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Mutual
funds are time and again publicized as a valuable mode of
investment for small
as well as big investors as it lets an investor to take into
service an expert to go through a overabundance of
constraint for assessing in the middle of the hundreds of
stocks and securities listed on stock exchanges.
Nevertheless, with loads of mutual funds to select
from, the investors are no better off than they were without
the mutual funds.
The standard approach is to look at the earlier performance
of the fund, the risk linked with the mutual fund etc. the
accomplishments of the fund house, services of the fund
house, the observance to or the deviation from the
objectives of the scheme, if any, etc.
Looking at these factors is important, but there is another
viewpoint that requests to be looked at. Every fund manager
has a particular style of working, certain ethics, and
certain hunger for risk. Some funds are aggressive while
some are conservative. Some fund managers believe in taking
certain risks, whereas the others would keep away from
those. While none of the approaches is wrong, it is up to
the investor to decide what go with the fund manager.
Have you ever thought of that how would you decide that the
fund manager is taking high risk or not?
You should start with the with equity based funds.
Investors can look at some constraint like beta, portfolio
turnover, stock or sector concentration, exposure to
unlisted stocks, etc. Beta indicates the risk associated
with price unpredictability, which fundamentally points
toward the improbability regarding the returns that the
portfolio would generate in future. The fund managers
deliberately take certain risks in order to generate higher
returns for the portfolio. Some of the approaches that the
fund manager may take up are taking higher contact to
certain companies or sectors where they have very high
certainty about brighter future. On the other hand, since
short term activities of stock prices may not be strongly
related to the strengths of the stocks or companies, the
short-term risk could go up if the prices do not move
favorably. If the concentration is high, the risk goes up
even further.
Now, let us consider the debt funds, one needs to look at
credit quality of securities, average maturity of the
portfolio, exposure to certain kind of sectors or
securities, exposure to liquid securities, etc.
The purpose of debt funds is to make available regular
income with high safety of the investment. In such cases, if
the fund has higher exposure to low quality securities, the
investor is open to the elements to higher risk. The quality
of the portfolio can be assessed by looking at the credit
ratings of the debentures that the fund has invested in.
Liquidity of the investments is a most important
reflection especially if the fund in question is an open-end
fund. This is applicable for both equity as well as debt
funds. Reduced liquidity of the primary instruments may
present a good deal to a buyer, but when it comes to
selling, the same illiquidity may turn against the holder of
the stock or debenture. Liquid funds are used to park
short-term investments, such that the money is protected at
all times and accessible when considered necessary. In such
cases, exposure to illiquid securities and credit risk
become some of the important factors to look at.
As stated previously, it is significant to learn by heart
that in all cases, the fund manager takes a higher risk only
with an aim to add to portfolio return. It is very important
to understand this relationship between risk and return.
Such an understanding allows the investor to weigh the
upside and downside with the investment goal and the
appetite for risk.
You should expect the unexpected and be ready for natural
calamities such as earth quake, Hurricane ,fire, mudslide
etc. The idea is that you must be ready for any unpleasant
happenings which may happen.
When it happens to your house is a total thrashing that
necessitates your house to be completely re-erected. And you
know you do not have that must insurance coverage for a
complete reconstruction of your house. Got a shock. Yes and
the reason is normally the insurance policies generally
insures up to the book value of your house. It ignores the
inflation and appreciation effect on the value of your house
which means if you had built your house in 1999 for the cost
of $200,000 but the at present in 2008 if you build the same
house the cost would be $350,000. The difference of $150,000
would actually kill you as you would get only $200,000
from the insurance company. There is not protection against
the inflation and the rising cost of construction.
To avoid the situation what you need is Guaranteed
Replacement Coverage. This coverage insures that you would
get the coverage for the cost of rebuilding your house in
the event of any miss happenings. In simple terms you get
the replacement cost for your house. Its important that
while taking the insurance you must make sure that the
coverage is full as some of the policies restrict the
coverage to 20to 30 per cent which means in the case of
claim you may only get $220,000 or $230,000.
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