follow all that is mentioned above and work out a few more rules for himself. Take, for instance, the point related to the creation of a retirement corpus.

Take, at another level, the point related to goals. Would you require an extra dose of money in, say, ten years in order to send your child to college? Do you have access to that sort of money now? If you do not, make sure you are investing enough, perhaps systematically in equity funds.

On another front, if you are an intelligent investor, you will also want to purchase the right sort of general insurance products. To begin with, let’s take up what is probably your most valuable worldly possession.

Yes, your home, that very precious asset, needs to be secured against risks, via a single policy that provides adequate protection to the property owner. A small premium, may be equivalent to the salary paid to a security guard, will go a long way in this direction.

Further, there are insurance policies that provide compensation for loss of life (or injury, partial or permanent) that may be caused by accidents. The unfortunate will leave a trail of unfinished work. There may well be very fundamental matters, such as education and marriage of children, to take care of.

A smart individual will buy insurance to take care of medical expenses, following hospitalization (may be, from sudden accident or ailment). Typically, a critical illness policy provides protection in the case of major ailments, including ones that can jeopardise your normal working life.

Remember, these insurance policies will not cost you the earth. On the contrary, each small allocation will augment your personal security levels. These days, individuals often pay a lot of money to entertain themselves, socialize and live in style. Imagine the kind of money you spend every year to purchase movie tickets or dine at restaurants. Just a fraction of that may buy you peace and happiness. So be it.

You need not be a Warren Buffet in order to think big. You can start in a small, controlled manner. After all, your resources may well be limited, your time may not stretch too long and your patience may run out earlier than you think.

 Did you know that you can start a SIP with a tiny amount, say, even Rs 500? May be, you would want to put in a mere Rs 100 every month. Think of each payment (in a SIP) as a brick, needed to build a strong bulwark, finally leading to a solid house. It’s one step at a time, and, with a little help from market trends, you will create a strong foundation for yourself and your family. On that happy note, let’s part ways for the time being.

How will you invest in mutual funds in 2011, now that the equity market is again so fickle, the debt market is capricious and several major economic parameters are not looking too good? This question is looming large right at the moment, given the kind of volatility that the past year has recorded – a trend that may well spill over into the next.

A quick recap will help us remember recent developments that did influence the markets substantially. We are referring to corporate results (benign, for most parts), inflation (strong, as the nation’s banking authorities remind us), interest rates (hardening, even as we are writing this column) and so on. Yes, equity prices did get strengthened in the process, a scenario that was replicated by gold and real estate.

But before we move into related territories, let’s try to answer the question raised in the very beginning of this column. You will, if you are trying out equity funds seriously, have to be patient in the New Year in order to reap the full benefit of your allocation to this risky asset class. If you are not comfortable with a large, one-time allocation, you may consider gradual month-by-month investments in select equity funds.

Such a calibrated investment programme will help you pass through the ups and downs of the stock market with relative ease; it will also allow you to exploit the advantages of Rupee Cost Averaging. In plain terms, this means when the market is high (that is, NAVs are north-bound), you end up with fewer units; similarly, when the market is low (NAVs, consequently, have declined), you get to acquire more units. On the whole, you close the year with a decent monthly average. And when you do this for more than just a year – five, ten or even longer – your average becomes really enviable.

If you are an avid equity fund investor, please keep a watch on corporate performance in general. A decent step-up in year-on-year performance will lead to finer valuations and firmer stock prices as well. In such a scenario, your investment strategy needs to cover a few well-chosen growth funds.

At another level, you need to see whether you would be comfortable with sectoral funds. Perhaps, a small exposure to sector-specific funds may not be out of place. However, such a ploy carries its own set of special risks. We shall discuss sectoral funds in greater detail in another column.

If you are trying out debt funds, you will need to temper your expectations in favour of more stable and predictable returns. A lumpsum investment in debt funds may be helpful, especially if you require stable income. In fact, for conservative investors who are chiefly inclined towards debt funds, a limited exposure to balanced funds may be prescribed.

A balanced fund, as the name suggests, invests in a mix of equity and debt. A range of asset allocation funds too are available; one or more of these may be chosen in line with your risk appetite. The average five-year track record displayed by balanced funds is not too bad.

For the record, equity-oriented hybrid funds have delivered more than 14 per cent during this period. Names like HDFC Prudence (which has performed exceptionally well in recent years) can be brought up in this context. Barring a few, this category of funds, incidentally, has been largely ignored by investors. And this may be the time to consider their merits more seriously.

A quick word about the impact of the latest policy missive by RBI may be relevant here. Fund houses have generally pointed out that the apex bank’s action was quite anticipated. Many of them were running higher duration and greater allocation to government securities.

A rally in yields (after the policy was declared) will have a positive effect on funds. Debt fund specialists expect gilts to find support from open market operations buybacks and demand from greater FII investment limits. Most of them feel that the debt market will still remain volatile in the months to come. Yet, in the days ahead, fund managers recommend more investment in duration products. That is because yields are expected to soften a bit from the present levels.

Inflation, it needs to be told here once and for all, will continue to trouble the markets. The banking regulator, we can naturally assume, will remain vigilant on this front. Strong domestic demand and rising commodity prices will fuel inflationary trends, experts suggest. Already, increased fuel prices are unleashing a lot of heat. In a scenario marked by rising demand, the manufacturing sector should be able to pass on their input price rise to products. This should ultimately bode well for corporates and their margins.

Be that as it may, we hope you enjoy investing in the New Year. A few quick resolutions – disciplined investments, regular allocations, diversified holdings – may help you usher in good times for yourself and your family. A review of your basic financial objectives will be a nice way to begin 2011.

 The markets have been fiercely violent during the past few days, dashing hopes of a pre-Christmas rally and generally affecting net asset values. In the light of these distortions, let us move from our usual haunt – financial planning with mutual funds – to the state of the markets, both equity and debt.

 Investors, it seems, are getting increasingly worried about the monetary tightness that is impacting a number of economic sectors, a mood compounded by negative sentiments stemming from the susceptibility of the global economy.

 In our opinion, however, the Indian market for equities will rise smoothly once again on the basis of FII-dominated inflows, provided there are enough positives cues from major markets. That may well happen once the dust settles on the corruption issues that have lately found a place on the national platter.

 Remember, we witnessed splendid flows in recent weeks, especially during Deepavali – at a time when Coal India did its initial float. Sentiments have worsened considerably since then. Only positive flows from institutional investors (and we are not ignoring domestic institutions here) will change the mood for the better.

 Let’s mention here that investors have generally responded well to IPOs, especially issues offered by public sector companies. Going by their response, it is clear that domestic investors want to come back, particularly if they find attractive valuations at lower levels.

 The opinion being expressed by fund managers, therefore, is simple: Investors need to make use of the opportunities unleashed by this volatility, more so because medium- to long-term fundamentals look lucrative. Others who are watching the corporate sector also feel that valuations will start crawling back to their previous levels and may even go higher.

 Fund houses further suggest that investors need to stay put and indeed spread their holdings over a number of well-diversified portfolios. Investing in a mixed bag – across sectors, capitalizations and the like – has its merits. Diversification, experts feel, can really make a difference to your overall returns. We too urge you to pick up a few diversified equity funds with the intention of staying invested for at least three to five years. While some of the smart performers may be chosen, there is no guarantee that past performance will be repeated in future as well.

 On the debt side, investors are aware how bond yields have fallen with the changing RBI stance on interest rates. Liquidity has generally remained tight, a scenario that is not too comfortable for anyone. The central bank has on a number of occasions expressed the view that inflation needs to be tamed on a priority basis.

 Fund houses suggest that investors need to check out shorter term products, including liquid and ultra short debt funds. Typically, they have low duration and are well placed to provide consistent, predictable returns. You too may need debt products that will be able to make use of a rise in short term yields. Those who seek consistent income over a decent stretch of time may consider these funds.

 If you happen to be a conservative investor – one who has low appetite for equity – you may well consider two time-tested options: capital protection oriented funds (CPOFs) and monthly income plans (MIPs).

 The average product in the former category normally comes with a lock-in of three years. The general idea is to offer returns that are somewhat superior to those provided by bank deposits. Banks, as you may be aware, have now increased their rates, although the increment has been marginal. The point to note here is that there is nothing guaranteed by CPOFs. The market regulator does not allow asset management companies to launch guaranteed-return products at all. All those guaranteed-return funds are a thing of the past and we will, it now quite seems, never go back to those days when investors locked their money into such products.

 The average MIP, unlike CPOFs, has no lock-in period. There is a limited exposure to equity. Under normal circumstances, the ceiling on equity is 15-20 per cent. There are several instances of multiple products (managed by the same fund house) offering varying equity ceilings. You will have to ascertain your risk profile before you select the most appropriate option.

 It is indeed impossible for us to advise you on the ideal duration of your investment. However, given the controlled allocation to stocks, it is safe to stay invested for at least a year. Now, if you are satisfied with a 10 per cent equity ceiling in your MIP, why should you opt for a fund that can invest up to 25 per cent in stocks? That is a very critical question. Only you will have the answer. As always, be prepared to consult a financial planner in order to arrive at the correct solution.

In our last column, we dealt largely with retirement planning, a subject that seems to be quite close to people’s hearts, considering the kind of response we received. To stretch the point a little more, we will discuss a few other pertinent issues, including goal-setting.

Among the most important considerations for an investor is sorting of goals. For the average individual, there may be a few very specific long-term goals – such as ensuring that children get expensive education – and a slew of short- and medium-term ones as well. The latter may include investment in a second home or an overseas trip. Whatever it is, the simple fact of life is that you will need money to achieve these goals. Setting goals according to priorities, in this context, is critical.

You will, in your endeavour, notice that some goals are more important than others. Financial goals very often compete with each other. In most cases, investors have multiple goals. In such cases, prioritizing is essential. A suitable investment plan is necessary for each of them.

A significant issue stems from time horizon – that is, the time you have to pursue a certain objective. The shorter the time horizon, the safer should be the investment. If you, say, have a goal to meet in 12 months, you may not add an additional equity fund to your holdings. That is because 12 months is far too short a time to bet on equities. In such a situation, a debt fund may well be prescribed. However, there too, there is no guarantee that your aim will be fulfilled. After all, investments are subject to market risks of myriad hues.

Therefore, here is what we recommend for those who invest in mutual funds. While this is by no means fool-proof, it may serve as a rough guide.

• For very short-term goals, involving payments to be done within the year: Liquid funds that will probably fetch you 4-5 per cent, a very predictable score. Plain vanilla income funds may also be chosen after careful consideration.
• For goals that will require you to pay within the next one to three years:  Balanced funds (or, more conservatively, MIPs that have a limited equity allocation).
• For goals that will involve payment after three years: Equity funds, because you can now take the risk and aim at a decent capital appreciation. If you can stay invested for, say, eight to ten years, there is a clear scope for selecting a variety of equity funds.

Conventional wisdom tells us that your risk appetite will determine how you will invest in equity products. Are you closer to the payment date (for meeting your goal)? If the answer is Yes, you may feel inclined to go slow on equities. In other words, as you move closer to your goal, you will want to revise your asset allocation so that less (and not more) is at risk in the stock markets.

 If you, after goal setting and budgeting for each goal, know how much to save, you will be required to deal with a host of other tricky issues. Creating a budget needs to be among your first tasks. And once you have a budget, it is important to revise it in order to reflect the latest commitments. Curbing wasteful habits may well be seen a major achievement in this context.

 For the record, working out an efficient budget is an essential step. This may be based on the experience you have gained from running your household. Budgets will have to be revisited, considering the impact of inflation on prices, especially prices of food, fuel, medicines and so on. Remember, in the current economic context, food inflation is already running high – a fact that will inevitably influence all budgets.

If the individual is still very young and can not save enough, there is no need to feel discouraged. As time passes and your career progresses, there will be a lot of opportunities for you to earn, save and invest. Meanwhile, till such time it happens in a meaningful manner, do invest regularly and systematically in mutual funds.

Here, we must particularly mention equity funds and the advantages they offer, provided there is enough time on your side. A few well-managed equity funds, held perhaps for ten years or even longer, can make a big difference to your portfolio. However, the selection must be made carefully. Do not be overly attracted by past performance. A fund manager who performed spectacularly in an earlier phase of the market may not be so successful in the next phase.

Starting at an early age with equity funds will give you certain special advantages that older investors will not be able to enjoy. So, if you are young, this may be the best time to start an investment programme. As the well-known adage goes, time and tide wait for no man.

 Retirement, like the collapse of dictatorships, is inevitable. You know it, whether you have invested in mutual funds or have consciously stayed away from them. If you are in the former category, you have probably started using funds as a tool to build retirement assets. And you are in the latter, this may well be the time to begin what may well become an eventful journey.

 First, a quick look at a basic issue related to retirement. If are close to it, please read on carefully; after all, you need to ensure that your capital remains with you, at least, for as long as you survive. Given the advances in medical science, you may live for many years – well after you are retired and are not earning as actively as you once did.

 Now, if you are a believer in do-it-yourself investment strategies, here is what you may consider doing with your mutual fund investments: Assess your risk-profile, determine your time horizon, focus on capital creation/preservation/growth, beat inflation and taxes.

If you have some years to go before retirement is actually set to happen, do invest in the right funds and re-balance your holdings in line with the latest requirements. You will need the fruits of your labour to last a lifetime. Regular, systematic investments in the choicest funds may become essential for you.

 At all times, investors need to understand how they, as retirees, should spend their retirement savings. Retirement savers do not always have the luxury of multiple income options. Research shows that retirees often have greatly varying needs. Clearly, there is no one-size-fits-all solution when it comes to retirement planning.

 However dedicated you are (in your effort to set up a retirement corpus), you may still run a huge risk: longevity. The killing impact of inflation, the crazy behaviour of the securities markets, sudden health-related issues are likely to emerge as big concerns for you. Are your investments liquid enough so that emergency funds can be made available at the slightest notice? Are you, despite the insurance you have bought, running risks owing to sub-standard cover? Do you have the correct budgeting and spending plans in place?

 As many advisors recommend, retirees would do well if they think about preserving their capital to the extent possible. The question for us is this – how do you use mutual funds (or, more specifically, returns from your funds) to your advantage?

 The prudent investor is often willing to reinvest any lump sum gain that he may have reaped. Also, he is inclined to choose the most optimum installment payments or annuities. Before he does this, however, he needs to select a financial advisor who will guide him, especially through the maze of tax laws.

 Perhaps, you need to choose a professional who will charge you fees. Such a person will be quite different from someone who is merely interested in selling you financial products. Remember, worldwide, there is massive awareness about retirement, pensions and the like. Yet, increasingly, despite plenty of reforms initiated by governments, there are large hurdles for retirees.

 Let’s close this column with an interesting trend that has been discussed lately by ICI – Investment Company Institute, the well-known industry body in the US. Between 1975 and 2009, contrary to conventional wisdom, private-sector pension income has become more prevalent, not less prevalent, over time. Employer-sponsored retirement plans are evolving – but fast enough, ICI feels.

 Not so, perhaps, in India where the government has lately done a lot on this front. As in many other countries, social security currently serves as the foundation for retirement security here as well. Elsewhere, it often acts as the largest component of retiree income and the principal income source for lower-income retirees. In India, pension reforms have been introduced, spearheaded by the new pension regulator. A number of pension fund managers have offered their services to subscribers.

 Yes, the pace of growth has been slow. Yet the good thing is that a beginning has been made – we had to start somewhere. The tempo, it is only hoped, will increase in the days ahead. The new pension system (NPS) is available to all. Subscribers have the option to decide how their contributions are to be managed. That, we believe, is one of the best things that have happened on the pensions front. NPS is today among the most low-cost options for retirement planning. We, as Indians, must use it prudently to in order to take advantage of the reforms process.