Investments are all about matching risks and returns. Investors worry too much about returns but risks are also important. CNBC-TV18's special show Informed Investor gets PN Vijay, Portfolio Manager of askpnvijay.com to guide which type of mutual fund suits a young investor who has just started his earnings.
Vijay advises, "Ability to take risk depends on two factors; how much money you get and how much goes out. You must have some cash surplus. Normally you don’t make investments and then use it for daily bread."
Here is an edited transcript of his comments.
Q: What investment advice do you have for people who have just started earning? What steps should they take?
A: Investments are all about matching risks and returns. People think too much about returns but risks are also important. Your ability to take risk depends on two factors; how much money you get and how much goes out. You must have some cash surplus. Normally you don’t make investments and then use it for daily bread.
Second is age. when you are young, your income is good and that is the time to build wealth, build assets. In a country with 8 percent inflation it cannot lower than 6 percent because there is so much of growth and consumption. So many people are coming up the ladder. It makes sense to slowly build-up the portfolio of good property and good stocks because these are the only two assets where you can get inflation to work for you.
Q: A lot of people do not review their portfolio investments often and suddenly they loose a lot of value. What should they do at that point? Keep the faith or should they do something to asses their position?
A: Surely keep the faith. The thing about mutual fund is like asking whether dating a girl is good or not. A girl can either be most wonderful or most awful. This mistake I find not only in a young investor but also in experienced ones as well. I have invested in mutual funds and have lost a lot of money. Now mutual funds can be the safest. If you are in a liquid fund or a fixed maturity plan (FMP) it is the safest. It is money in the bank. If you have invested in small cap sector fund it is the riskiest. So, mutual fund is a generic name.
Equity mutual funds, sectoral mutual funds, diversified mutual funds and to some extent balanced mutual funds are exactly like equity shares. FMPs, liquid funds are exactly like bank deposits. You get certain tax benefits and certain other things, complications but generally income funds swing with interest rates. It is important to look at your mutual fund portfolio.
Find out how much risky is equity, how safe is debt and make the choice, within that choose some good mutual funds. But on a personal note, I prefer well picked portfolio, diversified portfolio of stocks better than intermediation of equity mutual funds because the cost of that intermediation is somewhat high.
Q: A lot of information is available online. It is better if you invest a little time in research before you make an investment.
A: Moneycontrol is a wealth of knowledge. It is free.
Q: What type of things do we need to remember while buying a property?
A: Peter Lynch, the greatest fund manager ever perhaps. One of his books says, unless you have made an investment for your home do not invest in stocks, said by world’s biggest equity manager. The important thing to look in a property is location, location and location. Don’t pick a property that is 60 kilometers from Noida where you have been told that some highway is going to come. Because that might be a third or fourth property investment where you are punting, but your basic property investment should be in an area which is well known, liquid and easily tradable.
Q: How safe is investment in commodity trading? At this moment when gold is reaching heights is it safe to invest in gold?
A: Commodities are risky because they follow big waves dictated by global central banks. The commodity market has become huge from being a market for real players or people who actually needed nickel or copper. They sold the metals and that is what London Metal Exchange (LME) is all about. It has become a financial instrument used by hedge funds. So, it is highly speculative and is driven by central bank liquidity, the main factor. Apart from perceived growth rates of countries, commodities require considerable knowledge about global liquidity, global positions and global economic factors. If you are trading in commodities don’t trade on all of them together. Become an expert on one or two or any category, say agro commodities or metals or gold and play both sides.
Q: Is it a good time to invest in gold? Should the investment be an Exchange-Traded fund (ETF)?
A: Gold defies gravity and therefore investing in it is good. For the next one year gold will be good because there are two things happening – one is the US Fed and the ECB which are unleashing a wave of liquidity. So, a lot of money is expected to get into commodities and gold is a good commodity. Slightly less, but a positive movement is going on.
Secondly, on a very short-term basis people expect Indian demand to pick up in 4-5 months. So, you could buy gold through an ETF that is best for the next one year and you should make a decent return.
Q: What percentage of income should we invest to have a better security financially? In what ratio in different sectors or stocks can we have a mixed portfolio?
A: For your age 80 percent is quite decent for investment. The major investment should be in stocks and property and 20 percent more in safety net usually called fixed return instruments.
Q: What is the right time to come out of a mutual fund?
A: If you have invested for five years the answer is simple. Let us say you have invested in diversified equity mutual funds, then do the comparison. How have these funds performed vis-à-vis their competitors? Are they diversified mutual funds? How have they performed vis-à-vis the Nifty? If you think they have outperformed or have booked some profit then stay because five years is a long period for a fund manager to prove his class. If he is not as good as his class or the broad market, he needs to be thrown out.