Coal scam: If CBI smells a rat, PM should be accused No. 1, former coal secretary PC Parakh says

Former union coal secretary Prakash Chandra Parakh said on Tuesday that if the CBI smelt a conspiracy in allocation of coal blocks, then Prime Minister Manmohan Singh should be an accused too since he signed off on the decision.
"At the moment, I would only like to say that in its investigations, CBI is unable to make a distinction between bona fide decisions taken in public interest and wrong decisions. If CBI has come to conclusion that allocation of Talabira (coal blocks) to Hindalco was a conspiracy, then they should have made the Prime Minister, who approved the allocation, as accused No. 1," said Parakh.

"It is strange that CBI should question my bona fides, when I initiated several measures to bring transparency in the coal sector despite several odds."
Parakh's remarks came hours after he was named in the latest chargesheet filed by the CBI along with industrialist Kumar Mangalam Birla and his company.
In fact, Parakh, a geologist-turned IAS officer of the 1969 batch of the Andhra Pradesh cadre, who now lives in Hyderabad, was described as the coalgate whistleblower and the inclusion of his name in the CBI chargesheet has surprised many following the scam closely.
Parakh was appointed Union coal secretary in March 2004 and despite several attempts by ministers in the UPA government to unseat him remained in that post till he retired in December 2005.
Although the Centre had decided to open the coal sector for discretionary allocations in 1993, it was only in May 2004, after the UPA government took over, that the allocations actually happened in big numbers. As coal secretary, Parakh headed a screening committee whose job was to hand over lucrative coal blocks for mining to private companies. According to sources, the beneficiaries of such allocations were companies that made political contributions to the Congress-led coalition.
Parakh was also against the screening committee's approach of subdividing a coal block so that more companies could be accommodated. He proposed that the discretionary allocation of coal blocks be scrapped and replaced with competitive bidding. Parakh then moved a cabinet note recommending that the Coal Mining Act be amended with the help of an ordinance to bring about competitive bidding of coal blocks. The ordinance was nixed.
Interestingly, while Shibhu Soren and Dasari Narayana Rao were the coal minister and minister of state respectively when the UPA government took over in May 2004, at the time when Parakh moved the cabinet note seeking the scrapping of the selective allocations of coal blocks in favour of competitive bidding, Soren had to resign due to political reasons and it was Manmohan Singh who was in-charge of coal ministry. The PM headed the ministry between July 2004 and November 2004, when Soren was reinstated.
According to sources, not only Soren, but several MPs tried to get Parakh removed as coal secretary. Under pressure, the officer opted for voluntary retirement but in fact retired on his official date of December 2005. A few months ago, Parakh was of the view that the PM should have put his weight behind competitive bidding.

Cooper Tire pension fund objects to Apollo's takeover

Apollo Tyres is facing the heat over its $2.5 billion takeover not only from its own shareholders but also from the pension funds of Cooper Tire employees.

The Cooper Avon Tyres Pension Trust has alleged that the acquisition of Cooper Tire would be materially detrimental to the pension plan and contacted the relevant pension regulator seeking higher payments to the fund.

The UK Pension Trustee has intimated Apollo that unless it receives certain assurances, including in the form of special contributions, an acceleration of recovery plan contributions or provision of guarantees and security, it would exercise its moral hazard powers.

In simple terms, moral hazard power relates to a contribution notice (CN) or a financial support direction (FSD) which the regulator issues to pay a set amount of money to the pension scheme. An FSD, on the other hand, requires a target to put forward a proposal of longer-term financial support for the scheme. This support could be in a number of different forms, such as cash, a guarantee or other security arrangements. Any proposal requires a regulator’s approval before it is put in place.  The regulator can only issue a CN or FSD where it believes that it would be reasonable to impose the liability.

In a communication to Cooper dated October 4th, Apollo has said that it asked for but has not yet received the correspondence between Cooper and the UK Pension Trustee and is “very concerned” based on the tone of the most recent letter as Cooper has once again sought to conceal the true state of affairs confronting the company from the parent parties.

The same letter has alleged the financial performance forecast of the American company deteriorated consistently within a few weeks of the $2.5-billion deal announcement in June.

From court documents, Apollo says on September 17, Cooper provided a new account of its financial situation, forecasting a nearly 33% decline in operating profit for September from the forecast delivered only days earlier.

“Now, we have just received yet another story of the company’s third quarter forecast and this one reveals the most troubling shortfall yet — $3.4 billion in revenues and $257 million in operating profit for 2013. In other words, 2013 revenues and operating profit as projected in July were 25% and 48% higher than your current estimates,” goes a letter dated October 4 sent to Cooper by Apollo.

Apollo was trading at Rs 67 a share on the BSE. The stock has lost a quarter of its value since the company announced the jinxed deal with Cooper Tire.

oreo - A GLOBAL BRAND

Executive Summary: For most of its 100-year existence, Oreo was America's best loved cookie, but today it is a global brand. Faced with stagnation in the domestic market, Kraft Foods moved it into emerging markets where it made some mistakes, learnt from them and ultimately triumphed. This case study looks at the strategies used to win over customers in China and India.

On March 6, 2012, the famous cookie brand, Oreo, celebrated its 100th birthday. From humble beginnings in a Nabisco bakery in New York City, Oreo has grown to become the bestselling cookie brand of the 21st century generating $1.5 billion in global annual revenues. Currently owned by Kraft Foods Inc, Oreo is one of the company's dozen billiondollar brands.

Until the mid-1990s, Oreo largely focused on the US market - as reflected in one of its popular advertising slogans from the 1980s, "America's Best Loved Cookie". But the dominant position in the US limited growth opportunities and spurred Kraft to turn to international markets. With China and India representing possibly the jewels in the crown of international target markets due to their sheer size, Oreo was launched in China in 1996.

The China launch was based on the implicit assumption that what made it successful in its home market would be a winning formula in any other market. However, after almost a decade in China, Oreo cookies were not a hit as anticipated, according to Lorna Davis, in charge of the global biscuit division at Kraft. And the team even considered pulling Oreo out of the Chinese market altogether.

In 2005, Kraft decided to research the Chinese market to understand why the Oreo cookie that was so successful in most countries had failed to resonate with the Chinese. Research showed the Chinese were not historically big cookie eaters.

According to Davis, Chinese consumers liked the contrast of sweet and bitter but "they said it was a little bit too sweet and a little bit too bitter".

Without the emotional attachment of American consumers who grew up with the cookie, the taste and shape could be quite alien. In addition, 72 cents for a pack of 14 Oreos was too expensive for the value-conscious Chinese.

Kraft's Chinese division used this information to formulate a modified recipe, making the cookie more chocolatey and the cream less cloying. Kraft developed 20 prototypes of reduced-sugar Oreos and tested them with Chinese consumers before arriving at a formula that tasted right. They also introduced different packages, including smaller packets for just 29 cents to cater to Chinese buying habits.

The changes had a positive impact on sales and prompted the company to ask some basic questions challenging the core attributes of the traditional Oreo cookie. Why does an Oreo have to be black and white? And why should an Oreo be round?

This line of questioning and an ambition to capture a greater share of the Chinese biscuit market led Kraft to remake the product in 2006 and introduce an Oreo that looked almost nothing like the original. The new Chinese Oreo consisted of four layers of crispy wafers filled with vanilla and chocolate cream, coated in chocolate. The local innovations continued and Oreo products in China today include Oreo green tea ice cream and Oreo Double-Fruit.

Another challenge for Kraft in China was introducing the typical twist, lick and dunk ritual used by American consumers to enjoy their Oreos. Americans traditionally twist open their Oreo cookies, lick the cream inside and then dunk it in milk. Such behaviour was considered a "strangely American habit", according to Davis. But the team noticed China's growing thirst for milk which Kraft tapped with a grassroots marketing campaign to tell Chinese consumers about the American tradition of pairing milk with cookies. A product tailored for the Chinese market and a campaign to market the American style of pairing Oreos with milk paid off and Oreos became the bestselling cookies of that country.

The lessons from the Chinese market have shaped the way Kraft has approached Oreo's launch in India. Oreo entered India through the import route and was initially priced at Rs 50 (about $1) for a pack of 14. But sales were insignificant partly because of limited availability and awareness, but also because they were prohibitively expensive for the value-conscious Indian masses.

Learning from the Chinese success story, the company under global CEO Irene Rosenfeld took localisation strategies seriously from 2007 onwards. The $19.1-billion acquisition of Cadbury in 2009 provided Kraft the local foothold it needed in India.

Unlike the Chinese, Indians love their biscuits. Nielsen says India is the world's biggest market for biscuits with a market share of 22 per cent in volumes compared with 13 per cent in the US. While the lion's share of this market is for low-cost glucose biscuits led by Parle-G, premium creams account for a substantial chunk valued at around Rs 5,500 crore ($1.1 billion). The way to the Indian consumer's stomach is through competitive pricing, high volumes and strong distribution, especially in rural areas.

Oreo developed a launch strategy around taking on existing market leaders in the cream segment - Britannia, Parle and ITC. Internally, they even have an acronym for this strategy - TLD (Take Leaders Down).

The focus was to target the top 10 million households which account for 70 per cent of cream biscuit consumption. Oreo launched in India in March 2011. It entered the market as Cadbury Oreos because Cadbury is a stronger brand name than Kraft, and initially focused on generating awareness and rapid trials. The product was sweetened to suit the Indian palate and Kraft exploited Cadbury's network of 1.2 million stores.

The Made in India tag meant using locally-sourced ingredients, modification of the recipe to suit Indian tastes and possibly cheaper ingredients, a smaller size and competitive prices. Oreo launched its traditional chocolate cookie with vanilla cream at Rs 5 for a pack of three to drive impulse purchases and trials, Rs 10 for a pack of seven and Rs 20 for a pack of 14 for heavy usage. The cookie looks the same as its international counterpart with a motif of 12 florets and 12 dashes.

The company maintained the heritage of the bitter chocolate cookie with sweet vanilla cream to stand out from me-too products and meet customer expectations of having the real thing. Kraft initially chose to outsource its manufacturing for the Indian market instead of using Cadbury factories.

Communication and advertising have been consistent across the world as the core customer remains the same. The company focused on using the togetherness concept to sell Oreos in India, with television forming the main medium of communication although other media are also being tapped. Oreo India's Facebook page is one of the fastest growing in the world. The company also went on a bus tour to push the concept of togetherness among families across nine cities and it used a smaller vehicle for a similar campaign across 450 small towns. Oreo is driving point-ofpurchase sales with store displays and in-store promotions in a bid to overtake market leader Britannia Good Day's distribution.

With a strategy focused on rapid brand awareness and extensive distribution, the Oreo India launch story has been a success so far. Its market share has grown from a little over one per cent after its debut to a massive 30 per cent of the cream biscuit market. As awareness of the Oreo brand grows in India, Kraft is looking to shift from the Cadbury distribution network to a wider wholesale channel. It is also eyeing kirana stores and small towns apart from modern stores in big cities.

Today, Oreo is more than just an American brand. It is present in more than 100 countries, with China occupying the No. 2 slot. Seven years ago, this was highly improbable.

The new Oreo brand proposition is richer and more elaborate while allowing for brand growth and innovation: Prof Nirmalya Kumar

BRANDS FACE AN EXISTENTIALIST DILEMMA

Initially, successful brands begin with a tight core brand proposition which is often unique at the level of the product or product features. Just as McDonald’s was about hamburgers and Starbucks about coffee, Oreo was about its distinctive cookie. As time goes by, consumers change and the company needs growth. Sooner or later, the brand faces an existentialist dilemma. Staying faithful to the traditional proposition would lead to brand irrelevance, while expanding it too much would lead to brand incoherence.

Continued success requires the brand to redefine its core, finding in it a proposition that is still faithful to tradition, and yet encompasses modernity in a manner to keep the brand relevant, differentiated and credible. The rise of emerging markets with their different consumption patterns and greater diversity of income distribution questions the core proposition of many developed world brands. Just as McDonald’s had to realise it was about clean, affordable fast food and not hamburgers, Oreo had to go through a candid self-exploration. The new Oreo brand proposition is richer and more elaborate while allowing for brand growth and innovation.

Similarly, Starbucks realised that when China was going to be its second home market, coffee was not essential to the core proposition. This required a change in the logo and the word ‘coffee’ was dropped from it. In China, more than coffee, people line up at Starbucks for cold refreshments. However, brands are like rubber bands and can only be stretched so far in the short run. In the long run, they can often be more flexible than their brand managers.

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Affordable pricing is one of the strategic value propositions Kraft is offering valued customers in India: Hiroshi Omata

AVAILABILITY, AFFORDABILITY AND ADAPTABILITY ARE KEY

This is a good example of marketing excellence in three As in India: Availability, Affordability and Adaptability. The key to success in the Indian market is to pursue a balanced marketing effort in terms of the three As.

Availability is a function of distribution and value networks, which generates brand awareness when it goes along with well-devised advertising campaigns.

Affordable pricing is one of the strategic value propositions Kraft (Cadbury) is offering to valued consumers in India. Better or more-for-less is the mandate for the value proposition in this category. Arguably, where Oreo India made a difference in is the fact that it successfully overcame a real challenge each and every marketer faces to realise affordable pricing with profitability.

Excellence in adaptability to local culture also helped Oreo capture a share of mouths and minds. One of the key success factors for Oreo in India is replicating the learning from China in terms of the intangible brand promise more than tangible benefits like taste. The notion of togetherness fits the Indian context of valuing the family and resonates with the nuclear family in the expanding middle class. Togetherness has successfully created emotional bonding not only between the brand and consumers, but also between parents and children when they experience the brand through product consumption.

When Oreo enters smaller towns, it will be able to enjoy a sweet taste of the future as the case proves the existence of global or universal consumers in India.

NSEL CRISIS-CBI

The Financial Intelligence Unit has begun a probe into the transactions of investors and owners of crisis-ridden National Spot Exchange Limited (NSEL) after probe agencies investigating the bourse detected alleged discrepancies in financial dealings.
The FIU, under the Union Finance Ministry, is the central agency which is tasked to collect, analyse and disseminate reports related to suspicious transactions and doubtful cash remissions or withdrawals to various law enforcement agencies for action at their end.
Days after the Income Tax department conducted surveys on over two dozen investors of the exchange, the FIU, sources said, was alerted and ask to prepare dossiers about movement of cash and funds of all those involved in the transactions.
The two reports prepared by the Enforcement Directorate (ED) and the RBI early this month are understood to have made recommendations for an intense "search" of financial databases and records of the activities of the entities involved in the operations of the bourse over a period of time.

The FIU, which is an empowered agency for undertaking penal action under money laundering laws, however, will not take any action on its end but will essentially support the CBI and the Ministry of Corporate Affairs in conducting their investigation, sources privy to the development said.

The preliminary information digged out by the FIU in the NSEL case has been of vital help to the I-T department as it is probing any possible instance of black funds involved in the bourse or entities involved, they said.
NSEL, a part of the Jignesh Shah-led Financial Technologies (FTIL) group, is grappling with a Rs 5,600 crore payment crisis after it had to suspend trading on July 31 after a government directive.
It has defaulted on six consecutive weekly payments to its investors.
Finance Minister P Chidambaram has recently said three authorities -- the CBI, the Forward Markets Commission (FMC) and the Ministry of Corporate Affairs (MCA) -- are looking into the payment crisis at the commodity exchange, as per recommendations of the high-level committee headed by Economic Affairs Secretary Arvind Mayaram.

There are around 17,000 investors in NSEL, out of which 9,000 traded through top eight brokers, including Anand Rathi, Motilal Oswal, India Infoline and Systematix

Mutual Funds - 10 commonly committed mistakes!

Money is a very strange thing - human beings make rational decisions while dealing with most aspects of life but make serious errors of judgment when it comes to dealing with money - while dealing with different aspects of money and finance including earning, protecting, budgeting, saving, spending, leveraging, investing and insuring. Completely rational investors take totally irrational decisions when part of crowd - their own individual rational minds come down many levels to the irrational level of the crowd. Many a times, rational intelligent people commit simple mistakes while making investment decisions in common stocks. And those mistakes get compounded while investing in mutual funds. Fund managers, marketers as well as the markets themselves have its own ways of finding and exploiting human weaknesses. I try to explain and explore the 10 most common mistakes which investors usually commit while investing in Mutual Funds (MF). Mistake 1: Imagining that Low NAV is Cheap This is one of the silliest mistakes which an investor commits while investing in Mutual Funds. The investor feels that a fund with a lower Net Asset Value (NAV) is cheap compared to a fund with a higher NAV. There is nothing further from truth. This mistake stems from the simple fact of a person who does not know the meaning of mutual fund. This blunder is because the investor neither understands nor appreciates the difference between price and value. A MF unit in itself has no value - it is "not" an asset like a house property, bond, equity stock, gold etc. Yes, the MF unit in itself simply has no value on its own - it derives the value from the underlying asset which it owns. The NAV is nothing but the value of the total underlying assets of the fund divided by the number of units. For example, if a fund has equity shares in different companies who current value sums up to Rs.1000 crores and has 50 crore units then its NAV is Rs.20 per unit while another fund whose current total value of equity shares is again Rs.1000 crores but has 100 crore units then its NAV amounts to Rs.10 per unit. Does it mean that the second fund with a NAV of Rs.10 per unit is cheaper than the one with Rs.20 per unit? Certainly not. This is because the total value of the assets of each fund is the same Rs.1000 crores - in the first case it is distributed among 50 crore unit holders while in the second case it is 100 crore unit holders. Mistake 2: Too costly or very cheap This is a continuation of the first mistake. A MF unit can't be costly or cheap - it is not an asset in itself which can be costly or cheap - it derives its value from the underlying investment. If the value of the underlying investment goes up then the NAV will go up and vice versa. For example, there are two funds - A and B. Now, the NAV of Fund A is Rs.10 per unit while the NAV of Fund B is Rs.50 per unit. Does this mean that Fund A is cheaper than Fund B? Not at all. The NAV simply means that Fund A is holding such assets in totality which when divided by the total number of units' results in a NAV of Rs.10 and ditto computation for Fund B which results in NAV of Rs.50. Further assume that the portfolio of both these Funds is exactly similar. In that case, a 20% rise in the value of the portfolio will result in a commensurate 20% increase in the value of the NAV of the Funds - Rs.2 in the case of Fund A while Rs.10 in the case of Fund B. Hence, while investing in MFs, don't look at the price of the NAV but rather the underlying value which is derived from the portfolio of the Fund. Mistake 3: Buying MF NFO at "par" This is another derivative of the first two mistakes - an investor can't be more foolish when he / she invest in a MF- New Fund Offer (NFO) simply because it is available at "par value." As explained above, the MF- NAV is meaningless in itself as it is merely the value of the underlying asset. Therefore, buying a MF unit because it is available at par value would be one of the silliest mistakes which an investor can commit with its money. Remember that MF unit is not a scarce resource - a MF can create as many units as the inflows into the fund - it has to just print the units and send it to the investor - similar to how the Government can infinitely print currency notes. The same is not true for an equity share because a company can't just print its shares without diluting the holding of its assets. Mistake 4: Fancy Funds, fads and fantasies: Many new funds and schemes prop up during times of exuberance. Banking Funds will be launched when banking stocks have performed well, infrastructure funds when the infrastructure stocks are rising or IT funds when the technology boom is underway, so on and so forth. These sector funds follow simply smart tactics to collect money from the gullible investors. No sector or theme continuously performs well over a longer term. Even worse than it, a sector fund is generally launched after the sector has already performed well because the fund has to show good past performance to attract fresh investor money. And by applying the "law of averages," it becomes more likely that the sectors which have already performed well in the past will actually not perform so well in the future. Hence, never fall prey to fund gimmicks and invest in sector or theme based funds. Mistake 5: Ignoring Index Funds This is another very common mistake which MF investors commit - ignoring a simple low cost index fund in favour of the high cost actively managed fund. You will get these kind of advice most of the time from majority of the people that equity investments are for the experts and if you don't know how to pick your stocks then you should entrust your money to the expert fund manger etc. However, I dare to say that these are probably one of the most useless advice that one can ever receive. Hold on, I am not saying that you don't entrust your money to the experts and start picking your own stocks - no there may not be a bigger financial suicide than this. I just humbly submit that it's very difficult, if not impossible, to beat the stock market indices consistently over a longer period of time. If that were not the case, then why over a period of a decade or more, approximately 75% of all "actively" managed stock funds underperform the passively constructed stock indices. The fact of the matter is that most people have no reason whatsoever to believe that they can pick winning stocks or time the markets and their success at it would be the same as it would be like throwing darts at the financial pages. I would like to quote Dr. William Bernstein who told that "there are two kinds of investors, be they large or small: those who don't know where the market is headed, and those who don't know that they don't know where the market is headed. Then again, there is a third type of investor - the investment professional, who indeed knows that he or she doesn't know, but whose livelihood depends upon appearing to know where the market is headed". Nothing more succinctly explains the real world of professional investing and stock picking. Mr. Merton Miller, Nobel laureate and professor of Economics of Chicago commented that "if there are 10000 people looking at the stocks and trying to pick winners, one in 10000 is going to score, by chance alone, a great coup, and that's all that's going on. It's a game, it's a chance operation, and people think they are doing something purposeful, but they're really not". Then I would quote Mr. Rex Sinquefield, co-author of Stocks, bonds, ills and inflation that "we all know that active management fees are high. Poor performance does not come cheap. You have to pay dearly for it". Thus, active fund management is nothing but paying heavy fees for underperforming the passive indices! Then for the investors who are always on the look out for the next hot fund, the next great sector fund or so, Bethany McLean, columnist for Fortune magazine wrote "skepticism about past returns is crucial, the truth is, much as you may wish you could know which funds will be hot, you can't and neither can the legions of advisors and publications that claim they can. That's why building a portfolio around index funds isn't really settling for the average. It's just refusing to believe in magic." And let me further quote Mr. Jon Bogle, founder and retired CEO of the Vanguard group "Index funds eliminate the risks of individual stocks, market sectors, and manger selection. Only stock market risks remain". In other words, when you invest in a passively managed index fund than all the risk relating to the fund manager, his / her stock selection and market timing, individual sectors etc all go and the only risk which remains is the risk of the whole stock market and that is precisely the risk which would like to expose yourself to when you invest in equities. Mr. Nicholas Taleb has written an excellent book titled "Fooled by randomness" wherein he explains the role of chance in life and in the markets and I will recommend that book to anyone who believes that he / she can consistently pick winning stocks and / or time the markets to perfection. Last but not the least I would like to jot the words of the great legendary investor Mr. Warren Buffet who once said that "most investors, both institutional and individual, will find the best way to own common stocks is through an index fund that charges minimal fees. Those following this path are sure to bear the net results (after fees and expenses) delivered by the great majority of investment professionals". The conclusion therefore is that there is no reason for you or anybody else to believe that they can pick winning stocks or time the markets. Hence, the best solution for any equity investor is to stock into low cost passively managed index funds because year after year they would beat at least 75% of the actively managed funds and over the longer term in most probabilities beat almost all the funds. Mistake 6: Selling Winning Funds while sticking on to the loosing ones This is a grave mistake which people commit with MFs, equity stocks, other kind of investments as well as in many real life situations - sticking on to the loosing ones while selling the winning ones. It's important to be realistic about investments that are performing badly including MFs. Recognizing the losers is hard because it's also an acknowledgement of your own mistake. But, it’s important to accept and book a loss or else future loss would be even higher. Mistake 7: Fund Churning This is a common advice which might be showered on you by your MF Distributor. Instead of churning your fund just churn the MF distributor who gave you that advice. Distributors love the churning game - simply because it gives them extra commissions and fees while it gives you extra income tax, expenses and most probably a sub optimal fund. Mistake 8: Paying credence to recent past performance A common mistake which a fund investor does is by looking at recent past performance. Past performance is certainly important but if you give too much importance to "continuous performance by looking at daily NAV" then you are inviting unnecessary worries for you in the form of selling a good fund and moving to a not so good fund, the MF churning advisors, income tax, higher commissions and other costs etc. Mistake 9: The Dividend Temptation You may be advised by the MF Distributors and marketers that a fund has declared dividend and it is trading cum-dividend and therefore take the advantage of earning free dividends. But, there is no free lunch in this world - particularly not in the world of investments and mutual funds. The dividend which a fund pays to an investor is immediately reduced from the NAV of the fund. So what is the sense of the dividend when on one hand you receive the cash and on other hand your NAV falls by that much amount? On the contrary, I would say that don't invest in a fund which has declared lofty dividends because that is against your purpose of investments - you are entrusting your money to the Fund Manager to manage it on your behalf and not to return back to you! (unless ofcourse you require regular income in the form of dividends). Mistake 10: Not Understanding the Type of Funds The primary purpose of MFs is to make your life simpler by investing your money on your behalf. However, actually they have made your life difficult by making available a plethora of different categories and schemes. Hence, before biting the bullet get acquainted with which category of Fund you are investing in - Equity, Fixed Income, Balanced, Commodity and within them the various sub-sets like sector, theme, gilt, income, short-term, liquid etc in which you are investing. The risk, expected return, income tax, expenses, required time horizon are immensely different in each of those categories. So don't commit the unpardonable mistake of investing your money in a fund without actually knowing where and in which asset class it is going to deploy your money. Market is a place which will test your patience and character. Many times you might have bought the right stock or Mutual Fund for all the right reasons at the right price but it simply refuses to go up for a long period of time - just hang on to it because the day you get frustrated and sell it off,  there are chances it will then start rising. Hence, patience and character are key virtues which will be repeatedly tested by the market. To conclude, there are many simple and avoidable mistakes which investors mutually commit while investing in mutual funds and I have tried to explain some of the most common ones of them. Kindly note, that simple logical things work far better in the market place rather than complex algorithms, theorems, valuations principles, DCF etc. And there is no other place to test your virtues than the market - be it common sense, logical thinking, patience, perseverance, mental balance, emotional intelligence, performing under stress etc. All the qualities which make a successful human being will be tested by the market - it has its own method of finding and exploiting human weaknesses. Investing is not about beating the market or anybody else, its simply beating your own self, your own negative traits and once you are able to master your own self and become a complete human being, then only you would also become a successful investor. Articulate your investment goals, know your time horizon, recognize your risk appetite, understand your need for income and growth, invest regularly although it may be in small lots, do your thinking and research and after doing it don't panic just because the market went against you, accept your mistakes and flaws and avoid the common mutual mistakes which investors mutually commit while investing in Mutual Funds so as to embark on becoming a successful Mutual Fund investor and a complete human being. -Mehrab Irani The author is the General Manager - Investments of Tata Investment Corporation Limited and writes blog called intelligentmoney.blogspot.com.His first book titled "10 Commandments for Financial Freedom" would be released shortly. He may be reached at mehrabirani10@gmail.com.

Money is a very strange thing - human beings make rational decisions while dealing with most aspects of life but make serious errors of judgment when it comes to dealing with money - while dealing with different aspects of money and finance including earning, protecting, budgeting, saving, spending, leveraging, investing and insuring. Completely rational investors take totally irrational decisions when part of crowd - their own individual rational minds come down many levels to the irrational level of the crowd. Many a times, rational intelligent people commit simple mistakes while making investment decisions in common stocks. And those mistakes get compounded while investing in mutual funds. Fund managers, marketers as well as the markets themselves have its own ways of finding and exploiting human weaknesses. I try to explain and explore the 10 most common mistakes which investors usually commit while investing in Mutual Funds (MF). Mistake 1: Imagining that Low NAV is Cheap This is one of the silliest mistakes which an investor commits while investing in Mutual Funds. The investor feels that a fund with a lower Net Asset Value (NAV) is cheap compared to a fund with a higher NAV. There is nothing further from truth. This mistake stems from the simple fact of a person who does not know the meaning of mutual fund. This blunder is because the investor neither understands nor appreciates the difference between price and value. A MF unit in itself has no value - it is "not" an asset like a house property, bond, equity stock, gold etc. Yes, the MF unit in itself simply has no value on its own - it derives the value from the underlying asset which it owns. The NAV is nothing but the value of the total underlying assets of the fund divided by the number of units. For example, if a fund has equity shares in different companies who current value sums up to Rs.1000 crores and has 50 crore units then its NAV is Rs.20 per unit while another fund whose current total value of equity shares is again Rs.1000 crores but has 100 crore units then its NAV amounts to Rs.10 per unit. Does it mean that the second fund with a NAV of Rs.10 per unit is cheaper than the one with Rs.20 per unit? Certainly not. This is because the total value of the assets of each fund is the same Rs.1000 crores - in the first case it is distributed among 50 crore unit holders while in the second case it is 100 crore unit holders. Mistake 2: Too costly or very cheap This is a continuation of the first mistake. A MF unit can't be costly or cheap - it is not an asset in itself which can be costly or cheap - it derives its value from the underlying investment. If the value of the underlying investment goes up then the NAV will go up and vice versa. For example, there are two funds - A and B. Now, the NAV of Fund A is Rs.10 per unit while the NAV of Fund B is Rs.50 per unit. Does this mean that Fund A is cheaper than Fund B? Not at all. The NAV simply means that Fund A is holding such assets in totality which when divided by the total number of units' results in a NAV of Rs.10 and ditto computation for Fund B which results in NAV of Rs.50. Further assume that the portfolio of both these Funds is exactly similar. In that case, a 20% rise in the value of the portfolio will result in a commensurate 20% increase in the value of the NAV of the Funds - Rs.2 in the case of Fund A while Rs.10 in the case of Fund B. Hence, while investing in MFs, don't look at the price of the NAV but rather the underlying value which is derived from the portfolio of the Fund. Mistake 3: Buying MF NFO at "par" This is another derivative of the first two mistakes - an investor can't be more foolish when he / she invest in a MF- New Fund Offer (NFO) simply because it is available at "par value." As explained above, the MF- NAV is meaningless in itself as it is merely the value of the underlying asset. Therefore, buying a MF unit because it is available at par value would be one of the silliest mistakes which an investor can commit with its money. Remember that MF unit is not a scarce resource - a MF can create as many units as the inflows into the fund - it has to just print the units and send it to the investor - similar to how the Government can infinitely print currency notes. The same is not true for an equity share because a company can't just print its shares without diluting the holding of its assets. Mistake 4: Fancy Funds, fads and fantasies: Many new funds and schemes prop up during times of exuberance. Banking Funds will be launched when banking stocks have performed well, infrastructure funds when the infrastructure stocks are rising or IT funds when the technology boom is underway, so on and so forth. These sector funds follow simply smart tactics to collect money from the gullible investors. No sector or theme continuously performs well over a longer term. Even worse than it, a sector fund is generally launched after the sector has already performed well because the fund has to show good past performance to attract fresh investor money. And by applying the "law of averages," it becomes more likely that the sectors which have already performed well in the past will actually not perform so well in the future. Hence, never fall prey to fund gimmicks and invest in sector or theme based funds. Mistake 5: Ignoring Index Funds This is another very common mistake which MF investors commit - ignoring a simple low cost index fund in favour of the high cost actively managed fund. You will get these kind of advice most of the time from majority of the people that equity investments are for the experts and if you don't know how to pick your stocks then you should entrust your money to the expert fund manger etc. However, I dare to say that these are probably one of the most useless advice that one can ever receive. Hold on, I am not saying that you don't entrust your money to the experts and start picking your own stocks - no there may not be a bigger financial suicide than this. I just humbly submit that it's very difficult, if not impossible, to beat the stock market indices consistently over a longer period of time. If that were not the case, then why over a period of a decade or more, approximately 75% of all "actively" managed stock funds underperform the passively constructed stock indices. The fact of the matter is that most people have no reason whatsoever to believe that they can pick winning stocks or time the markets and their success at it would be the same as it would be like throwing darts at the financial pages. I would like to quote Dr. William Bernstein who told that "there are two kinds of investors, be they large or small: those who don't know where the market is headed, and those who don't know that they don't know where the market is headed. Then again, there is a third type of investor - the investment professional, who indeed knows that he or she doesn't know, but whose livelihood depends upon appearing to know where the market is headed". Nothing more succinctly explains the real world of professional investing and stock picking. Mr. Merton Miller, Nobel laureate and professor of Economics of Chicago commented that "if there are 10000 people looking at the stocks and trying to pick winners, one in 10000 is going to score, by chance alone, a great coup, and that's all that's going on. It's a game, it's a chance operation, and people think they are doing something purposeful, but they're really not". Then I would quote Mr. Rex Sinquefield, co-author of Stocks, bonds, ills and inflation that "we all know that active management fees are high. Poor performance does not come cheap. You have to pay dearly for it". Thus, active fund management is nothing but paying heavy fees for underperforming the passive indices! Then for the investors who are always on the look out for the next hot fund, the next great sector fund or so, Bethany McLean, columnist for Fortune magazine wrote "skepticism about past returns is crucial, the truth is, much as you may wish you could know which funds will be hot, you can't and neither can the legions of advisors and publications that claim they can. That's why building a portfolio around index funds isn't really settling for the average. It's just refusing to believe in magic." And let me further quote Mr. Jon Bogle, founder and retired CEO of the Vanguard group "Index funds eliminate the risks of individual stocks, market sectors, and manger selection. Only stock market risks remain". In other words, when you invest in a passively managed index fund than all the risk relating to the fund manager, his / her stock selection and market timing, individual sectors etc all go and the only risk which remains is the risk of the whole stock market and that is precisely the risk which would like to expose yourself to when you invest in equities. Mr. Nicholas Taleb has written an excellent book titled "Fooled by randomness" wherein he explains the role of chance in life and in the markets and I will recommend that book to anyone who believes that he / she can consistently pick winning stocks and / or time the markets to perfection. Last but not the least I would like to jot the words of the great legendary investor Mr. Warren Buffet who once said that "most investors, both institutional and individual, will find the best way to own common stocks is through an index fund that charges minimal fees. Those following this path are sure to bear the net results (after fees and expenses) delivered by the great majority of investment professionals". The conclusion therefore is that there is no reason for you or anybody else to believe that they can pick winning stocks or time the markets. Hence, the best solution for any equity investor is to stock into low cost passively managed index funds because year after year they would beat at least 75% of the actively managed funds and over the longer term in most probabilities beat almost all the funds. Mistake 6: Selling Winning Funds while sticking on to the loosing ones This is a grave mistake which people commit with MFs, equity stocks, other kind of investments as well as in many real life situations - sticking on to the loosing ones while selling the winning ones. It's important to be realistic about investments that are performing badly including MFs. Recognizing the losers is hard because it's also an acknowledgement of your own mistake. But, it’s important to accept and book a loss or else future loss would be even higher. Mistake 7: Fund Churning This is a common advice which might be showered on you by your MF Distributor. Instead of churning your fund just churn the MF distributor who gave you that advice. Distributors love the churning game - simply because it gives them extra commissions and fees while it gives you extra income tax, expenses and most probably a sub optimal fund. Mistake 8: Paying credence to recent past performance A common mistake which a fund investor does is by looking at recent past performance. Past performance is certainly important but if you give too much importance to "continuous performance by looking at daily NAV" then you are inviting unnecessary worries for you in the form of selling a good fund and moving to a not so good fund, the MF churning advisors, income tax, higher commissions and other costs etc. Mistake 9: The Dividend Temptation You may be advised by the MF Distributors and marketers that a fund has declared dividend and it is trading cum-dividend and therefore take the advantage of earning free dividends. But, there is no free lunch in this world - particularly not in the world of investments and mutual funds. The dividend which a fund pays to an investor is immediately reduced from the NAV of the fund. So what is the sense of the dividend when on one hand you receive the cash and on other hand your NAV falls by that much amount? On the contrary, I would say that don't invest in a fund which has declared lofty dividends because that is against your purpose of investments - you are entrusting your money to the Fund Manager to manage it on your behalf and not to return back to you! (unless ofcourse you require regular income in the form of dividends). Mistake 10: Not Understanding the Type of Funds The primary purpose of MFs is to make your life simpler by investing your money on your behalf. However, actually they have made your life difficult by making available a plethora of different categories and schemes. Hence, before biting the bullet get acquainted with which category of Fund you are investing in - Equity, Fixed Income, Balanced, Commodity and within them the various sub-sets like sector, theme, gilt, income, short-term, liquid etc in which you are investing. The risk, expected return, income tax, expenses, required time horizon are immensely different in each of those categories. So don't commit the unpardonable mistake of investing your money in a fund without actually knowing where and in which asset class it is going to deploy your money. Market is a place which will test your patience and character. Many times you might have bought the right stock or Mutual Fund for all the right reasons at the right price but it simply refuses to go up for a long period of time - just hang on to it because the day you get frustrated and sell it off, there are chances it will then start rising. Hence, patience and character are key virtues which will be repeatedly tested by the market. To conclude, there are many simple and avoidable mistakes which investors mutually commit while investing in mutual funds and I have tried to explain some of the most common ones of them. Kindly note, that simple logical things work far better in the market place rather than complex algorithms, theorems, valuations principles, DCF etc. And there is no other place to test your virtues than the market - be it common sense, logical thinking, patience, perseverance, mental balance, emotional intelligence, performing under stress etc. All the qualities which make a successful human being will be tested by the market - it has its own method of finding and exploiting human weaknesses. Investing is not about beating the market or anybody else, its simply beating your own self, your own negative traits and once you are able to master your own self and become a complete human being, then only you would also become a successful investor. Articulate your investment goals, know your time horizon, recognize your risk appetite, understand your need for income and growth, invest regularly although it may be in small lots, do your thinking and research and after doing it don't panic just because the market went against you, accept your mistakes and flaws and avoid the common mutual mistakes which investors mutually commit while investing in Mutual Funds so as to embark on becoming a successful Mutual Fund investor and a complete human being.

Read more at: http://www.moneycontrol.com/news/mf-experts/mutual-funds-10-commonly-committed-mistakes_723728.html?utm_source=ref_article

Money is a very strange thing - human beings make rational decisions while dealing with most aspects of life but make serious errors of judgment when it comes to dealing with money - while dealing with different aspects of money and finance including earning, protecting, budgeting, saving, spending, leveraging, investing and insuring. Completely rational investors take totally irrational decisions when part of crowd - their own individual rational minds come down many levels to the irrational level of the crowd. Many a times, rational intelligent people commit simple mistakes while making investment decisions in common stocks. And those mistakes get compounded while investing in mutual funds. Fund managers, marketers as well as the markets themselves have its own ways of finding and exploiting human weaknesses. I try to explain and explore the 10 most common mistakes which investors usually commit while investing in Mutual Funds (MF). Mistake 1: Imagining that Low NAV is Cheap This is one of the silliest mistakes which an investor commits while investing in Mutual Funds. The investor feels that a fund with a lower Net Asset Value (NAV) is cheap compared to a fund with a higher NAV. There is nothing further from truth. This mistake stems from the simple fact of a person who does not know the meaning of mutual fund. This blunder is because the investor neither understands nor appreciates the difference between price and value. A MF unit in itself has no value - it is "not" an asset like a house property, bond, equity stock, gold etc. Yes, the MF unit in itself simply has no value on its own - it derives the value from the underlying asset which it owns. The NAV is nothing but the value of the total underlying assets of the fund divided by the number of units. For example, if a fund has equity shares in different companies who current value sums up to Rs.1000 crores and has 50 crore units then its NAV is Rs.20 per unit while another fund whose current total value of equity shares is again Rs.1000 crores but has 100 crore units then its NAV amounts to Rs.10 per unit. Does it mean that the second fund with a NAV of Rs.10 per unit is cheaper than the one with Rs.20 per unit? Certainly not. This is because the total value of the assets of each fund is the same Rs.1000 crores - in the first case it is distributed among 50 crore unit holders while in the second case it is 100 crore unit holders. Mistake 2: Too costly or very cheap This is a continuation of the first mistake. A MF unit can't be costly or cheap - it is not an asset in itself which can be costly or cheap - it derives its value from the underlying investment. If the value of the underlying investment goes up then the NAV will go up and vice versa. For example, there are two funds - A and B. Now, the NAV of Fund A is Rs.10 per unit while the NAV of Fund B is Rs.50 per unit. Does this mean that Fund A is cheaper than Fund B? Not at all. The NAV simply means that Fund A is holding such assets in totality which when divided by the total number of units' results in a NAV of Rs.10 and ditto computation for Fund B which results in NAV of Rs.50. Further assume that the portfolio of both these Funds is exactly similar. In that case, a 20% rise in the value of the portfolio will result in a commensurate 20% increase in the value of the NAV of the Funds - Rs.2 in the case of Fund A while Rs.10 in the case of Fund B. Hence, while investing in MFs, don't look at the price of the NAV but rather the underlying value which is derived from the portfolio of the Fund. Mistake 3: Buying MF NFO at "par" This is another derivative of the first two mistakes - an investor can't be more foolish when he / she invest in a MF- New Fund Offer (NFO) simply because it is available at "par value." As explained above, the MF- NAV is meaningless in itself as it is merely the value of the underlying asset. Therefore, buying a MF unit because it is available at par value would be one of the silliest mistakes which an investor can commit with its money. Remember that MF unit is not a scarce resource - a MF can create as many units as the inflows into the fund - it has to just print the units and send it to the investor - similar to how the Government can infinitely print currency notes. The same is not true for an equity share because a company can't just print its shares without diluting the holding of its assets. Mistake 4: Fancy Funds, fads and fantasies: Many new funds and schemes prop up during times of exuberance. Banking Funds will be launched when banking stocks have performed well, infrastructure funds when the infrastructure stocks are rising or IT funds when the technology boom is underway, so on and so forth. These sector funds follow simply smart tactics to collect money from the gullible investors. No sector or theme continuously performs well over a longer term. Even worse than it, a sector fund is generally launched after the sector has already performed well because the fund has to show good past performance to attract fresh investor money. And by applying the "law of averages," it becomes more likely that the sectors which have already performed well in the past will actually not perform so well in the future. Hence, never fall prey to fund gimmicks and invest in sector or theme based funds. Mistake 5: Ignoring Index Funds This is another very common mistake which MF investors commit - ignoring a simple low cost index fund in favour of the high cost actively managed fund. You will get these kind of advice most of the time from majority of the people that equity investments are for the experts and if you don't know how to pick your stocks then you should entrust your money to the expert fund manger etc. However, I dare to say that these are probably one of the most useless advice that one can ever receive. Hold on, I am not saying that you don't entrust your money to the experts and start picking your own stocks - no there may not be a bigger financial suicide than this. I just humbly submit that it's very difficult, if not impossible, to beat the stock market indices consistently over a longer period of time. If that were not the case, then why over a period of a decade or more, approximately 75% of all "actively" managed stock funds underperform the passively constructed stock indices. The fact of the matter is that most people have no reason whatsoever to believe that they can pick winning stocks or time the markets and their success at it would be the same as it would be like throwing darts at the financial pages. I would like to quote Dr. William Bernstein who told that "there are two kinds of investors, be they large or small: those who don't know where the market is headed, and those who don't know that they don't know where the market is headed. Then again, there is a third type of investor - the investment professional, who indeed knows that he or she doesn't know, but whose livelihood depends upon appearing to know where the market is headed". Nothing more succinctly explains the real world of professional investing and stock picking. Mr. Merton Miller, Nobel laureate and professor of Economics of Chicago commented that "if there are 10000 people looking at the stocks and trying to pick winners, one in 10000 is going to score, by chance alone, a great coup, and that's all that's going on. It's a game, it's a chance operation, and people think they are doing something purposeful, but they're really not". Then I would quote Mr. Rex Sinquefield, co-author of Stocks, bonds, ills and inflation that "we all know that active management fees are high. Poor performance does not come cheap. You have to pay dearly for it". Thus, active fund management is nothing but paying heavy fees for underperforming the passive indices! Then for the investors who are always on the look out for the next hot fund, the next great sector fund or so, Bethany McLean, columnist for Fortune magazine wrote "skepticism about past returns is crucial, the truth is, much as you may wish you could know which funds will be hot, you can't and neither can the legions of advisors and publications that claim they can. That's why building a portfolio around index funds isn't really settling for the average. It's just refusing to believe in magic." And let me further quote Mr. Jon Bogle, founder and retired CEO of the Vanguard group "Index funds eliminate the risks of individual stocks, market sectors, and manger selection. Only stock market risks remain". In other words, when you invest in a passively managed index fund than all the risk relating to the fund manager, his / her stock selection and market timing, individual sectors etc all go and the only risk which remains is the risk of the whole stock market and that is precisely the risk which would like to expose yourself to when you invest in equities. Mr. Nicholas Taleb has written an excellent book titled "Fooled by randomness" wherein he explains the role of chance in life and in the markets and I will recommend that book to anyone who believes that he / she can consistently pick winning stocks and / or time the markets to perfection. Last but not the least I would like to jot the words of the great legendary investor Mr. Warren Buffet who once said that "most investors, both institutional and individual, will find the best way to own common stocks is through an index fund that charges minimal fees. Those following this path are sure to bear the net results (after fees and expenses) delivered by the great majority of investment professionals". The conclusion therefore is that there is no reason for you or anybody else to believe that they can pick winning stocks or time the markets. Hence, the best solution for any equity investor is to stock into low cost passively managed index funds because year after year they would beat at least 75% of the actively managed funds and over the longer term in most probabilities beat almost all the funds. Mistake 6: Selling Winning Funds while sticking on to the loosing ones This is a grave mistake which people commit with MFs, equity stocks, other kind of investments as well as in many real life situations - sticking on to the loosing ones while selling the winning ones. It's important to be realistic about investments that are performing badly including MFs. Recognizing the losers is hard because it's also an acknowledgement of your own mistake. But, it’s important to accept and book a loss or else future loss would be even higher. Mistake 7: Fund Churning This is a common advice which might be showered on you by your MF Distributor. Instead of churning your fund just churn the MF distributor who gave you that advice. Distributors love the churning game - simply because it gives them extra commissions and fees while it gives you extra income tax, expenses and most probably a sub optimal fund. Mistake 8: Paying credence to recent past performance A common mistake which a fund investor does is by looking at recent past performance. Past performance is certainly important but if you give too much importance to "continuous performance by looking at daily NAV" then you are inviting unnecessary worries for you in the form of selling a good fund and moving to a not so good fund, the MF churning advisors, income tax, higher commissions and other costs etc. Mistake 9: The Dividend Temptation You may be advised by the MF Distributors and marketers that a fund has declared dividend and it is trading cum-dividend and therefore take the advantage of earning free dividends. But, there is no free lunch in this world - particularly not in the world of investments and mutual funds. The dividend which a fund pays to an investor is immediately reduced from the NAV of the fund. So what is the sense of the dividend when on one hand you receive the cash and on other hand your NAV falls by that much amount? On the contrary, I would say that don't invest in a fund which has declared lofty dividends because that is against your purpose of investments - you are entrusting your money to the Fund Manager to manage it on your behalf and not to return back to you! (unless ofcourse you require regular income in the form of dividends). Mistake 10: Not Understanding the Type of Funds The primary purpose of MFs is to make your life simpler by investing your money on your behalf. However, actually they have made your life difficult by making available a plethora of different categories and schemes. Hence, before biting the bullet get acquainted with which category of Fund you are investing in - Equity, Fixed Income, Balanced, Commodity and within them the various sub-sets like sector, theme, gilt, income, short-term, liquid etc in which you are investing. The risk, expected return, income tax, expenses, required time horizon are immensely different in each of those categories. So don't commit the unpardonable mistake of investing your money in a fund without actually knowing where and in which asset class it is going to deploy your money. Market is a place which will test your patience and character. Many times you might have bought the right stock or Mutual Fund for all the right reasons at the right price but it simply refuses to go up for a long period of time - just hang on to it because the day you get frustrated and sell it off, there are chances it will then start rising. Hence, patience and character are key virtues which will be repeatedly tested by the market. To conclude, there are many simple and avoidable mistakes which investors mutually commit while investing in mutual funds and I have tried to explain some of the most common ones of them. Kindly note, that simple logical things work far better in the market place rather than complex algorithms, theorems, valuations principles, DCF etc. And there is no other place to test your virtues than the market - be it common sense, logical thinking, patience, perseverance, mental balance, emotional intelligence, performing under stress etc. All the qualities which make a successful human being will be tested by the market - it has its own method of finding and exploiting human weaknesses. Investing is not about beating the market or anybody else, its simply beating your own self, your own negative traits and once you are able to master your own self and become a complete human being, then only you would also become a successful investor. Articulate your investment goals, know your time horizon, recognize your risk appetite, understand your need for income and growth, invest regularly although it may be in small lots, do your thinking and research and after doing it don't panic just because the market went against you, accept your mistakes and flaws and avoid the common mutual mistakes which investors mutually commit while investing in Mutual Funds so as to embark on becoming a successful Mutual Fund investor and a complete human being.

Read more at: http://www.moneycontrol.com/news/mf-experts/mutual-funds-10-commonly-committed-mistakes_723728.html?utm_source=ref_article

Money is a very strange thing - human beings make rational decisions while dealing with most aspects of life but make serious errors of judgment when it comes to dealing with money - while dealing with different aspects of money and finance including earning, protecting, budgeting, saving, spending, leveraging, investing and insuring. Completely rational investors take totally irrational decisions when part of crowd - their own individual rational minds come down many levels to the irrational level of the crowd. Many a times, rational intelligent people commit simple mistakes while making investment decisions in common stocks. And those mistakes get compounded while investing in mutual funds. Fund managers, marketers as well as the markets themselves have its own ways of finding and exploiting human weaknesses. I try to explain and explore the 10 most common mistakes which investors usually commit while investing in Mutual Funds (MF). Mistake 1: Imagining that Low NAV is Cheap This is one of the silliest mistakes which an investor commits while investing in Mutual Funds. The investor feels that a fund with a lower Net Asset Value (NAV) is cheap compared to a fund with a higher NAV. There is nothing further from truth. This mistake stems from the simple fact of a person who does not know the meaning of mutual fund. This blunder is because the investor neither understands nor appreciates the difference between price and value. A MF unit in itself has no value - it is "not" an asset like a house property, bond, equity stock, gold etc. Yes, the MF unit in itself simply has no value on its own - it derives the value from the underlying asset which it owns. The NAV is nothing but the value of the total underlying assets of the fund divided by the number of units. For example, if a fund has equity shares in different companies who current value sums up to Rs.1000 crores and has 50 crore units then its NAV is Rs.20 per unit while another fund whose current total value of equity shares is again Rs.1000 crores but has 100 crore units then its NAV amounts to Rs.10 per unit. Does it mean that the second fund with a NAV of Rs.10 per unit is cheaper than the one with Rs.20 per unit? Certainly not. This is because the total value of the assets of each fund is the same Rs.1000 crores - in the first case it is distributed among 50 crore unit holders while in the second case it is 100 crore unit holders. Mistake 2: Too costly or very cheap This is a continuation of the first mistake. A MF unit can't be costly or cheap - it is not an asset in itself which can be costly or cheap - it derives its value from the underlying investment. If the value of the underlying investment goes up then the NAV will go up and vice versa. For example, there are two funds - A and B. Now, the NAV of Fund A is Rs.10 per unit while the NAV of Fund B is Rs.50 per unit. Does this mean that Fund A is cheaper than Fund B? Not at all. The NAV simply means that Fund A is holding such assets in totality which when divided by the total number of units' results in a NAV of Rs.10 and ditto computation for Fund B which results in NAV of Rs.50. Further assume that the portfolio of both these Funds is exactly similar. In that case, a 20% rise in the value of the portfolio will result in a commensurate 20% increase in the value of the NAV of the Funds - Rs.2 in the case of Fund A while Rs.10 in the case of Fund B. Hence, while investing in MFs, don't look at the price of the NAV but rather the underlying value which is derived from the portfolio of the Fund. Mistake 3: Buying MF NFO at "par" This is another derivative of the first two mistakes - an investor can't be more foolish when he / she invest in a MF- New Fund Offer (NFO) simply because it is available at "par value." As explained above, the MF- NAV is meaningless in itself as it is merely the value of the underlying asset. Therefore, buying a MF unit because it is available at par value would be one of the silliest mistakes which an investor can commit with its money. Remember that MF unit is not a scarce resource - a MF can create as many units as the inflows into the fund - it has to just print the units and send it to the investor - similar to how the Government can infinitely print currency notes. The same is not true for an equity share because a company can't just print its shares without diluting the holding of its assets. Mistake 4: Fancy Funds, fads and fantasies: Many new funds and schemes prop up during times of exuberance. Banking Funds will be launched when banking stocks have performed well, infrastructure funds when the infrastructure stocks are rising or IT funds when the technology boom is underway, so on and so forth. These sector funds follow simply smart tactics to collect money from the gullible investors. No sector or theme continuously performs well over a longer term. Even worse than it, a sector fund is generally launched after the sector has already performed well because the fund has to show good past performance to attract fresh investor money. And by applying the "law of averages," it becomes more likely that the sectors which have already performed well in the past will actually not perform so well in the future. Hence, never fall prey to fund gimmicks and invest in sector or theme based funds. Mistake 5: Ignoring Index Funds This is another very common mistake which MF investors commit - ignoring a simple low cost index fund in favour of the high cost actively managed fund. You will get these kind of advice most of the time from majority of the people that equity investments are for the experts and if you don't know how to pick your stocks then you should entrust your money to the expert fund manger etc. However, I dare to say that these are probably one of the most useless advice that one can ever receive. Hold on, I am not saying that you don't entrust your money to the experts and start picking your own stocks - no there may not be a bigger financial suicide than this. I just humbly submit that it's very difficult, if not impossible, to beat the stock market indices consistently over a longer period of time. If that were not the case, then why over a period of a decade or more, approximately 75% of all "actively" managed stock funds underperform the passively constructed stock indices. The fact of the matter is that most people have no reason whatsoever to believe that they can pick winning stocks or time the markets and their success at it would be the same as it would be like throwing darts at the financial pages. I would like to quote Dr. William Bernstein who told that "there are two kinds of investors, be they large or small: those who don't know where the market is headed, and those who don't know that they don't know where the market is headed. Then again, there is a third type of investor - the investment professional, who indeed knows that he or she doesn't know, but whose livelihood depends upon appearing to know where the market is headed". Nothing more succinctly explains the real world of professional investing and stock picking. Mr. Merton Miller, Nobel laureate and professor of Economics of Chicago commented that "if there are 10000 people looking at the stocks and trying to pick winners, one in 10000 is going to score, by chance alone, a great coup, and that's all that's going on. It's a game, it's a chance operation, and people think they are doing something purposeful, but they're really not". Then I would quote Mr. Rex Sinquefield, co-author of Stocks, bonds, ills and inflation that "we all know that active management fees are high. Poor performance does not come cheap. You have to pay dearly for it". Thus, active fund management is nothing but paying heavy fees for underperforming the passive indices! Then for the investors who are always on the look out for the next hot fund, the next great sector fund or so, Bethany McLean, columnist for Fortune magazine wrote "skepticism about past returns is crucial, the truth is, much as you may wish you could know which funds will be hot, you can't and neither can the legions of advisors and publications that claim they can. That's why building a portfolio around index funds isn't really settling for the average. It's just refusing to believe in magic." And let me further quote Mr. Jon Bogle, founder and retired CEO of the Vanguard group "Index funds eliminate the risks of individual stocks, market sectors, and manger selection. Only stock market risks remain". In other words, when you invest in a passively managed index fund than all the risk relating to the fund manager, his / her stock selection and market timing, individual sectors etc all go and the only risk which remains is the risk of the whole stock market and that is precisely the risk which would like to expose yourself to when you invest in equities. Mr. Nicholas Taleb has written an excellent book titled "Fooled by randomness" wherein he explains the role of chance in life and in the markets and I will recommend that book to anyone who believes that he / she can consistently pick winning stocks and / or time the markets to perfection. Last but not the least I would like to jot the words of the great legendary investor Mr. Warren Buffet who once said that "most investors, both institutional and individual, will find the best way to own common stocks is through an index fund that charges minimal fees. Those following this path are sure to bear the net results (after fees and expenses) delivered by the great majority of investment professionals". The conclusion therefore is that there is no reason for you or anybody else to believe that they can pick winning stocks or time the markets. Hence, the best solution for any equity investor is to stock into low cost passively managed index funds because year after year they would beat at least 75% of the actively managed funds and over the longer term in most probabilities beat almost all the funds. Mistake 6: Selling Winning Funds while sticking on to the loosing ones This is a grave mistake which people commit with MFs, equity stocks, other kind of investments as well as in many real life situations - sticking on to the loosing ones while selling the winning ones. It's important to be realistic about investments that are performing badly including MFs. Recognizing the losers is hard because it's also an acknowledgement of your own mistake. But, it’s important to accept and book a loss or else future loss would be even higher. Mistake 7: Fund Churning This is a common advice which might be showered on you by your MF Distributor. Instead of churning your fund just churn the MF distributor who gave you that advice. Distributors love the churning game - simply because it gives them extra commissions and fees while it gives you extra income tax, expenses and most probably a sub optimal fund. Mistake 8: Paying credence to recent past performance A common mistake which a fund investor does is by looking at recent past performance. Past performance is certainly important but if you give too much importance to "continuous performance by looking at daily NAV" then you are inviting unnecessary worries for you in the form of selling a good fund and moving to a not so good fund, the MF churning advisors, income tax, higher commissions and other costs etc. Mistake 9: The Dividend Temptation You may be advised by the MF Distributors and marketers that a fund has declared dividend and it is trading cum-dividend and therefore take the advantage of earning free dividends. But, there is no free lunch in this world - particularly not in the world of investments and mutual funds. The dividend which a fund pays to an investor is immediately reduced from the NAV of the fund. So what is the sense of the dividend when on one hand you receive the cash and on other hand your NAV falls by that much amount? On the contrary, I would say that don't invest in a fund which has declared lofty dividends because that is against your purpose of investments - you are entrusting your money to the Fund Manager to manage it on your behalf and not to return back to you! (unless ofcourse you require regular income in the form of dividends). Mistake 10: Not Understanding the Type of Funds The primary purpose of MFs is to make your life simpler by investing your money on your behalf. However, actually they have made your life difficult by making available a plethora of different categories and schemes. Hence, before biting the bullet get acquainted with which category of Fund you are investing in - Equity, Fixed Income, Balanced, Commodity and within them the various sub-sets like sector, theme, gilt, income, short-term, liquid etc in which you are investing. The risk, expected return, income tax, expenses, required time horizon are immensely different in each of those categories. So don't commit the unpardonable mistake of investing your money in a fund without actually knowing where and in which asset class it is going to deploy your money. Market is a place which will test your patience and character. Many times you might have bought the right stock or Mutual Fund for all the right reasons at the right price but it simply refuses to go up for a long period of time - just hang on to it because the day you get frustrated and sell it off, there are chances it will then start rising. Hence, patience and character are key virtues which will be repeatedly tested by the market. To conclude, there are many simple and avoidable mistakes which investors mutually commit while investing in mutual funds and I have tried to explain some of the most common ones of them. Kindly note, that simple logical things work far better in the market place rather than complex algorithms, theorems, valuations principles, DCF etc. And there is no other place to test your virtues than the market - be it common sense, logical thinking, patience, perseverance, mental balance, emotional intelligence, performing under stress etc. All the qualities which make a successful human being will be tested by the market - it has its own method of finding and exploiting human weaknesses. Investing is not about beating the market or anybody else, its simply beating your own self, your own negative traits and once you are able to master your own self and become a complete human being, then only you would also become a successful investor. Articulate your investment goals, know your time horizon, recognize your risk appetite, understand your need for income and growth, invest regularly although it may be in small lots, do your thinking and research and after doing it don't panic just because the market went against you, accept your mistakes and flaws and avoid the common mutual mistakes which investors mutually commit while investing in Mutual Funds so as to embark on becoming a successful Mutual Fund investor and a complete human being.

Read more at: http://www.moneycontrol.com/news/mf-experts/mutual-funds-10-commonly-committed-mistakes_723728.html?utm_source=ref_article

STT

Securities Transaction Tax is a tax paid by the buyer and seller at 0.125% of the transaction value on delivery based transactions. On non-delivery based transactions in equities or units of an equity oriented fund it is payable by the seller at 0.025%. In case of sale of options in securities, STT is levied at the rate of 0.017% of the option premium to be paid by the seller. In case of sale of options in securities where the option is exercised, STT is levied at 0.125% of the settlement price and is paid by the purchaser. In case of sale of futures in securities, STT at 0.017% is to be paid by the seller. In the case of sale of units of an equity oriented fund to the mutual fund, it is payable by the seller at 0.25%. 

What is meant by 'Right of first refusal'?

Right of first refusal, abbreviated as ROFR, is the right of a person (investor) or company to purchase something before the offering is made available to others. If an investor /PE fund plans to exit the company, it is obliged to give the promoters or existing shareholders, an opportunity to buy the shares held by the PE before selling the same to a third party.

There are other rights for minority shareholders, such as:

Tag along right - contractual obligation which protects a minority shareholder in case the majority / promoter is selling out. Minority shareholder can compel stake sale of his stake along with the majority / promoter.

Drag along right - contractual right with minority shareholder to force the majority shareholder / promoter to join in the sale of the company. If minority shareholder is selling-out, it can compel majority shareholder / promoter to compulsorily offer their stake as well.

20 Cities That May Face Bankruptcy After Detroit

These cities have amassed $118 billion in unfunded healthcare liabilities. These are legal promises to pay healthcare benefits to municipal workers beyond the employee contributions to finance those funds. This is a giant fiscal sink hole — and because of defined benefit plans, the hole keeps getting deeper.
Detroit may be the largest city in American history to go bankrupt, but it is not alone. The city raced to the financial insolvency finish line before anyone else in its class.
Keep an eye on "too big to fail" cities like Chicago, Philadelphia, and New York.
According to an analysis by the Manhattan Institute, several Chicago pension funds are in worse financial shape than the worker pensions in Detroit. One is only 25 percent funded, and where the other 75 percent of the money will come from is anyone's guess. And there are about a dozen major California cities having systemic problems paying their bills.
Here is my worry list, based on bond ratings and other data, of the top 20 cities to watch for financial troubles in the wake of the Detroit story:

1. Compton, Calif.Compton has teetered on the brink of bankruptcy after it accrued a general-fund deficit of more than $40 million by borrowing from other funds, depleting what had been a $22 million reserve.

2. East Greenbush, N.Y.A New York state audit concluded that years of fiscal mismanagement — including questionable employment contracts and illegal payments to town officials — left East Greenbush more than $2 million in debt.

3. Fresno, Calif.Fresno had the ratings of its lease-revenue bonds downgraded to junk-level by Moody's, which also downgraded its convention center and pension obligation bonds due to the city's "exceedingly weak financial position."

4. Gulf County, Fla.Fitch Ratings warned that Gulf County's predominately rural economy is "narrowly focused," with income levels one-quarter below national averages and economic indicators for the county also comparing unfavorably to national averages.

5. Harrisburg, Pa.Harrisburg is at least $345 million in debt, thanks largely to municipal bonds it guaranteed in order to finance upgrades to its problematic waste-to-energy trash incinerator.

6. Irvington, N.J.Irvington has a violent crime rate six times higher than New Jersey's average, with Moody's citing "wealth indicators below state and national averages and tax-base and population declines due to increased tax appeals and foreclosures."

7. Jefferson County, Ala.Jefferson County, home to the city of Birmingham, has been dealing with the collapse of refinancing for a sewer bond. It filed for bankruptcy protection in 2011 over a $3.14 billion sewer bond debt.

8. Menasha, Wis.Menasha defaulted on bonds in 2007 it had issued to fund a steam plant which has since closed and left the city permanently in the red and, as of 2011, had $16 million in general fund revenue, but had $43.4 million in outstanding debt.

9. Newburgh, N.Y.Newburgh was cited by Moody's for "tax base erosion and a weak socioeconomic profile," with 26 percent of its population below the poverty line and its school district facing a $2 million budget gap.

10. Oakland, Calif.Oakland is trying to get out of a Goldman Sachs-brokered interest rate swap that is costing it $4 million a year. According to a recent city audit, Oakland has lost $250 million from a 1997 pension obligation bond sale and subsequent investment strategy.

11. Philadelphia School District, Pa.Philadelphia's school district, the nation's eighth-largest, faces a $304 million deficit in its $2.35 billion budget, and is seeking $133 million from labor-contract savings to prevent further cutbacks.

12. Pontiac, Mich.Pontiac, where the emergency manager has restructured the city's finances, was downgraded by Moody's, reflecting the city's history of fiscal distress and narrow liquidity.

13. Providence, R.I.Providence, rumored to be filing for bankruptcy for more than a year, experienced consecutive deficits through fiscal 2012, has a high-debt burden and significant unfunded pension liabilities, as well as high unemployment and low income levels.

14. Riverdale, Ill.The credit rating for Riverdale is under review by Moody's because the city has not released an audit of interim or unaudited data for the year that ended April 30, 2012.

15. Salem, N.J.Salem is under close fiscal supervision after it issued bonds to finance the construction of the Finlaw State Office Building, which was delayed by construction issues, and its leasing revenues are not enough to cover the debt payments and the maintenance fees.

16. Strafford County, N.H.Strafford County regularly borrows money to cover its short-term cash needs after it spent two-fifths of its budget on a nursing home, which lost $36 million from 2004 to 2009.

17. Taylor, Mich.Taylor has a large deficit and is vulnerable due to significant declines in the tax base, limited financial flexibility, and above-average unfunded pension obligations.

18. Vadnais Heights, Minn.The St. Paul suburb of Vadnais Heights had its debt rating downgraded to junk last fall by Moody's after the city council voted to stop payments to a sports center financed by bonds.

19. Wenatchee, Wash.Wenatchee defaulted on $42 million in debt associated with the Town Toyota Center, a multipurpose arena, and has ongoing financial issues due to the default.

20. Woonsocket, R.I.Woonsocket faces near-term liquidity shortages necessitating an advance in state aid, a high-debt burden and unfunded pension liabilities, with Moody's citing the city's continuing difficulties in making spending cuts because of poor management and imprecise accounting.

The stock market rally in the first half of 2013 has helped many of these cities as they invest pension contributions and get higher returns. But another market downturn could send these teetering cities back into the red.
And the states can't bail them out because Illinois, California, New York, and Pennsylvania face their own money challenges. Republicans in Congress have been insistent that Washington, D.C., won't be tossing a life-preserver to troubled cities, either.The view among conservatives in Washington is that a federal bailout would only reward cities for their own bad behavior. But that won't stop the unions from trying.
What do most of these ailing cities all have in common? Well, consider that the vast majority are located in states with forced unions, non-right-to-work states.
"Right-to-work laws attract people and businesses," says labor economist Richard Vedder of Ohio University. "Non-right-to-work states repel them." His statistics show that cities in states with right-to-work laws have sturdier tax bases and higher employment levels.
Unions control state legislatures and city halls in non-right-to-work states, so it can become politically paralyzing to try to fix the problem of runaway labor costs.
Another common trait of financially troubled cities: years and years of liberal governance.
For at least the last 20 years major U.S. cities have been playgrounds for left-wing experiments — high taxes on the rich; sanctuaries for illegal immigrants; super-minimum wage rules; strict gun-control laws (that actually contribute to high crime rates); regulations and paperwork that make it onerous to open a business or develop on your own property; crony capitalism with contracts going to political donors and friends; and failing schools ruled by teacher unions, with little competition or productivity.
Starting in the 1970s, Detroit became inhospitable if you wanted to raise a family and send your kids to good schools. Criminal predators also made cities like Detroit unlivable for families with children. Businesses that provide jobs often faced citywide income taxes that were layered on top of state income taxes.
"Declining cities are jurisdictions that levy local income taxes," a Cato Institute report concluded. Detroit levies a 2.5 percent income tax; New York's is 5 percent.
Another problem has been the decline in family structure that has become acute in so many big cities across the country, from Los Angeles to New York. In many cities, as many as two out of three children are born to a family without a father. As Charles Murray of the American Enterprise Institute has warned, "Single-mother families are a recipe for social chaos."
They are a major factor in high-poverty levels of many U.S. cities, again with Detroit being exhibit A. Welfare reforms have helped, but much work needs to be done to reinstall a culture of traditional two-parent families in urban areas. This would lead to less crime, fewer school dropouts, more businesses, and more social stabilization.
But for all these problems, cities could see a potential renaissance. More empty-nesters in their 50s and 60s are moving back into central cities like Chicago and Boston, New York and Washington, D.C., because of the cultural amenities — fine restaurants, the theater, sports, fashion, and river or lakeside condominium properties. As baby boomers retire, cities may see new populations moving in.
But this creates a Catch 22 for American cities trying to recapture their glory days and attract new residents.
Who wants to pay taxes for retired city workers when they don't provide any services?
These legacy costs are a fiscal millstone. They put cities in a service decline spiral, because current taxes go to retired teachers and other municipal retirees, while city managers and mayors are forced to lay off firefighters, police, and teachers. Detroit has three retired city workers collecting a pension for every two currently working.
The Vallejo, Calif., city manager once told me when that city couldn't pay its bills several years ago, "You have no idea how bad it is here. We are now paying for three police forces: one that is working and two that are retired."
Given that payment of the benefits are often legally guaranteed contracts, bankruptcy may  be a salvation for some cities. It is a way to hit the reset button and erase those costs so cities can start over.
A good example is Stockton, Calif., which overdeveloped and took on $1 billion in debt during the Golden State housing boom six years ago. When the economy collapsed and housing values plummeted, Stockton couldn’t pay its supersized debts. It declared bankruptcy, but now is starting to rebuild.
According to The Fresno Bee, "Stockton has negotiated voluntary agreements with current workers to eliminate retiree healthcare entirely and is awaiting court approval of a plan to eliminate healthcare benefits for existing retirees as well. City Manager Bob Deis says those reductions will generate $1.6 billion in savings. Three years after it sought bankruptcy protection, Stockton is beginning to right itself. Employee pay and benefits have been downsized, allowing for necessary investments in public safety."
So can America's great and iconic cities make a financial and population comeback? The answer is certainly yes, if they can erase from their books the mistakes of 50 years of labor-union political control.
Bankruptcy, strangely enough, may not be the end for cities, but perhaps the dawning of a new urban revival