Importance of asset allocation

Raghuram V, a 29-year-old IT consultant was not too comfortable with the way his portfolio looked at the end of November 2008. Given the steep market correction from the beginning of this year, his equity holding had fallen sharply. As a result, he wanted some advice on how best he could re-align his portfolio to recoup some of his losses.

The table on the left clearly indicates the losses suffered by him between January 1, 2008 and November 30, 2008. A quick glance will show that Raghuram's investments in equity and equity mutual funds were hit the hardest.

While his direct equity investments dwindled from Rs 5,69,879 in January to Rs 1,59,566 in November his mutual fund investments came down from Rs 8,63,259 from the start of this year to Rs 3,28,038.

Overall, his portfolio shrunk considerably by Rs 9.41 lakh. The equity exposure through direct equity shares and equity mutual funds fell from about 80 per cent (Table 1) in January to the current level of 57 per cent (Table 2) because of the steep market fall.

The ULIP was the only form of life insurance cover that he held with a sum assured of about Rs 6 lakh. The fund value as of November 30, 2008 was Rs 1.26 lakh. While he was drawing a salary of about Rs 8.4 lakh per annum he held cash of Rs 2 lakh in his savings bank account to meet any emergency situations.

Because his parents were old and prone to health problems he consistently maintained a minimum of around Rs 2 lakh in his savings bank account. Any additional cash required would have to be brought in from his investments (more so equities).

The table below shows how Raghuram's priorities were placed: He needed Rs 7 lakh to take care of his child's education by 2024; another Rs 50 lakh to construct / buy a house for himself; Rs 40,000 per month as pension after he completed 50 years and money to meet any medical emergencies that his parents might face.

Out of his monthly surplus of Rs 25,000, he set aside Rs 5,000 every month towards the ULIP. While he was averse to combining insurance with investments he did it at the behest of his friend, mainly for tax saving. He had systematic investment plans, SIP, into equity mutual funds running to the extent of Rs 10,000 per month. The balance of his savings (Rs 10,000) was invested into equities whenever he found an opportunity.

Apart from his investments he also felt the need to cover his parents against health hazards because of rapidly increasing health expenses. He wanted to fund the education of his son who was a little under two years and planned to invest in a house worth Rs 50 lakh in a couple of years. He would then save on the rent of Rs 14,000 per month that he is currently paying.

Recommendations: What he should do

After looking at the overall picture we first did a review of his current investments and found them to be pretty equity-focused. In November 2008, Raghuram held a set of 22 mutual funds with about 78 per cent exposure towards mid cap and sector funds.

He also had good number of new fund offers since he felt they were coming cheap at Rs 10, a common mistake that investors make. Finally, we realised there was an immediate need to re-align and consolidate Raghuram's equity mutual fund portfolio because over-diversification (putting money into too many mutual funds and stocks) was dangerous!

Within his equity mutual fund portfolio we suggested he consolidate his investments across six mutual fund houses including HDFC, Templeton, Reliance, Birla Sunlife, Sundaram and DSP Blackrock over about eight equity schemes, with a combination of large cap / mid cap / theme / contrarian funds. The funds were chosen based on factors including long term track record, performance on market falls, the fund manager and requirement to diversify across investment styles and market caps.

The weightage of mid caps was recommended to be reduced significantly for the next two years (in a steep market fall mid caps fall the most). Equity shares also need to be consolidated within a set of large cap and mid cap stocks, preferably, with a greater bias towards large cap companies (they recover first when market move up).

Considering that his parents were within the insurable age, a family floater health cover of about Rs 5 lakh to Rs 8 lakh was suggested reducing the need to hold cash in his savings bank. For emergency purposes, we suggested holding three months' expenses in the bank account and move the rest into debt mutual funds: preferably into Liquid Plus (a debt mutual fund scheme that is easy to buy and sell) and short term gilt funds. Gilt funds invest purely in government securities and hence are safe. Debt mutual funds were preferred over bank fixed deposits considering that he was in the highest tax slab.

The premiums paid towards parents' medical insurance would also qualify for deduction US 80D to a maximum extent of Rs 15,000.

A house for Mr Raghuram

For the house that Raghuram wanted to purchase by 2010, we suggested he use a loan of Rs 40 lakh; the balance of Rs 10 lakh could be brought in as down payment. As this need was likely to arise in the medium term, we could use part of the investments in ULIPs, bank fixed deposits and equity mutual funds towards this need.

We suggested a continued contribution towards the ULIP, since they are beneficial only in the longer term. The equated monthly installment (EMI) paid towards housing loan will help avail of tax benefits on interest as well as the principal part as deduction US 80C. In addition, Raghuram could save on rent (Rs 14,000 per month now) assumed to be about Rs 15,000 per month in 2010.

After a detailed study of his monthly expenses, needs and current insurance cover, it was estimated that an additional cover of Rs 75 lakh was required. Given his age, we suggested that he avail a term cover for a period of 25 to 30 years that would cost him about Rs 22,000 to Rs 25,000 per annum depending on whether he chose a 25 or 30 year term and the company he chose. The term insurance cover provides only risk cover and no returns. The premiums paid towards such term cover would also cater to deduction US 80C.

In the whole bargain of planning for his needs, we had particularly taken care of his deductions US 80C and 80D.

Meeting Raghuram's targets

For his monthly investment, we suggested him to use SIPs into equity mutual funds for Rs 10,000 per month. We suggested he invest Rs 2,500 per month in gold ETFs or a fund investing in gold mining companies.

Rs 2,500 monthly could be invested into a bank recurring deposit or a debt mutual fund. Considering that interest rates are likely to start seeing a downward cycle (decrease from current levels), income funds were the preferred option of debt funds. Such funds offer monthly returns and are easy to sell if the need arises.

We suggested Raghuram continue with his ULIP investment because such plans give good returns only over a period of 15-20 years.

Considering his age, the target asset allocation had a reasonable tilt towards equity (both directly through stocks and indirectly through mutual funds). This was also aided by the SIPs that he was investing in. The objective was to have a balanced portfolio across various assets.

Now that we have made a plan for Raghuram to recoup some of his losses it is important he sticks to it. While asset allocation helps optimise your returns and stay well within the preferred risk profile, regular monitoring will help best achieve the required financial goals and create wealth in the medium to long term.

15 Ways to Increase Sales in a Dragging Economy

1. Discounts – Straight discounts are fantastic when the economy is in a rough patch. For example, retailing institutions such as Wal-Mart typically see significant sales increases when the economy is in a down turn. This is because consumers are being significantly more judicious when it comes to purchases.

2. Luxury and Necessity Good Placement – The first thing consumers in financially tough times will do is cut out luxury goods.However, one way to work on increasing the sales of luxury items is to place them close to necessity items in the store.

3. Add More Workers – One of the biggest things to slow down sales during a busy time is to have too few people working. In tough economic times, it’s tempting to try to cut back hours and save money, but the money you’ll be losing will be more.

4. Special Promotional Offers – If people are being more judicious in their expenditures, then they want better deals. Special offers, such as “buy one, get one free,” can do wonders to draw consumer interest.

5. Giveaways – Everyone likes free stuff. having a giveaway can do wonders to increase store numbers. If a business had a special giveaway regularly, then overall customer numbers would likely increase.

6. Celebrity Endorsements – If your business has the ability to pay for Celebrity Endorsements, why not consider it? Local celebrities are still celebrities, so endorsements can be just as effective.

7. Local Commercials – If you can get local stars, then local commercials would be the natural progression of things. In all seriousness, local commercials can be a fantastic investment even for a large company, because of an excellent targeted consumer base. In a dragging economy, consumers become more demanding and want to know what you offer especially for them. Local commercials are a great way to get such a message out.

8. Make it a “Must Have” – If you find less of your product is flying off the shelves in a bear market, and then you need to make your product a “must have.” Companies like Apple Computer are still able to have solid sales in rough economic climates because their products have the “cool” factor. They become “must haves” because Apple is able to bridge the gap between needs and wants.

9. Longer Hours of Operation – When sales are in decline, one great way to rectify this is to lengthen the hours of operation. If you are open for longer hours, then you should see an increase in sales.

10. Go Online – If you’re attempting to make sales, and you don’t have an online facet to your businesses, you’re missing out on great opportunities. Increase sales by making a web site. Giving consumers the ability to shop online can do wonders to increase sales. Make sure your web site is easy to use and customer-friendly. The more ways potential customers can access your products, the more opportunities there are to make a sale.

11. Go Green – Concern for the environment is at an all time high in this day and age. Businesses with social consciousness who are concerned about the future of the planet will definitely enjoy positive PR. So, if you are noticing that sales are taking a nosedive, it can be a fantastic idea to revitalize your business by going green.

12. Go Global – If you need any proof that today’s business world is truly global, look no further than the stock markets. When one country’s market is in decline, other countries’ markets will soon follow. The best way to combat this is to make sure your invested in every market you can be. You can increase sales simply by widening your consumer base.

13. Advertise Online – Having a web site is great, but actually advertising online coupled with having a web site is even better. Google AdWords is an excellent way to promote your web site and increase your sales with a positive ROI. Having an online presence can help, but it is much more helpful to be an industry leader when it comes to online enterprises.

14. Word of Mouth – Some of the most loyal customers come directly from word of mouth. The best way to generate word of mouth buzz is by having high quality service coupled with effective ad campaigns. Word of mouth is the trustworthiest type of advertising. Essentially, this means that your biggest sales increases will come if people decide to tell their friends and family about your business.

15. Relocate – Some areas are simply more economically sound than others. If you find that your sales are dwindling significantly, then it’s a good idea to consider relocation. Moving into a bigger market, or a less competitive market can do wonders for the bottom line of any business. Moving is not an admission of defeat, but rather, an affirmation of a willingness to have success, even if success comes at the cost of leaving one’s comfort zone.

Score at your B-school Personal Interview

Your academic skills were checked in the entrance test, your people's skills were checked at the group discussion, now comes the time of gauging your personality. B-schools want to know how aware you are of yourself and how much you relate your goals to your personal self. Students spend most of the time in going through course books whereas 90 per cent of the interview questions are based on you. What could be better than answering questions on yourself? But answering questions on yourself can catch you in a tight spot. There can be some rules set when it comes to the GD because there is certain expected etiquette, but there can be no rules set for the interview because everyone has a unique personality. The best way to tackle the interview is to sit down and know yourself inside and out. Think of why you want to pursue an MBA degree. Make a list of your strengths and weaknesses. Not only will it help you analyse your personality, it will also help you prepare for many other questions in the interview. The most commonly asked questions are: Why do you want to do MBA? What are your personal goals? Where do you see yourself 10 years down the line? What are your hobbies? What are your strengths and weakness? Tell us about yourself. Who wins? Those with: Self awareness You should be able to speak on each and every aspect of your personality, family background, the city you come from and the institutes you have studied in. If you are aware of your strengths and weaknesses you will be able to justify them, for example the panelists may ask you about your poor academic record. As long as you know why you under-perform you can explain yourself. Goal clarity You should know where the MBA programme fits in with and how it will help you achieve your long-term goals. There might be different reasons for doing an MBA for different people and even for one person there can be more than one objective to do MBA, but you should analyse it beforehand rather than doing it in front of the panel. Ability to maintain calm The real you comes up when you are under a pressure situation. The panelists will try to grill you on your weaknesses or on the answers you are giving. They want to put you under pressure and see whether you lose your calm. Students in this situation tend to become nervous and it starts showing on their faces. Who loses? Those who: Give tutored answers You have your own strengths and weaknesses. But while attending the mock interviews you were told how some students gave impressive answers and got selected. If you try to give the same answers, you might be caught. Lie to the panelists They are very experienced people and can catch you if you try to bluff them on your academic record or on a fact-based question or when you try to answer the question even if you don't know the answer. Think that battle is over The interview is not over till the last question is asked. The moment a candidate says, "I am sorry Sir, I don't know the answer," he starts coming under the pressure. There is no harm in accepting that you do not know what the population of China is. They might try to put you under pressure by asking you the population of Africa, once again you say sorry and the pressure starts mounting. The next question is of your interest, which book did you read last? You know the answer but since you have already come under pressure you might not be able to answer this question properly because you are nervous. A chain of events that might ultimately lead to getting rejected.

10 ways the economy impacts financial markets

1. The economy is an important driver of the stock market

The central economic force of interest rates - plus the assorted effects of exchange rates, inflation, public spending and taxation - will eventually have a powerful influence on overall valuations, whatever the temporary investment craze.

2. In the short term, it can be hard to discern a clear relationship between the economy and the markets

The markets clearly react to economic news - the latest figures on production, sales, consumer and producer prices, unemployment, and so on - but the reaction can often seem perverse, with share prices rising on bad news and falling on good news. This is because the markets anticipate the economic news, and securities prices reflect those expectations before the figures are announced. When they are announced, the reaction has less to do with the numbers per se than to whether they are worse or better than the expectations.

3. Over the longer term, the relationship becomes clearer

At base, investors are looking for the likely impact of any economic indicator on the future course of interest rates. This is because interest rates are one of the two key variables that affect investment results. They act on share valuations like gravity: the higher the rate, the greater the downward pull. First, an increase in interest rates makes the return on shares vis-a-vis bonds less attractive, typically pushing down their valuations. Second, it means that future corporate cash flows should be discounted at a higher rate, which, unless expectations are revised, will re-duce current share values. And third, the higher cost of borrowing generally has a damaging impact on corporate profitability.

4. National output, inflation and expectations of inflation are the key determinants of movements in interest rates

If inflation is rising or expected to rise, it probably means the national monetary authorities - central banks like the Bank of England or the US Federal Reserve Board - will raise rates, with typically negative consequences for the stock market. If output - or at least the rate of growth of output - is falling, rates will probably be brought down.

5. The exchange rate is a further important influence on interest rates and share prices

A significant decline in the national currency�s value against other leading currencies is equivalent to a reduction in interest rates, potentially raising inflationary pressures through higher import prices. But depreciation is also of considerable benefit to companies selling extensively to overseas markets, making their products more competitive and their ex-port divisions more profitable. The possibility of future depreciation also suggests a potential currency benefit from investing in promising shares in foreign companies.

6. Markets tend to react adversely to falling unemployment, at least when the economy is doing well

Shorter dole queues hint at a tighter labour market - and the potential consequences of rising inflation and higher interest rates. Increased demand for goods and services raises the demand for labour to produce them. If there are unemployed and appropriately skilled workers avail-able, they will be employed. But if manpower and skills are in short supply, there will be upward pressure on earnings, raising company wage bills and encouraging nervous central banks to take action on interest rates.

7. Rising oil prices are generally good for oil shares but not for inflation

The OECD rule-of-thumb warns that a $10 increase sustained for a year adds half a percentage point to inflation and knocks quarter of a percent-age point off growth. A sustained boom in crude oil prices inevitably feeds through to higher prices for heating oil and petrol and could add at least half a percentage point to the rate of inflation. High priced oil also has a direct 'micro' effect on profits since it is a significant input in many industries. Airlines are the most obvious victims as the cost of jet fuel increases, but chemical producers that rely on oil as a raw material also suffer. And even service sector companies make some use of energy, whether for travel or simply running their offices.

8. The government's budgetary policy can have a major impact on the markets

Ideally, fiscal policy should support the aim of monetary policy to keep growth at around its trend rate without fuelling inflation. In particular, this means that any tax cuts or spending increases should not boost consumer demand when the economy is doing well. By cutting taxes and/or increasing government spending on health, education, transport, law and order, etc, the government can loosen fiscal policy, hence boosting domestic demand. Conversely, raising taxes and/or reducing spending - a fiscal tightening - depresses demand.

9. Many economic indicators provide valuable information for analysing particular sectors of the economy and companies operating within them

Statistics for industrial output, for example, offer precise data on the performance of the various sectors that constitute the production industries. These include manufacturing - durable goods such as cars; non-durables like clothing and footwear, and food, drink and tobacco; in-vestment goods such as electrical equipment; and intermediate goods like fuels and materials - plus mining and quarrying, which includes oil and gas extraction; and electricity, gas and water.

10. Trade figures also offer valuable insights into the relative performance of different parts of the economy

More broadly, the trade balance - whether the country is importing more than it exports or vice versa - can have a significant impact on the sustainability of growth, the exchange rate and the level of inflation.