this appeared on Utvi when the index was 11,000 or thereabouts…

In the latest episode of Smart Money, UTVi’s Vikram Oza interviewd PV Subramanyam who is a Financial Trainer.

Is it a common to people stop making investments when times are tough?

Subramanyam: When the markets are down, people ask if they can stop their SIP. If you have lost your job and can not make your SIP payments it is still justified.

Kamini from Indore is planning to stop her SIP. Let’s see what her question is.

Even though I started an SIP in an equity mutual fund 3 years back, I am still losing money. Should I stop my SIP?

This is a funny situation, she must have sent in this question may be 5 or 10 days back when the market was not even at 12000 mark. Today she may already be in the money. The market is moving in such a small range that when the market is at the 13000 mark, I am sure this 3 year SIP will be in the money. Last 1 year, SIPs are in the money, last 4 years, SIPs are in the money. Only last 2 years and 3 years SIPs are now losing money. Perhaps when the index is 12300 or 12400, she will already be in the money. And when the market touches 14000-15000, she will very well be in the money.This is a very good time she has gone through this phase especially if she has a long term view.

What are the other things you need to keep in mind while choosing a mutual fund at this point in time?

Subramanyam: Choosing a mutual fund at any time does not change much whether the index is 8000-9000 or 15000. This is because we don’t know what’s going to happen. We just know that over a period of 20-25 years in a growing economy, the income from the equities will be an upward rising curve. So if you have a long term view, you anyway do an SIP in an equity fund. Choose the fund according to your goals, not because something new has been offered to you.

Obviously, these goals keep changing. So how do you account for that?

Subramanyam: Your protection needs don’t change so quickly. If you have a wife and children, and say if your daughter was three years old when you took the fund and today she is 5 years old, so really nothing has changed. But you wanted to retire when you were 52, now may be it is 55, you cannot negotiate with your term insurance and medical insurance. Those risks still remain the risk of dying young, the risk of falling ill, and risk of having a heart attack. So understand that your endowment plan, your pension plan you have some ability to negotiate, whether to pay, whether to get it postponed, whether to reduce the premium. But your term and medical insurance, these are non-negotiable.

What are the other mistakes that people make?

Subramanyam: The other mistake they make is that they buy any product that is reached out to them. When a product is launched, look at it like a medicine. I mean, you don’t buy a new diabetes drug because a new diabetes drug has been launched. Similarly, in mutual funds or any other investment, you first write down your goals. This is my daughter’s education, this is my son’s education, this is my retirement plan and these are the people I need to protect. You do all that and then choose the product.

Also one common question that we get is, how do you choose your fund manager?

Subramanyam: Actually how good a fund manager is largely checked by his past performance. But using the past performance as a check to how he will perform in the future is akin to driving looking at the rear view mirror. Look at a fund manager with a 5-10 year track record and look at the corpus i.e. how many people have trusted him. Look at those fund houses where the CIO or the head who’s managing the fund has not changed for very long periods of time, say 10 years. When you do all this you will ultimately narrow down to 4-5 fund houses. This is I think a simpler way than looking at how they have performed in the last quarter or next quarter how they are going to perform. You have no clue of that. Your guess is as good as mine.

Lots of mutual funds, we tend to put in money looking at their past performance. Is that good indicator or..

Subramanyam: It is not. But the fact that the human mind wants some prop, we use the past as an indicator of the future. Consider a fund manager who has performed very well in the last 10 yrs but in the next 10 yrs the situation may change completely and he could be very bad. Look at good fund house with a good process. So you largely choose some 5 or 6 large cap funds from which you will choose some 1 or 2.  You pick some madcap funds and some small caps funds. Just stick to it.

After that you ask the questions. What questions you ask?

1.How long have you been in this business?
This is for you to understand what’s happening.
2.How much he has educated himself is a nice thing to ask.
And then you look at fund houses where many people have put their money.

Now considering that we have put in money in a mutual fund, obviously there are times when we feel, our money is not being adequately used or is not giving us the kind of returns that we expected. How do we ensure that we get the most of the money that we’ve invested?

Subramanyam: There are two-three things to watch. First is, every mutual fund tells you which is the benchmark. If the benchmark is sensex or the benchmark is nifty and the fund is performing very close to it or all funds are performing similar to what your fund is performing, you don’t have much to crib about. If the best fund is 24% and your fund is 23.29 and the next fund after that is 23.11, really the gap is miniscule over the 30 yr period. Don’t look at what your brother-in-law or neighbor is getting, then you might get hurt. If your fund is achieving your objective, believe me you don’t need to do anything.

So incase you are in dire need of money, then equity mutual funds are the place you’re looking. Hopefully 50% of your investments are in debt and that’s when you are in urgent need of cash.