Ideal Finance - Timeless Advice

It’s Time to Change Your Financial Advisor if...

It helps to have a good investment advisor. But a bad one can spell disaster. Here, according to experts at the financial website PersonalFn. com, are some warning signs to watch out for:

He only recommends the season’s flavour. If so, he’s not creative enough. Many advisors follow the herd and make you invest in what everybody else is — like new fund offers (NFOs). Usually these schemes enjoy a moment of glory, one that may not last for long.

You’re keeping him for the commission he offers. A widely prevalent practice (despite being illegal) among advisors is to give you part of his commission. Select an advisor for his analyses and advice. Commission offered by the advisor could be a ploy to disguise his inefficiencies.

He only advises lump sum investing. An advisor who makes you invest large amounts at one go is probably doing that to increase his earnings and may not under-stand the nuances of market-related investments made over time.

He only delivers and picks up the forms. Oddly this is what the bulk of the advisors do. An investment advisor’s primary role includes creating a portfolio based on your needs, risk profile and successfully managing the same.

- PersonalFn.com



Save on Shirts

You’ve possibly forgotten your friendly neighbourhood tailor, because you’ve been buying readymade branded shirts at Rs.1200 apiece. Most good tailors can clone a branded shirt that fits you perfectly. So, even if you buy the best fabric that readymades use and pay the tailor (about Rs.150 for a shirt), you could save more than 50%. And he’ll also “tailor” your shirt to your taste — a larger pocket perhaps, button-up collar, or a shorter sleeve.

There is a very easy way to return from a casino with a small fortune: Go there with a large one.

- Jack Yelton



Mutual Funds: Do SIPs really work?

Mutual funds offer you systematic investment plans (SIPs) where you are committed to invest a fixed amount of money every month in an equity scheme. The number of units you get will depend on the prevailing price: You get fewer units when the market price is high, and more units when the stock market is down. Your cost averages out, and hence SIPs are based on what’s called “rupee cost averaging.” But do they always work to the investor’s advantage as the mutual funds claim?

The answer, according to researchers: Not always, but only sometimes. Every known stock investment strategy will work at times, but nothing works all the time. And SIPs are no exception.

Of course, SIPs will work for a while if the date at which you start buying units falls just before a significant market crash (like May 2006). You’d have been even more lucky if the market slumped for a year after you joined the scheme (like most of 2002). Since you can’t predict these downturns, there’s little reason to believe that SIPs will give you an advantage.

Yet, why do many people persist in believing that SIPs always work? It’s, first, the effect of mutual fund ads and newspaper articles that constantly spread the myth. But there’s probably also a psychological appeal: If the market dips, people will be happy because the units become cheaper. If the market goes up, people will be happy anyway!

- M.S.



Q: Should I invest in new fund offers?
Answer: To most unsuspecting investors, a mutual fund’s new fund offer (NFO) looks cheap, because units are sold at Rs10, while the units of an older scheme are sold at a price determined by its net asset value (NAV), which may be higher than Rs10. Schemes that have done well may have very high NAVs and so they will seem costlier. For instance, one unit of HDFC Prudence (launched 1994) sells for about Rs105 while Reliance Growth (launched 1995) sells for about Rs250.

But it does not mean that your risk is low when you invest in an NFO at Rs10 per unit. In fact your risk of losing money may be much higher with an NFO than if you were to buy into an older scheme, say, at Rs250 per unit. Units of the older scheme, like HDFC Prudence or Reliance Growth, are priced higher only because their fund managers have done a good job and grown their NAVs. But with an NFO, you have no history to look at. So go for an old scheme that has performed well, since there’s a good chance it’s going to stay that way. Visit ValueResearchOnline.com or use Outlook Money magazine to study an older scheme’s annual returns before investing. And, if it’s an equity fund, it’s best to hold your cash and invest when there’s “bad news” and the stock markets are down.