Why global mutual funds are not exciting

The last few months have seen a spate of global fund launches, which has created a buzz among investors.

Some investors (rightly) look at these funds as a means to diversify across countries/economies, while some look at them as novel investment avenues, the way they would look at many of the domestic NFOs (new fund offers).

By and large, investors have not quite taken to global funds for a variety of reasons; some of these are related to tax (ironically, according to domestic taxation guidelines, global equities are at par with debt, so global funds are treated as debt funds from a taxation perspective); while product complexities and sheer indifference rank as lesser reasons.

At Personalfn, we have advised investors not to rush into investing in global funds just as yet. Some global funds have already been launched, while many more are on the way. We have recommended that as more and more global funds get launched, visitors can evaluate comparable global funds across parameters (the fund's investment proposition, its processes, long-term track record across market phases, especially the downturns) before taking an investment decision.

Our lack of interest in the global funds that have been launched in the recent past stems mainly from three reasons:

1) Higher allocation to Indian equities

Many of the global funds that have already been launched in the past (like the Templeton India Equity Income Fund and Fidelity International Opportunities Fund), as also the recently-launched NFOs like ICICI [Get Quote] Prudential Indo Asia Fund are mandated to invest at least 65% of their assets in Indian equities.

In other words, only 35% of assets can be invested in global equities. Despite that, these funds are termed as global funds! By that logic, equity-oriented funds/balanced funds that invest at least 65% in equities should be considered as debt funds by virtue of their 35% debt investments!

We can appreciate that these funds are pre-dominantly invested in domestic equities because domestic laws accord equity status (from a taxation perspective) only to domestic equities and not to global equities.

So in their bid to qualify as equity-oriented funds, many of these so-called global funds are pre-dominantly invested in domestic equities. Given that these funds are pre-dominantly invested in Indian equities, they should not be marketed by fund houses as global funds.

From the perspective of an investor seeking a global investment avenue, clearly he must choose between being invested in the right avenue (in this case, predominantly in global equities) and being invested in an 'equity-oriented' avenue (an Indian equity fund that can invest no more than 35% of assets in global equities).

Our recommendation is that investors go for the former i.e. global funds that invest predominantly in global equities. Even if these funds are classified as debt funds in our view, principles of financial planning (like diversifying across economies/countries) cannot be dictated by taxation laws.

If you must diversify, then you should diversify regardless of the tax status of your investment. In any case, it is probably only a matter of time, before the laws are adjusted to accord global equities a status at par with domestic equities.

2) Higher allocation to Asia/emerging markets

Many of the recently launched global funds (like Sundaram BNP Paribas Global Advantage Fund, Kotak Global Emerging Market Fund, ICICI Prudential Indo Asia Fund) have chosen to invest largely in Asian/emerging market economies. Again this beats the purpose of global diversification.

By investing primarily in Asia/emerging market, these funds qualify as Asian/emerging market funds, not true blue global funds.

In our view, an Indian investor already has a flavour of investing in Asia by being invested in Indian equities. To diversify globally, he does not need to invest in more of the same (although different countries, China, Russia, Brazil and many of the other emerging economies are bracketed along with India in terms of growth potential).

The Indian investor needs to diversify across countries/economies that have dynamics very different from the Indian economy. In other words, he needs to diversify across both developed economies and emerging economies and not just the latter. Global funds that do not allow for this, are not presenting Indian investors with an ideal diversification avenue.

3) Too many fund management levels

Most Indian fund houses do not have an expertise in managing global equities (although many fund houses do have tie-ups with foreign partners); they have nonetheless gone ahead and launched their global fund offerings.

To facilitate this, they have opted for the FoF (fund of funds) route. Put simply, there are designated global funds wherein the Indian fund houses will invest their monies. The global funds in turn will invest in global markets.

So what does this mean to the Indian investor?

A lot. For one, the Indian investor does not really know the global fund wherein his money will be eventually invested. He only knows the Indian fund house where he is investing the money. This fund house in turn will invest the money in a global fund.

So there are two levels of fund management -- one at the level of the Indian fund house and the other at the level of the global fund that will actually be investing the money. As an investor you don't know the global fund that is investing your money and are relying totally on the Indian fund house for this, which may or may not have an existing association with the global fund.

Investors must appreciate that although they are investing with the Indian fund house, there is an onus on the latter to identify the right global fund.

Moreover, two layers of fund management mean two layers of expenses (fund management expenses, marketing expenses, and admin expenses to cite a few examples). That is one reason why an FoF is usually not a very cost-effective way of investing your money.

By Personalfn.com

Entry load waiver splits Mutual Funds down the middle

The proposal to waive off entry load on mutual fund schemes is creating a split within the mutual fund (MF) industry. Some fund managers and CEOs feel the move has the potential to boost the insurance business at the cost of Mutual Funds. However, some others feel the move is very important as the waiver will benefit end investors.

At present, the biggest MF distributors happen to be banks, with the top five accounting for 70% of the entire market of equity-related MFs. More than 50% of private banks’ revenues today come from fee-based income, which mainly comprises of selling MF and insurance products.

“If entry load is waived, MF business in toto stands to lose. It will apply brakes on initiatives of fund houses to improve penetration and reach out to the masses. In India, MF as a product is bought and not sold. And that is where the role of a distributor in advising the investors becomes crucial, especially in non-metros,” said ABN Amro Mutual Fund managing director Nikhil Johri. He is scared that if the new rule comes into effect, financial products distributors may prefer selling insurance products as it is more lucrative in terms of commissions.

Selling MFs gives the distributor a commission of 2.5%, but distributors of insurance products, which include unit-linked insurance plans, can charge commissions up to 25 times that of MFs. Presently, there are around 60,000 AMFI-certified MF agents in the country compared with more than a million insurance agents.

Market regulator Sebi wants to waive the entry load since the present structure does not allow investors to avail maximum benefits from MF investments. There are also cases where distributors churn investors’ portfolios by investing into new fund offers on a regular basis to maximise their fees.

“We need to be transparent. The current model does not allow the investor to know how much the distributor is making through commissions. There should be transparency between the investor, the distributor and the MFs. It should be a purely fee-based model. That way the distributor can also ask for higher fees if he believes that he has given better service,” said Benchmark MF executive director Sanjeev Shah.

There is also a school of thought among fund managers that MFs should have the freedom to charge loads the way they want. If a fund manager wants to have a high load fund he should not be stopped from having the same. At the same time, an asset management company, which wants to sell MFs directly, should be allowed to do the same.

“With this move, investors will get a choice. This choice was not available for investors. In India, the high net worth individuals (HNIs) have always managed to get the load factor waived because of their high investments. But with this move, even retail investors can get the benefits that have been the privilege of HNIs,” said Boston Consulting Group director Sanjeev Shah.

The top 10 cities account for 80% of the mutual fund assets, according to a BCG report. The non-urban areas still are heavily invested in savings accounts and MFs find it a challenge to tap this market. “Without the aid of distribution it will be difficult to tap this market. It is expensive for a MF to reach every corner of the country and in a country like India, distributors are doing this for them at a low cost of 2.5%. In other countries these costs is very high,” Mata Securities country head for mutual fund Sameer Kamdar said.

Thus, it becomes important for the industry now to concentrate on the non-urban areas to expand. If the entry load is waived, getting new business from small towns could get tough. Presently, only Quantum MF follows the direct selling model where it does not give distributors commissions. The model is derived from Vanguard MFs, which basically are index investors.

Quantum MF chief investment officer Devendra Nevgi said, “If distributors are saying that they are the ones helping the industry to spread assets geographically, how come 80% of the assets are accounted by the country’s top ten cities. Why are distributors waiting to improve their reach. We launched our equity scheme without the help of the distributor and reached 80 cities. I don’t agree that distributors are needed to spread the industry reach.”

The industry is now going through a new phase of evolution. The outcome will only help the investor if transparency increases.

End of entry load to benefit small MF investors

The proposal of SEBI to remove entry load (an initial charge on the fund) on direct MF investments is good news for retail investors. This facility would be available for investors who apply directly to the asset management company (AMC) either through the Internet or by visiting the premises of the fund house without involving the services of agents.

This move is progressive as entry loads only reduce overall returns earned by mutual fund investors. The entry loads — which are charged at the time of investment — can range anywhere from 1%-2.25% of the investment amount depending upon the category of the scheme (See Table). So, for instance, an investor seeking to invest Rs 10,000 in an equity fund actually ends up paying Rs 225 as entry load, while the rest is invested.

Says Gaurav Mashruwala, a certified financial planner: “An investor who is equipped to make his/her own decision in choosing schemes and has time to visit mutual fund office directly will save a substantial amount. Eventually, it is a forward step towards free pricing, where the investor and the distributor agree on the load structure”.

Most mutual fund investors of the country today rely on the advice rendered by their agents to pick and choose the schemes to invest in. Those who are better off use the services of their financial advisors. However, the ones who can truly understand the industry and make their own decisions are only a handful. And it is probably this third category of investors who will benefit the most from this new proposal.

The no-front-load model was reportedly introduced for the first time by Vanguard, which decided to go ahead and sell mutual funds without the service of agents. In India, Quantum MF is following a similar model of selling mutual fund schemes. The fund accepts investments through the Internet and does not charge a front-end load to the investor.

Says Quantum MF chief investment officer Devendra Nevgi: “This is a welcome proposal and will benefit the investor if and when it comes through. Right now, we need more investment education so that more investors can actually take the decision of their investment in their hands than depend on other advisors and agents.”

Today, actively-managed funds charge loads on equity-oriented mutual fund schemes. Many mutual funds are ready to waive off the loads if investors are ready to invest more than Rs 10 lakh at a go. Thus, higher the investment, lower the fees.

Mr Nevgi sees a problem in this. Ideally, small investors invest around Rs 10,000 to 20,000 in mutual funds. But since their investments are small, they get charged the highest loads, he feels. If front end loads are removed, the investor will benefit in this regard as well.

Great investing tips from Rakesh Jhunjhunwala

Markets are like women -- always commanding, mysterious, unpredictable and volatile," quipped 'Big Bull' Rakesh Jhunjhunwala (inset) while addressing a meet organised by Shailesh J Mehta School of Management, IIT, Bombay on August 10.

A champion broker, often termed as Warren Buffett of the Indian stock market, Jhunjhunwala had a full-to-the-brim auditorium spellbound as he traced how he made his fortune from a starting capital of Rs 5,000. His career path is stuff dreams are made of.

What earned him fame is his skill to pick under-valued stocks. Some of his renowned calls are Karur Vysya Bank, CRISIL and Bharat Electronics. There are, however, quite a few more. Talking about his company RARE (derived from the first two letters of his name and that of his wife Rekha) Enterprises, Jhunjhunwala says, "My company has only one client -- my wife -- so that I don't need to handle others' money."

One of the biggest bulls of the Indian market, Jhunjhunwala believes in trading by the hunches. "If in doubt, listen to your heart," is what he tells young investors. Extremely optimistic about India's growth story, Jhunjhunwala shared with his audience some valuable insights about the Indian economy, future of Sensex. Read on.

What paved the way to Jhunjhunwala's success?

A democratic growth process rather than an imposed one and a biological evolution, pat comes the reply.

He owes a lot to resurrection of a dormant and vigorous entrepreneurial gene of India. "The country has rediscovered its confidence."

There has been a strong improvement in India's macroeconomic indicators, combined with a robust banking system.

Improvement has also been observed in India's corporate performance, powered through productivity gains. Jhunjhunwala is convinced that on-going reforms would have a multiplier effect on India's economy.

Jhunjhunwala's investment strategies

August 14, 2007
Jhunjhunwala learnt investment strategies the hard way. And he was more than willing to share it with his audience. Here are a few gems from his book of learning

Necessary for any investor is optimism.

Be opportunistic but wait for the right moment

Study the market thoroughly. Refer to history

Maximise profits and minimise losses

Invest in a business not a company

Always have an independent opinion. Observe and read relevant information with an open mind

Be happy with your gains but learn to accept losses with a smile

Be prepared for challenges and risks

Predicting a brighter and better future for the Indian markets, Jhunjhunwala signed of by saying that the Indian markets will reach the peak by 2010.

For beginners in the market, here are a few invaluable gems from Jhunjhunwala's book:

Whatever you can do or dream you can, begin it. Boldness has genius, power and magic in it.

Do something you love

The means are as important as the end

Aspire, but never envy

Be paranoid of success -- never take it for granted. Realise success can be temporary and transient

Build a fighting spirit -- take the bad with the good

When you see a horizon, it seems so distant. When you reach that horizon, you will realize how many more horizons are within reach

Mutual funds for your child

Rarely have we seen a time when parents were overwhelmed with so many investment options to help them plan for their children's future. It is equally true that often parents find themselves so preoccupied that they can't seem to find time to manage their own commitments, let alone plan for their children's education and marriage among other events. That is why it is important that they get some professional help. This is where mutual funds come in.

Put simply, mutual funds hire the services of a professional money manager to invest on behalf of a group of individuals. The individuals pool in their savings and leave it to the fund manager to manage their money in an optimal manner. Individuals can go about their work as usual, content in the knowledge that there is professional help at hand.

Mutual funds have much to offer to parents. Consider this - you have office work to complete, household work to do, children's homework to help with and whole lot of other social and personal commitments to take care of. In the middle of all this, where is the time to invest for your child's education or marriage or business?

Say hello to child plans/funds. We mentioned that mutual funds invest on behalf of individuals to achieve a pre-determined objective. For many investors, this objective is planning for a house, retirement, an overseas trip, parking surplus money. For parents, this objective can be 'planning for child's education or marriage or seed capital for his/her business'.

Parents must note some peculiar feature of child funds. These features tell parents exactly what makes these funds tick. It gives them a reason to consider these plans for building a corpus for their children's future.

Investment objective
The good news for parents is that there is common ground between their objectives and the objectives of child funds. Child funds are launched with the explicit objective of helping parents build a corpus. Sample this - Principal Child Benefit's investment objective reads - 'To generate regular returns and/or capital appreciation/accretion with the aim of giving lumpsum capital growth at the end of the chosen target period or otherwise to the Beneficiary (child).'

Even more explicit is UTI Children Career Plan's investment objective - 'to provide children after they attain the age of 18 years a means to receive scholarship to meet the cost of higher education and/or to help them in setting up a profession, practice or business or enabling them to set up a home or finance the cost of other social obligation.'

Asset allocation
Although most child funds take on a degree of risk by investing in stock markets, they are relatively less risky compared to diversified equity funds that can invest upto 100% of their assets in equities. They are relatively less risky because fund houses have taken adequate measures to ensure that child funds are managed conservatively.

The most important measure adopted by fund houses is to cap the equity investments at a reasonable level. Most of them have capped the equity weightage of the portfolio at varying levels, usually not exceeding 70 per cent of the net assets.

These funds have the flexibility to invest in equity and debt markets depending on the fund manager's view on these markets. These funds work like asset allocation plans allowing the fund manager to shift across asset classes so as to maximise returns for the investor.

For instance, in an equity fund, the fund manager is usually compelled to remain completely invested in equities even when stock markets appear overvalued and therefore poised for a correction. But a child fund with a cap on the equity component can always shift a portion of its assets in debt when the going gets rough.

On the same lines when equity markets are overvalued, the fund manager can shift a portion of his assets to debt so as to capture gains. When equity markets decline, he can add to the equity component. By smartly allocating assets across debt and equities, he can ensure that he enters low and exits high, the cornerstone of a successful investment strategy

Lock-in
We mentioned that fund houses make provisions to ensure that the risk associated with child funds is controlled. One way to lower the risk of equities is to make long-term investments. Over the short-term equities are the riskiest assets; over the long-term, if you tread wisely, they can generate the best risk adjusted returns for you. That is just what fund houses do; they give the fund manager the time and flexibility to make really long-term investments in the child fund. For that, they have what is commonly referred to as a lock-in period.

If you are an investor in public provident fund and National Savings Certificate then you already know what a lock-in period means. In fact, fixed deposit investors are equally aware of this term. Only difference is that child funds have an equity flavour, while NSC, PPF and FDs are debt instruments.

Reason why it makes imminent sense for equities to have a lock-in is because they demonstrate their potential over the long-term (at least 3 years in our view). When the fund manager is certain that he can invest the money for a longer period of time without being concerned about the investor standing outside his office demanding his money, he can make more prudent investments that stand a good chance of making money over the long-term.

For parents, who want to build a corpus for their children over the long-term, a lock-in must be seen as an ally for two reasons. One, it enables the fund manager to make investments that are in the investor's long-term interests. Second, it acts as a deterrent for the parent from making premature withdrawals.

As parents will appreciate, child funds have a lot of features working for them. Even if some of these features appear restrictive in nature (cap on equity investments, lock-in period) remember over the long-term they work to the parent's benefit. They instill discipline and have the potential to generate a corpus for the child, and in the final analysis that is all that matters.

SBI Magnum Taxgain Scheme 1993: Efficiently managing market crashes

Magnum Taxgain has emerged as the prodigious son of the ELSS category — one that every investor would be extremely proud of owning. It has been ranked number one for three consecutive years from 2004 to 2006.

And along the way the fund has matured. Of late it has shown an ability to efficiently manage market crashes. In the June 2006 quarter, the fund lost just 11 per cent compared with the category’s loss of 15.35 per cent and again in the March 2007 quarter, it lost 4.06 per cent compared to the 6.45 drop in the category.

Since January this year the fund has been consciously reducing its exposure to technology and construction stocks. The exposure to construction has come down to 7.68 per cent in June 2007 from an earlier high of 16 per cent in December 2006.

Similarly, the allocation to tech is also down to 14.17 per cent in June from 18.5 per cent

ULIPs Vs Mutual Funds - the battle ends

The long-standing debate over the suitability of Unit Linked Insurance Plan (ULIP) and mutual funds is set to come to an end as the recent announcements by the IRDA, clearly demarcates the playing fields. The insurance industry is buoyant as it views the new guidelines as an endorsement of the fact that ULIPs as an investment tool has become important enough for the regulators to sit up and take notice and the industry players are unanimous in their opinion that the growth of the overall industry in the future will be led by ULIPs.

As per IRDA's new guidelines, which came into effect on July 1, there has to be a minimum lock-in period of three years for ULIPs, a minimum term of atleast five years and the death benefit payable or sum assured under the single-premium product has to be at least 125 per cent of the single premium paid, among other major policy changes. The new guidelines will stop ULIPs being positioned as short term investments products, and they will look less like mutual funds and more like insurance policies. The new move is expected to derail the robust growth of ULIPs in the country somewhat which till now have banked on their flexible investment mandate to lure investors.

New ULIPs now come with a minimum term value of five years, whereas in mutual fund’s ELSS there is a lock-in period of just three years. If an investor decides to withdraw money from ULIP after three years, the amount depends on the surrender value given by the respective insurance company. Ideally ULIPs are considered for those classes of investors who want to put money in a investment product that earns them decent returns by further investing the money in the market, and at the same time ensure a life cover and tax efficiency.
As per the new guidelines, no loans can be granted under ULIP schemes. Further, insurance advisors who sell ULIPs have to be given separate training before they are authorised to sell them. Also, advertisements have to clearly bring out the fact that ULIPs are different from traditional insurance products.

In the wake of the new guidelines insurance companies are busy re-positioning ULIPs and the message is not to view these products as short-term investments to reap windfalls from market fluctuations. The guidelines therefore are unlikely to dampen the growth for companies that are already focussing on products with a medium to long-term cover, though the guidelines surely take away some flexibility from a customer. The new guidelines are intended to enhance transparency levels and provide better understanding of the product to prospective investors, and if applied in principle, ULIPs will remain as attractive as they were earlier.
However, the new guidelines by the IRDA which allows insurance companies to accept new policies, fund switches, withdrawals and surrender requests upto 4.15 p.m, well after the market closes, has sparked a controversy. It has thrown the insurance product to potential misuse. What this translates into is that an investor can switch from liquid fund to an equity fund at the end of the market hours, with the complete knowledge of how the markets have transpired during the day and gain any arbitrage opportunity thereof. ULIP have long been considered insurance industry’s answer to mutual funds, and were the only weapon which insurance companies had to ward off the threat posed by AMCs. Now, there has been always a parallel comparison of unit linked insurance products and mutual funds, but new guidelines allows transactions till 4.15 p.m, mutual funds companies have to shut shop a good half an hour before the market closes to control any misuse.

Mutual funds are essentially short to medium term products. The liquidity that these products offer is valuable for investors. ULIPs, in contrast, are now positioned as long-term products and going ahead, there will be separate playing fields for ULIPS and MFs, with the product differentiation between them becoming more pronounced. ULIPs now do not seek to replace mutual funds, they offer protection against the risk of dying too early, and also help people save for retirement. Insurance has to be an integral part of one's wealth management portfolio. Further, exposure of Indian households to capital markets is limited. ULIPs and mutual funds are, therefore, not likely to cannibalise each other in the long run. While ULIPs as an investment avenue is closest to mutual funds in terms of their functioning and structure, the first and foremost purpose of insurance is and will always be 'protection'. The value that it provides cannot be downplayed or underestimated. As an instrument of protection, insurance provides benefits that no investment can offer. It is important for an investor to understand his financial goals and horizon of investment in order to make an informed investment decision. The decision to invest in either a mutual fund or a ULIP should depend on the time period of investment, individual financial goals as well as risk taking appetite, and it’s about time the industry and customer realise it.

Ideal Asset Allocation through the Midcap route - top mutual funds

The path to create wealth over the long term in the world of mutual funds is through the equity-oriented funds route - is a fact we all accept and acknowledge, but in these volatile times, asset allocation have assumed a bigger role than ever. Investment advisors and expert financial planners are busy chalking the right asset allocation model based on the investor’s age and his risk appetite to suit his overall financial planning and help him in realizing his investment objectives.

Mutual funds as a preferred investment vehicle for financial planning have gained ground pretty fast. The paradigm shift in Indian psyche from viewing mutual funds as pure returns instruments to products which can blend with their individual investment style is amazing, and is a tribute to the superior product innovation and tireless efforts of the industry as a whole.

Coming back to the subject of asset allocation, a major question which an investor faces after he has zeroed in on the amount of equity exposure, is the allocation between Large, Mid and Small cap funds.

There are a total of 168 equity-oriented schemes in the country now and approximately twenty schemes which are either dedicated to investing in midcap or large cap stocks or have a flexi/multi cap mandate. The chief reason behind the AMCs launching so many market cap-based schemes is the realization of the fact that these schemes are now looked upon as a separate category, and as the world of investing in India gets more sophisticated, these schemes will realize even more attention.

If we look at the performance of the entire equity-oriented schemes in the last one year period a midcap scheme – Sundaram Select Midcap is dominating the rankings, in an era when the general perception is that large caps have outperformed the midcap in the recent times. For example, Sensex returns for the last one year period is 46.2% and in the same time, BSE Midcap has appreciated by only 19.07%. Even in the long run, Reliance Growth which is a midcap oriented scheme is dominating the ranking in the five-year return category.

Large cap stocks typically signify stability of returns and less volatility as there is a clear earnings visibility, strong business model and long term performance record. For investors in these bluechip stocks there are plenty of advantages like liquidity and ready availability of company’s financial and other related information which makes it a little easier to track the company, these stocks generally have a large number of analysts tracking them; therefore any downward deviation comes with a lot of advance warnings, giving investors the requisite time to liquidate their holdings. Comparatively, Midcaps are less liquid and more volatile but they are still favoured by the investors, because they compensate the above handicaps by offering higher returns.

In Emerging markets and specifically in countries like India, where the markets are just coming of age, there are plenty of opportunities in the Midcap space, which is due to the fact that a booming economy gives birth to and sustains new ideas and businesses all around, and companies with the right mix of business model and people have the potential to become, as they say, large cap of tomorrow.

India is home to some of the finest technology, has become an outsourcing hub on the back of skilled and cheap labour, its management quality is fast being recognized as world class, and globalization which was initially looked upon as a threat has now been converted into an opportunity, the above factors combined with the favourable demographics of Indian population, political stability has lead to an environment which is very conducive for trade and business to flourish.

Presently, Midcaps find a place in the overall portfolio of the investors “just to spice up the returns” and even for the most aggressive of the fund investors, it may mean a 10-15% higher allocation than normal. Not surprisingly, the combined fund size of the capitalisation-oriented funds is only around 20% of the total corpus managed by equity diversified schemes.

In view of the above arguments, investors – even the most conservative of the lot, who have decided to allocate a certain portion of his hard earned money into equities, must not kill his portfolio by allocating a larger share of the pie to large cap stocks than is necessarily required and must get invested in the Indian midcap space, where the growth rate is not just phenomenal but looks sustainable as well.

How to build your Mutual Fund portfolio?

Great salaries, excellent bonuses, fairly valued markets, high interest rates -- the time looks just perfect to design and put together your mutual fund portfolio.

Building a MF portfolio is akin to building and furnishing your own home:

a) It depends on your financial capacity

b) Your personal tastes and preferences

c) Requires a lot of patience and care

Therefore, while there cannot be a model portfolio suiting everyone's needs and objectives, you can follow a few general rules to build yourself one.

Be clear of what you want

To begin with, you must decide what your financial objectives are; and how much risk you are willing to take to achieve those objectives.

The goals should be as precise as possible. For example, you goals could be:

• Rs 50,000 to pay-off the personal loan in 2007
• Rs 2 lakh (Rs 200,000) for children's higher education in 2012
• Rs 1 lakh (Rs 100,000) for foreign trip in 2010
• Rs 7.5 lakh (Rs 750,000) for daughter's marriage in 2015
• Rs 1 crore (Rs 10 million) retirement corpus in 2020

Second, your goals must be realistic. They must be in line with your financial position and risk appetite. No point in having too ambitious or too pessimistic goals; or having goals, which require you to take undue risks.

Devote proper time and thought to planning your goals.

Done? Good, that's a major part of your job over. Once you know where you stand and where you want to go, the rest is just a matter of details.

Match each goal with the appropriate MF category

Equity markets are too volatile in the short-term, but can give good returns in the long run. Debt funds, on the other hand, give steady but low returns. Therefore, select the goals, which you will finance through equity funds and through debt funds.

Assuming your retirement is still 15 years away, a predominantly equity portfolio may be a better option.

But for your personal loan, which is payable just one year hence, debt funds will be more suitable.

And for the medium term, like your foreign trip, balanced funds may be the right answer.

Liquid funds are a nice way to park your very short-term funds.

Don't be too concentrated or over-diversify

Depending on the corpus, one could invest in an average of 4-7 funds for an equity portfolio and maybe 3-4 funds for the debt and balanced category. Too less a number of funds make your portfolio concentrated and risky. Too many, makes it unmanageable and doesn't really serve the purpose. You need to strike the right balance.

Also, while selecting the fund, study their portfolio mix and ensure that they are different. If most of them are same, then even with 6-7 funds you won't get the desired diversification.

In order to achieve diversification across asset classes, one could now look at some of the forthcoming options such as real estate fund, gold fund, international fund, etc.

Build a suitable mix of equity funds

Apart from allocating your corpus in different asset classes, you need to do some allocation within the equity class. Index/Large Cap funds, Mid-cap/Small cap funds and Sector Funds are the 3 broad sub-categories in which you have to divide your corpus.

Index and Large Cap funds will deliver steady returns, which will be in line with the market performance. In the equity space, they carry lesser risk as compared to mid caps, small caps etc. About 70-80% of your corpus could be allocated to this category. They provide stability to your portfolio. Go for funds with moderate risk and consistent performance.

Your portfolio may need some kicker too. Mid-cap/Small cap funds and Sectors Funds have the potential to provide higher growth (of course with a higher risk). Be prepared for a bumpy ride; and sometimes crash landing too. A 10-20% allocation to this category may be okay. In case of a bad performance, major portion of your corpus is still relatively safe. Large caps will minimise your losses and will also bounce back quickly.

Don't forget the tax aspect

Neglecting to pay tax is bad, but tax planning is not. It can help you to minimize your tax outgo, legally.

Therefore, take care to choose the right option -- dividend payout, dividend reinvestment or growth. They may help you to save unnecessary taxes.

Make sure that you use the post-tax returns in your calculations. Else you may miss your target.

Having built a suitable portfolio, you need to nurture it. You have to regularly feed it with additional investments. You will have to remove the weeds (poor performing funds) periodically. And be patient. It takes time for the tree to grow. But once is has grown, it becomes strong -- so you don't have to take too much care; and fruitful -- it will give you returns year after year.

Sensex @ 15K: How to get the best from Mutual funds now

Sensex touched a new all time high today. The stock market has had a remarkable run since touching its low of 8900 in June 2006.

Needless to say, the last one-year or so has been quite eventful for investors in equity funds. If one were to analyze the behavior of investors during different phases of the stock market, there are lessons to be learnt for existing investors as well as for those who intend to make equity funds an integral part of their portfolio.

Market Ups & Downs

Every time the market goes up, many investors start wondering whether this is the right time to exit. In fact, there are investors who make the mistake of exiting too soon. It is important to remember that equities are a long-term investment vehicle and one needs to give one's money enough time in the market to get the best results. Remember, if one takes a wrong decision, there is always a risk of missing out on good rallies in the market or getting out too early thus missing out on potential gains.

Similarly, whenever the market turns volatile, it causes anxiety and in some cases, even sleepless nights. In times like these many investors abandon a carefully designed investment strategy as a knee jerk reaction and pay the price for it. Obviously, it is not be a smart thing to do. The key is to recognize that volatility exists in the market place and will remain so. After all, volatility is a statistical measure of the tendency of the markets to rise and fall. While volatility can be described as a natural phenomenon, there is a need for investors to develop ways to deal with it.

Invest Regularly

Though a lot has been written about systematic investing, it is often perceived as an option only for small investors. The fact of the matter is that systematic investing has nothing to do with the size of the investment. It is a way of disciplined investing that allows investors to invest in the stock market at different levels without having to worry about the market levels and the market movements in the short-term. Remember. When you opt for regular investing, you abandon any strategy that might control timing of your investments. In other words, you continue to invest irrespective of market conditions. This strategy works very well partly because of "averaging" and partly because in the long run markets move upwards, in spite of short-term falls.

It is not to say that one should not invest a lump sum amount in equity funds. For a long-term investors, making a lump sum investment is not an issue, however, a lump sum investment should not be the end of the story. Instead, it should be taken as a beginning of an investment programme to build wealth over time and needs to be followed by regular investments as and when investible surplus is available. Either which way, the key to successful equity investing is making investments on a regular basis.

Don't try to time the Markets

One often comes across investors who wait for months in anticipation of a correction in the markets. However, more often than not, they end up investing in a panic as the markets scale newer heights. At times, a small correction in the market seems like a great opportunity to them and as result they end up investing at much higher levels compared to the level prevalent at the time when they had originally planned to invest.

I am sure there are many investors who must be wondering whether they should be investing in the markets at the current levels or not. Though, the prospects of the markets look promising from the long-term point of view, it may be prudent for a new investor to adopt a strategy whereby a part is invested as a lump sum and the balance by way of systematic investing. The exact proportion of the lump sum and systematic investment would depend on one's risk profile and time horizon. This way, if the market drops right away, one would suffer a smaller loss and can buy more units each month at the lower prices.

Take help of a professional to determine the right levels for you. However, there are many investors who do not find regular investing very exciting. They also find the whole process a little cumbersome. It is important for investors to realize that investing in equity funds is not about excitement but a sensible way to build wealth through healthy real rate of returns. However, the key is to concentrate on selection and maintaining the disciplined way of investing.

It is often said that 90% of the investment success depends on the quality of the portfolio and the right mix of funds investing in different market caps and the remaining 10% on timing the investments. In reality, many investors spend 90% of their time "timing" their investments.

Now, a few words on the selection process. It is important to select the funds after careful deliberations especially keeping your risk profile, time horizon and investment objectives in mind. You will find some brokers constantly approaching you with new products. You need to learn to say "No" to products you don't really want or need. In other words, be wary of "buy now while the stocks last" sales pitch and always keep your long- term investment objectives in mind while building your portfolio.

Mid-cap funds: Are they money spinners?

Can there be a life without mid-caps stocks? After all, they can make you money fast, but they can also cause you huge losses.

Though answering this cynical question might appear difficult, we can probe the facts to find the answer.

If you go by the equity fund portfolios of various fund houses, most of them will be adorned by mid-cap stocks.

Such is the conviction of asset management companies (mutual funds that manage your money) that they have several dedicated funds that exclusively invest in mid-cap shares.

With the BSE Mid-cap index delivering an annualised returns of 34 per cent during the last three years as compared to Sensex's 31.87 per cent, mid-caps are clearly in the reckoning and no portfolio can be complete without them.

(The BSE Mid-cap index lists a representative number of mid-sized companies only and reflects the changes in the prices of their shares. The BSE Sensex has 30 stocks; the manner in which these stocks increase or decrease in value indicates how the stock market is performing).

The fund managers who invested with conviction in mid-cap companies have been rewarded well.

Though essentially diversified funds, the mid-cap funds are always on a look out for multi-baggers (companies whose stock prices grow by leaps and bounds over a period of time; for instance Infosys [Get Quote]), which have the potential of becoming large-cap companies.

However, a word of caution is in place here. Mid-caps, as fast as they rise, can also sink without a trace.

Why mid-caps?

Mid-cap companies are viewed as wealth creators as they have the potential of joining the large cap club. Mid-caps can adapt faster to changes and are nimble. But, for fund managers, the task of identifying such companies has always been a challenge. A fund is worth investing in if its manager is able to do this consistently.

• How to identify best mutual funds

However there are funds which, despite having a mid-cap orientation, like to play safe. Large companies like Reliance Industries [Get Quote], TCS [Get Quote], Infosys, Bharti, etc, adorn their portfolio, and more often than not, figure among their top holdings.

Additionally, some funds have extremely large numbers of stocks which reduces their risk element through large diversification. The case in point is Sundaram BNP Paribas Select Midcap. It is extremely diversified, with 100 plus stocks in its portfolio. Additionally, the fund also likes to keep a lot of cash (around 20 per cent) -- this helps them to buy more of the same stocks in case the stock market falls substantially. The fund has the reputation of identifying quite a few multi-baggers like Kalpataru Power and Laxmi Machine Works.

However it should be kept in mind that not every mid-cap is a success story. Anybody can burn hands if they are only taking selective bets on these funds. Some of them will not be equipped to survive the downfall and may sink without a trace.

Mid-caps stocks tend to combine the characteristics of large caps and small caps by offering more growth than the former but less risk than the latter. But, if a fund has invested in dominantly mid-cap stocks, then it may find it difficult to make a timely exit due to the liquidity constraints of such stocks (sometimes, even if the fund wants to sell a particular stock, there may not be any buyers for it).

But not all funds believe in this strategy. They like to take selective bets on a company. For example, Birla MNC's top three sectors constitutes around 46 per cent of its portfolio and the fund restricts itself to around 25-35 stocks. The fund which, till last year, had a large-cap orientation has now aggressively turned towards mid-cap stocks.

The flip side of mid-cap funds

So far so good. But have the funds been any good in protecting the downside?

Last year, when the markets had declined by a third (between May 11, 2006, and June 14, 2006), the BSE Mid-cap had lost 32 per cent and CNX Mid-cap (this is the mid-cap index on the National Stock Exchange) was also down by around 31 per cent. Though the mid-cap funds had started feeling the heat in May itself (when they began to lose at almost the same rate as diversified category's 12 per cent loss), the loss was more severe in June.

• Should you invest in a mid-cap fund?

In June 2006, when the diversified equity category had lost 5.7 per cent, funds like Franklin India Prima, HDFC [Get Quote] Capital Builder, Tauras Star Share, DBS Chola Opportunities, Tata Growth, etc -- which are all mid-cap funds -- had lost between 9 and 11 per cent.

Year	BSE Sensex(Returns in per cent)	CNX Nifty (Returns in per cent)	CNX Mid-cap (Returns in per cent)	CNX Mid-cap 200 (Returns in per cent)	CNX Mid-cap(Returns in per cent)	BSE Small-cap (Returns in per cent)
2002	3.52	3.25	--	22.77	--	--
2003	72.89	71.90	--	135.97	--	--
2004	13.08	10.68	25.55	44.61	24.96	41.07
2005	42.33	36.34	46.63	41.07	35.04	73.18
2006	46.70	39.83	31.13	--	29.01	15.97
2007*	0.62	3.06	-0.16	--	0.88	1.47

*Since start of the year till April 30, 2007

However, in February this year, when the equity-diversified category fell by around 8 per cent, most such mid-cap funds fell less than the category.

Watch out for the swelling fund size

After you are convinced that you are willing to take a chance with the aggressive funds, one thing should be of concern -- the fund's swelling size.

• How equity funds help you make money

The top-performing funds are getting bigger and bigger. Reliance Growth is as big as Rs 3,556 crore. Considering that the fund that had only Rs 1,962 crore assets under management in July 2006, this rings a bell. Similarly the corpus of Sundaram Select Midcap had been growing steadily and it now manages assets worth Rs 2,163 crore.

With the mid-caps being relatively less liquid stocks (hence difficult to sell in large numbers when the need arises), huge holdings in them could adversely affect your exit options. Moreover if any particular stock surges and becomes a multi-bagger, then its impact on the overall fund performance will be limited. A small fund is also more agile and can enter and exit mid- and small- stocks at ease.

Mid-caps truly reflect the growth of the economy. They cannot be your core holding but you can't live without them either

What your insurance agent will never tell you

Data from the Insurance Regulatory and Development Authority of India, the insurance regulator, suggests that 90 per cent of the insurance sold by the private insurance companies during the last financial year (April 2006-March 2007) were Unit-Linked Insurance Plans.

A Ulip has, both, investment and insurance features. A part of the premium is invested and another part goes towards paying the mortality charge for the insurance that an individual taking a Ulip receives. This two-in-one feature is one of the reasons for the popularity of this product.

The other major reason being the high upfront commission offered to insurance advisors selling the product. This leads to insurance advisors pushing Ulips more than other insurance products like term insurance.

Let us say an investor takes a 20-year Ulip. Every year he has to pay a certain premium. In the first year, 15-71 per cent of the premium can be deducted as a premium allocation charge, depending on which insurance company the individual goes to.

What this means is that if an individual decides to pay a premium of Rs 50,000 and the premium allocation charge for the first year is 30 per cent, then only Rs 35,000 will be invested. The remaining Rs 15,000 the insurance company will recover as a premium allocation charge.

The majority of this will be passed onto the insurance agent. When you compare this to the around 2-4 per cent a mutual fund agent makes on selling a new scheme, this is fantastic.

Try buying a simple term insurance policy from an insurance advisor. For those individuals who already have an investment plan in place through mutual funds, it does not make sense to buy a Ulip. But at the same time they do need insurance and term insurance policy which simply insures an individual for a certain amount for the period of the policy, is their best bet.

If the policy holder dies during the period of the policy, his nominee will get the amount for which the individual is insured, if he survives the period, he does not get anything.

Most Indians look at insurance either as a mode of tax saving or investment. Hardly anyone looks at insurance for the sake of insurance. Given this, most do not like to take on a term plan, as they do not get any money if they survive the period of the term plan.

Using this fact as a selling point, an insurance advisor usually tries to dissuade any individual from taking a term insurance policy. The main reason though is that the premiums to be paid in case of term insurance policies tend to be very low.

Also a lot of private insurance companies run contests for their insurance advisors. These contests have expensive cars, foreign trips, etc., as prizes. Insurance advisors are eligible for it only if they manage to generate a certain amount of new business for the company.

If insurance advisors are to get anywhere near having a chance of winning these contests, they can never get there by selling low premium term insurance policies. They have to sell Ulips to be eligible for prizes that these contests offer. Some insurance companies do not consider term insurance policies sold for these contests.

So no insurance advisor likes to sell term plans, which provide only insurance. In the same vein insurance advisors rarely like to sell whole life policies, endowment policies, etc.

When deciding which insurance policy to choose, an individual considers the insurance advisor as an expert and tends to go with what the advisor suggests. But this may not be the correct approach. As Steven D Levitt and Stephen J Dubner write in Freakonomics, A Rogue Economist Explores the Hidden Side of Everything, "But experts are human, and humans respond to incentives. How any given expert treats you, therefore, will depend on how that expert's incentives are set up."

The incentive of the insurance advisor is definitely not in favour of the individual wanting an insurance policy.

Realty MF norms on cards

The guidelines for real estate mutual funds (REMFs), which are being worked out by a panel appointed by the Securities and Exchange Board of India (Sebi), are likely to suggest quarterly disclosure of net asset value (NAV), besides putting an investment ceiling based on individual projects, developers and even locations.

The quarterly disclosure of NAVs is a step-down from the regulator’s earlier stand that REMFs should disclose their NAVs every day.

Sources said the domestic market could see the launch of the first REMF by the end of this calendar as the sub-committee is in the final stages of preparing detailed guidelines for the purpose.

“The guidelines could be out by the end of the third quarter,” a top mutual fund executive said.

He added that even though the launch has been delayed following recent policy changes, all newer issues, including land and property valuation and other regulatory disclosures, will be addressed in the final guidelines.

Last June, the Sebi board had cleared the basic norms for REMFs, stipulating that such funds would initially be close-ended and units compulsorily listed on stock exchanges.

The Sebi committee is also of the view that valuation of properties should be done by qualified experts such as chartered accountants.

Analysts point out that valuation of property will be a key issue before launch of REMFs. “For valuing assets such as property, no value parameter is available. That has to be set up by creating a comprehensive database.

They even have to accommodate recent Sebi guidelines on realty IPOs,” said Ajit Krishanan, partner, Ernst and Young.

The committee is also discussing investment regulations that will spell out per project investment limits, location specific limits and developer specific exposures. These norms are on similar lines as those specified for equity-oriented mutual funds.

Globally, REMFs are known as Real Estate Investment Trusts (REITs). “Globally, REITs are being traded 5 to 10 per cent below their asset value since they are not properly valued,” says Graham F Chase, president of The Royal Institution of Chartered Surveyors (RICS).

This will also be the case in India owing to the illiquid nature and close-ended structure of the funds, a local fund manager said.

Zero tax on income of Rs 11.20 lakh?

There will be zero Income Tax on income of Rs 11.20 lakh (Rs 1.12 million). Impossible? No, it isn't.

One would be forgiven for being sceptical because for the ongoing year (FY 2007-08), the total income exempt from income tax in the hands of a male individual is only Rs 110,000 and that for a woman only Rs 145,000. So how, then, can an income of Rs 11.20 lakh be completely exempt from tax?

You can achieve this by following one of the five golden rules of tax planning, namely:

Spread your income among your family members

This golden rule makes constructive use of the classic British concept of divide and rule. The simple rule is that each family member must have his or her independent source of income so as to legally become an independent taxpayer under the provisions of the Income Tax Law. When the entire income of a family belongs to just one member, the tax liability is very much higher than when the same income is divided among different members of the family.

Thus, the first golden rule of tax planning requires that one develops income tax files for oneself, one's spouse, one's major children, the Hindu Undivided family, and for all other major relatives in the family, including one's parents.

Of course, under the income tax law it is not possible to arbitrarily divide or apportion one's income amongst different members of one's family -- and then pay lower tax in the names of different family members. However, you can achieve this goal by intelligent use of the perfectly legitimate facility of gifts and settlements.

Here is how:

Generally, any gift you receive from various members of your family and specified relatives is not considered your income but a capital receipt. Thus, no income tax is payable on gifts received from relatives, and gifts received from parties other than relatives up to a sum of Rs 50,000 -- and up to any amount at the time of marriage.

Let us consider the example of a small family consists of Mr. A his wife who is a homemaker and not a career person, his major son studying in college, and one major daughter studying in school. They also constitute a Hindu Undivided Family.

The total combined income of all five members of the A-Family, including the HUF, is Rs 11.20 lakh. Every member contributes Rs. 70,000 in the PPF account and has invested Rs. 30,000 in an infrastructure Mutual Funds or company.

Through an intelligent use of gifts and settlements by Mr A to all members of his family, each family member has investments in business, industry, house property, etc., in their own individual names in such a manner that each of the male members and the HUF would have a gross annual income of Rs 210,000 and both the female members have an income of Rs 245,000 each, in all adding up to Rs. 11.20 lakh (Rs 210,000 x 3 + Rs 245,000 x 2)*.

And here is the beauty: this income of Rs 11.20 lakh can be totally tax-free. Here is how:

Section 80C of the Income-tax Act, 1961 provides each individual taxpayer, including an HUF, a deduction of Rs. 100,000 from his/her gross income when investments up to Rs 1 lakh is made in stipulated investment avenues, such as PPF, infrastructure bonds, equity linked savings schemes, life insurance, etc. Thus, all the four family members, and also the HUF, can avail of this deduction under Section 80C to the extent of Rs 100,000 each.

After availing of the deduction of Rs 100,000 each under Section 80C, the taxable incomes of the five taxpayers of the A-Family would be as follows:

Mr A	Rs 110,000
Mr A's son	Rs 110,000
HUF	Rs 110,000
Mrs A	Rs 145,000
Mr A's daughter	Rs 145,000

There, we have it!

The total tax liability of the A-Family is now ZERO, since the income of each taxpaying constituent individual/HUF is below the taxable limit which, as noted earlier is currently Rs 1,10,000 for male and HUF taxpayers, and Rs. 1,45,000 for women tax payers.

It may also be mentioned here that we have not considered the additional tax savings which are possible through a deity Trust, or a trust for an unborn person in the family, which would further increase the zero income tax level income to more than Rs 14 lakh (Rs 1.4 million). In addition, several items of fully exempted income, such as agricultural income, dividend income, income from mutual fund, etc., could be planned for each of the four family members, and also for the HUF, to secure a still higher level of zero income tax for the A-Family.

* Rs 210,000 x 3 (male members) = Rs 630,000
+
Rs 245,000 x 2 (female members) = Rs 490,000

Excerpt from the book:

Tax-Free Incomes & Investments: A-to-Z Tax Guide (A.Y. 2008-09)

By R N Lakhotia

Publisher: Vision Books

How to fund your child's education

Most of us would put our children's education above any other priority in life including, our own retirement. Planning, therefore, is imperative and should begin as early as possible.

With so many products and opportunities available in the market, a whole lot of emotive advertising and innovative products hitting the market every day, it's very easy to get it wrong.

So, let's try to find the best solution.

Step 1: How much would you need and when?

Let's assume you are 30 years and have become a parent recently. Also, assuming that the cost of higher/professional education you desire for your child is about Rs 900,000 at current value.

Since he will enter college at 18, you need to start planning for 18 years later. Since education costs increase faster then inflation, it is safe to assume an increase of 10 per cent per annum. Based on these numbers, you would need Rs 50 lakh (Rs 5 million) after 18 years.

Step 2: Which asset class should I choose - fixed income, real estate or equities?

Let's look at all of them and select the most suited one.

Fixed income investments like public provident fund, National Savings Certificates, fixed deposits, fixed maturity plans etc are the safest form of investment but they give poor returns after adjusting for inflation and taxes.

COST OF EDUCATION
	For investment(Rs)	For Insurance (rs)	Total (Rs)
Diversified Equity Fund	11,146	282	11,428
ICICI Child Plan	11,000	-	11,000
ETF Index Fund � Nifty	9250	282	9532

Real estate could give good returns but it needs to be ruled out because of high initial capital requirement and high entry/exit costs.

This leaves us with equities. It scores over others in more ways than one. Among others, there is scope for diversification, low investment risk if the horizon is long, good inflation adjusted returns and of course, easy liquidity.

Step 3: Now that we have decided on equities, what are our options?

They are:

• Direct investments
• Diversified mutual funds
• Exchange trade funds (the Nifty index fund)
• Education plan through an insurance company

Direct investment in shares could be very dangerous if you are not an expert. The other three are managed by professional money managers. So let us analyse them in detail.

Assume a very safe return of 10 per cent over the next 18 years in all the three options -diversified funds, exchange traded funds as well as child plans.

As far as the cost goes, you can see that the entry load is the maximum in case of the insurance cum investment plan. It is the minimum in case of the ETF tracking the Nifty. Asset management fees are the highest for diversified funds and lowest for the ETF. (See Entry and Management costs)

ENTRY AND MANAGEMENT COSTS
	One time entry load/ allocation charge	Annual Asset Management Fees
Diversified Equity Fund	2.25%	2.00%
ETF Index Fund - Nifty	0.00%	0.50%
"ICICI Child Plan"	"1st yr - 18% 2nd - 5th yr - 5% 6th - 10th year - 2% 11th yr onwards -1%"	1.50%
Asset Management Fees taken above are either quoted in their marketing material or are an approx based on the products available in the market. They may change at the discretion of the companies subject to approval from concerned authorities.

Based on the above charges and expected return of 10 per cent, to reach Rs 50 lakh in 18 years, you would need to invest about Rs 11,150 in a diversified equity fund, or Rs 11,000 in a child plan or Rs 9250 in the ETF.

Besides putting this money aside every month for your child's education, there is another important factor one must not forget. What if something unfortunate was to happen to you tomorrow? Since there won't be anyone else to pay for the education, your investments will not be able to generate the target of Rs 50 lakh.

To guard against this uncertainty you must buy a pure term insurance on your life. The amount of insurance should be adequate enough to generate Rs 50 lakh in 18 years would be Rs 13-14 lakh (rs 1.3-1.4 million), assuming that the entire corpus is invested in the ETF in case of your unfortunate death. A 30-year old can get a term policy from SBI Life Insurance of Rs 14 lakh (Rs 1.4 million) cover for 18 years at just Rs 282 per month!

Since the child plan already has insurance built into it, we have to consider this additional payment for others. So our total outgo per month would be Rs 11,428 for diversified, Rs 11,000 for the child plan and Rs 9532 for the ETF index plan.

As you can see, the ETF index fund with term insurance is the best option. It's about Rs 1500 cheaper. Moreover, you could increase or decrease your investments into ETF any time you like, depending on your situation. At 30, putting even this Rs 9,500 aside per month could be a stretch for many of us.

So you could plough in lower amounts in earlier years and increase them gradually, For example, you could pay Rs 282 per month for insurance and the ETF investments could be:

• Rs 6,000 per month for the first four years
• Rs 8,000 for the next four years
• Rs 11,000 in the next four years and Rs 16,000 in the remaining six years and still reach our goal of Rs 50 lakhs

As we can see that whichever way you may look at it, the ETF combined with the cheapest term insurance on your life, is the best way to plan of one's child's future.