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MF0001 (mMF0010) Solved Assignemnt (Set 1 & 2)

MF0001 (mMF0010) Solved Assignemnt (Set 1 & 2)

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Published by: wasimsiddiqui03 on Nov 29, 2010
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Q. 1 It is very often observed that retail investors enter the market when index is very highand exit when index is very low (comparatively speaking). Describe qualities of a savvyinvestor. Also throw light upon mistakes committed while managing investments.Ans:
Retail investors in mutual funds are known to chase returns, making large investments atmarket highs and staying away during its lows.Systematic Investment Plans or SIPs were devised mainly to prevent this. However, data on SIPinvestments for 17 leading fund houses now show that investors follow the same practice for their SIP investments as well. They decide to start paying the monthly installments on SIPs onlyafter markets have rallied and stop them if the stock market is falling.SIPs jump as Sensex risesThe number of new SIP accounts these funds added in the April-June 2010 quarter was over 50 per cent higher than the number added in the same quarter of 2009.The number of SIPs added every month averaged 1.79 lakh accounts in the latest quarter, against1.2 lakh accounts in the same period of 2009.The Sensex ranged between 17,000 and 18,000 in April-June 2010, compared with 11,000-15,500 levels in April-June 2009.Failed SIPsThe other disturbing trend is that of a good number of investors are discontinuing their SIPs mid-way. Even as funds added between one lakh and 1.9 lakh accounts each month over the last oneyear, the number of ‘failed' SIPs was quite large at 1.2-1.7 lakh accounts a month.The instances of SIPs ‘failing' peaked during March, April and May 2009. In hindsight, that wasthe best time to invest in equity funds.Stopping SIPs when market is down would defeat the purpose of cost averaging (buying moreshares when prices are low and fewer shares when prices are high) that monthly investing issupposed to serve.SIP collections risingOverall, however, fund houses have seen a steady improvement in the new SIP accounts as themarkets have climbed over the past year. Between 1.7 and 1.9 lakh SIPs have been added inrecent months.
In all, the 17 mutual funds had about 25.6 lakh SIP accounts by end of June 2010.Together, they managed SIP assets of Rs 20,600 crore.In spite of improved market conditions compared to 2008-09, the average ticket size of new SIPaccounts has not increased substantially. The national average has moved to Rs 2,190 from Rs2,100 reported in 2008-09.
Smart investors have a plan for investing, and they stick to it:
It is very easy to betempted by a tip about a hot stock. However this is not the way Smart investors invest. For example, if they are 40 years old and have twenty years until retirement, they implement a 20-year investment plan. They only buy securities that they have researched.
2) Smart investors invest consistently:
They generally use to methods to do this. First, theyinvest a part of their funds in securities with a growth potential (like stock & mutual funds).Second, they keep adding to their investment principal regularly.
3) Smart investors are patient:
It often takes time for a good investment to show results. Theyunderstand this, and therefore do not get excited about the daily ups and downs of the market.Smart investors don’t expect instant growth.
Smart investors are not emotionally tied to their
investment positions:
They know that to be successful, they must not be emotional towards their investment. No matter how attractive aninvestment looks or how badly an investment has performed recently, selling at the right time is just as imporant as buying. They are aware that no investment will move up forever, and theyare able to sell it when right.
Common errors in Investment Management
Investment mistakes happen for a multitude of reasons, including the fact that decisions are madeunder conditions of uncertainty that are irresponsibly downplayed by market gurus andinstitutional spokespersons. Losing money on an investment may not be the result of a mistake,and not all mistakes result in monetary losses. But errors occur when judgment is undulyinfluenced by emotions, when the basic principles of investing are misunderstood, and whenmisconceptions exist about how securities react to varying economic, political, and hystericalcircumstances. Avoid these ten common errors to improve your performance:
Investment decisions should be made within a clearly defined Investment Plan. Investing is agoal-orientated activity that should include considerations of time, risk-tolerance, and futureincome... think about where you are going before you start moving in what may be the wrong
direction. A well thought out plan will not need frequent adjustments. A well-managed plan willnot be susceptible to the addition of trendy, speculations.
The distinction between Asset Allocation and Diversification is often clouded. AssetAllocation is the planned division of the portfolio between Equity and Income securities.Diversification is a risk minimization strategy used to assure that the size of individual portfolio positions does not become excessive in terms of various measurements. Neither are "hedges"against anything or Market Timing devices. Neither can be done with Mutual Funds or within asingle Mutual Fund. Both are handled most easily using Cost Basis analysis as defined in theWorking Capital Model.
Investors become bored with their Plan too quickly, change direction too frequently, and makedrastic rather than gradual adjustments. Although investing is always referred to as "long term",it is rarely dealt with as such by investors who would be hard pressed to explain simple peak-to- peak analysis. Short-term Market Value movements are routinely compared with various un- portfolio related indices and averages to evaluate performance. There is no index that compareswith your portfolio, and calendar divisions have no relationship whatever to market or interestrate cycles.
Investors tend to fall in love with securities that rise in price and forget to take profits, particularly when the company was once their employer. It's alarming how often accounting andother professionals refuse to fix these single-issue portfolios. Aside from the love issue, this becomes an unwilling-to-pay-the-taxes problem that often brings the unrealized gain to theSchedule D as a realized loss. Diversification rules, like Mother Nature, must not be messedwith.
Investors often overdose on information, causing a constant state of "analysis paralysis". Suchinvestors are likely to be confused and tend to become hindsightful and indecisive. Neither  portends well for the portfolio. Compounding this issue is the inability to distinguish betweenresearch and sales materials... quite often the same document. A somewhat narrow focus oninformation that supports a logical and well-documented investment strategy will be more productive in the long run. But do avoid future predictors.
Investors are constantly in search of a short cut or gimmick that will provide instant successwith minimum effort. Consequently, they initiate a feeding frenzy for every new, product andservice that the Institutions produce. Their portfolios become a hodgepodge of Mutual Funds,iShares, Index Funds, Partnerships, Penny Stocks, Hedge Funds, Funds of Funds, Commodities,Options, etc. This obsession with Product underlines how Wall Street has made it impossible for financial professionals to survive without them. Remember: Consumers buy products; Investorsselect securities.
Investors just don't understand the nature of Interest Rate Sensitive Securities and can't dealappropriately with changes in Market Value... in either direction. Operationally, the income

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