Understanding Risk and Reward

How many times we have seen our investment gains going up and giving us a pleasant surprise. We take it in our stride. Some of us take it as our excellent stock picking abilities while some are more humble and think this is all because of market as a rising tide raises all boats. Similarly, how many times we have seen a stock that has gained enormously in last couple of months has started downward slide for no apparent reason. This is the most frustrating experience. Again some of us blame the market while some are more humble and learn from the experience.

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Asset Allocation Funds

The advantage of mutual funds over pure equity, bonds, precious metals, or real estate investment is that they have inbuilt risk management system. They invest in a set of assets to fend off any risk that arises because of single asset or a set of assets which are facing temporary slowdown. They also have someone, the fund manager, who is keeping a track of your investment and changes the assets depending on how they perform and the future prospects. Let’s look at asset allocation fund which is growing in popularity.

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Systematic Investment Plan

Investors can buy financial assets for the purpose of investment in two ways. They can pay lump sum amount and buy once. In this case, any adverse impact on the value of asset will reduce the investment returns. The other option is to invest a sum periodically. In this case, adverse impacts will not hurt drastically. The periodic investment option is also known as SIP. SIP or systematic investment plan is a scheme where investors can invest a certain amount every period (daily, weekly, monthly, quarterly, or yearly) in a financial asset up to the investment horizon.

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Interest Rate Risk and Debt Mutual Funds

Anup is a financial advisor and a sincere one. He advises people on mutual funds investment as per their requirement. Anup, in his interaction with many clients, has come to realize that many of the investors want to preserve their capital as well as earn an average return. It is fine for them to receive average returns as long as the capital is preserved. Investors, however, do want better returns than the banks. Anup realised that there in the market there is a significant set of investors who are risk averse and want a fund that not only preserves their capital but provides returns at least as good as banks. Anup, to satisfy and to do justice with the requirement of his clients started suggesting debt funds to his clients. It was all good. Debt funds usually don’t lose money. They provide periodic returns as well as chances of capital appreciation when interest rates go down.

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How to analyze Banking Stocks

Skyrocketing interest rates, rising NPAs, and high deposit rates have beaten down banking sector as a whole. The Bankex, (the index covering all banking stocks) is lowest in last 18 months. The exchange traded fund, Goldman Sachs Banking Index Exchange Traded Scheme, which tracks banking sector is down to close to 20% in last 1 year. The performance of PSU sector banks is even worse. They have been down by 30% in last 1 year. Could this be the right time to enter into banking stocks? The current valuation certainly looks attractive from long term perspective. However, RBI has not shown any indication that it will stop raising the policy rates.

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Debt Mutual Funds

Debt funds have been gaining popularity since 2008 when market crashed. Even after 4 years, the market has not touched the level it was in 2008. What this means at a high level is that the market has given negative returns over the last 4 years. An investor would have earned at least 30% had he invested in debt funds starting from 2008.There are few fund houses that are now encouraging SIP option in debt funds. It doesn't make much sense from investing perspective but it is a good option from discipline perspective. Let's look at the different types of debt fund available in the market for investment.

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