power play

We had some loose cash on our hands, and so decided to invest. Our regular investments happen in ELSS schemes, thanks to Section 80C. Besides that, we put some money every year in diversified equity funds and some hand-picked shares. This time, we decided to venture along a different route — sectoral funds.

The idea that immediately came to mind was to put equal amounts in each sector. That sounded nice and easy, and looked like a good way to hedge against bad sectors. But then, isn’t that what a diversified fund does, anyway? In fact a diversified fund is better at it than you putting money in all sectors by yourself. The latter implies that you have given a fixed weightage to every sector and you are unlikely to change it any time. But the management team for a diversified fund are likely to recalculate these weightages quite often, and churn their portfolio accordingly.

We checked the annualised returns on various sectors, and those on diversified funds. It did turn out to be as we expected — rough calculations showed that putting 100 rupees in a diversified fund is much better than putting 20 rupees in five different sectors.

But then, what are sectoral funds for? Its a mixed kind of risk for those who want just that right combination. We have diversified funds on one side, and hand-picked shares on the other. Sectoral funds fall in between — we hand pick the general “kind” of companies when we choose a sector, and the fund is busy hand-picking the individual companies. This seemed just the right kind of arrangement to fill out a hole in our equity portfolio.

The idea here is to place your bets on one or two sectors, and not all of them. The risk is that your bet may go wrong. The benefit is that if the bet goes the right way, you gain more than a diversified investment. And of course, the risk is less than hand-picking shares yourself. So for us, this kind of a risk just fit in with what we are already doing. But for others, this could mean a new kind of risk.

We decided to place a bet on power and infrastructure. We believe its going to be good for the next few years. So we subscribed to the NFO from Sundaram that ends on 11th December, for a three-year close ended fund in the power sector. We also invested some amount in the Tata Infrastructure Fund, besides some routine investments in diversified funds. Now we wait and watch … in the long term, of course.

There’s a key consideration to make when selecting funds, by the way … never put too much money in the same fund house. You don’t know when it could be hit by a scam, or by life in general. That means sometimes you have to choose the runner up instead of the best, but for me, the peace of mind is worth those lesser returns.

when investment meets insurance …

One of my regular ways of wasting time on the internet is reading about personal finance. Over the last couple of years, I have been totally convinced about the fallacy in “Jeevan ke saath bhi; jeevan ke baad bhi”. In general, any insurance scheme from any company, that promises you some kind of returns is simply not worth it.

I have managed to force a number of my acquaintances to see the light, or at least agree with me in saying that there’s something amiss about insurance policies the way they are advertised on TV. Here’s a set of articles that gives the broad picture, though:

Return of premium: What’s it worth?
This one is about how “money back” policies (from any company) are not as profitable as they seem.

Investments? Insurance? Or both?
A similar analysis of endowment policies.

Personally, these insurance policies disagree with my fundamental requirement that every rupee I save should continue to work for me, within reasonable parameters of risk v/s return. But on top of that, I suspect that these policies also actually lose money, once you bring inflation into the picture. Unfortunately I have yet to get enough insight to do an actual analysis of the effect of inflation, so it remains only a suspicion right now.

Here’s a bunch of articles on advise about how to approach insurance, whether or not one agrees with the articles quoted above:

4 common life insurance mistakes
Insurance: This time ask the right questions
4 ULIP ‘sales pitches’ to beware of
Mis-selling: ULIPs’ greatest bane
ULIPs? Read the fine print before investing

gold may not be so attractive anymore …

Happened to see this article today:

Gold delivers… but not for you

Gold has been a reasonably good investment for [the Indian investor] over the last few decades. And that’s not because gold has been a fundamentally strong asset. But because over most of the last three decades, the Indian Rupee actually lost value vis-à-vis the US Dollar. Yes, exactly the opposite of what you have witnessed this year.

The result was that even though the price of gold in US Dollar terms declined over most of this period, [the Indian investor] actually gained because the depreciation in the value of the Indian Rupee vis-à-vis the Dollar, more than made up for it!

If you believe that we are entering an era of a stronger Indian Rupee, then you should know that it is the fundamentals of gold which will drive the future price of gold; not any other factor as in the past.