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Disclaimer: All views expressed in this blog are my personal and in no way express or implied, of that of the company I work with, or have worked with in the past.

This game of strategy has an important lesson for us when it comes to investing. If you are wondering how, consider this:

Your investment objective is the King of the board. The various coins are the different investment vehicles that you may use to achieve your dream.

For instance, the Queen could be likened Diversified Equity Fund. This is a core investment with powers to move any side but ensure protection and growth at the same time. The Rook is the powerhouse and can give you great results in the long run. I would probably equate it with investing in Real Estate. The Bishop is a linear movement coin, which is always important and safe to have on the board. It can probably be likened to the Liquid Funds or even cash holdings. The horse on the other hand is like Gold. Alternative asset classes (just like the alternate moves) and provides the much needed fillip when required the most. It can also hedge your investments in financial investments because these asset classes have a cycle of their own and may not be in sync with Equity markets. And your pawns would be fringe investments. Direct Equity and sector / thematic funds would fall into this category. They can be very useful tools to provide you the necessary fillip when you need it the most. Similarly, direct stocks or theme funds may turn in high returns suddenly and your portfolio may look great or turn towards the good overnight.

So what do you learn from this?

• If you notice, the most important piece in the board is the King. It would then be apt to connect the King with your investment objective. At all points, this focus should be maintained and you must realize that the rest of the coins viz., the investment vehicles are just tools in achieving the investment objective.
• There is an adage; never fall in love with the path and lose sight of the destination.
  In a game of chess, you may end up sacrificing a coin to save the King. Similarly, you may have to let go of some investment vehicles, depending on the time, the macro economic scenario and the performance of the investment vehicle. For instance, if a stock is performing well and has given you say 50% absolute return in 2 months, don’t fall in love and expect it to give you say 60%. It is absolutely fine to book your profits and exit the stock. Because a performing stock is not the destination, the investment objective is!
• You would always have different coins in the move at any point of the game. It is never possible for you to play an entire game of chess without using say, the pawn that starts on D2. Likewise, you must always have different asset classes and different investment vehicles working for your investment objective. By doing so, you would increase the chances of achieving your investment objective because all your eggs won’t be in a single basket.
• Risk is a friend – if properly used. Yes, some investment vehicles are high on risk. But that doesn’t mean that you stay away from them forever. It is important to embrace risk, but with a cautious approach. For example, never invest more than 10% in a single vehicle OR never invest more than 40% of your portfolio in a single asset class etc. These are just illustrations and will change from person to person. The idea is to apply thought and engage risk positively.
• Even the best of kings will always have a minster. And your minister would be the financial advisor. Always consult your advisor to gauge your risk appetite, performance of a vehicle, macro economic scenario etc., before making an investment decision.

So the next time you need to make an investment decision, think of the Chess Board and the learning it provides. It is important to understand your risk appetite and build a portfolio of diversified asset classes to ensure that your investment dream for tomorrow is met, while you don’t lose sleep today.

Happy investing!

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Disclaimer: All views expressed in this blog are my personal and in no way express or implied, of that of the company I work with, or have worked with in the past.

The year 2009 had witnessed a boom for mutual funds as banks, faced with the poor loan scenario post the economic slowdown, invested their surplus capital in income and liquid schemes that offered tax benefits, higher returns, liquidity as well as relative insulation from market volatility. The schemes were widely accepted, as is witnessed by the fact that about 66% of the industry’s corpus lies in ultra liquid and liquid funds, as per the December figures released by the Association of Mutual Funds of India. The liquid plus schemes in particular, were highly popular. These had been introduced in 2007, in response to the budget increase in dividend distribution tax (DDT) for corporates from 14.03% to 28.03% in liquid funds.

However, these schemes are now rapidly losing their attractiveness. Following a record high of Rs.807,556 crore in November, the average monthly Asset Under Management (AUM) of top fund houses in India dropped for two successive months to Rs 7,94,486 crore in December and down again to Rs 7,61,632 crore in January this year. Inflows dropped due to the banks’ capital adequacy requirements in December and the impact of RBI’s October 2009 review of the monetary policy directing banks to cap their investments in MFs. The sharpest cut has been Sebi’s notification last week, according to which debt and money market instruments with maturity of over 91 days will be subject to mark-to-market norms from July 1.

In the near future, some more measures seem to be in the pipeline. There have been musings about the government taking the tax benefits away from fixed income funds, as also focusing on increasing the retail reach of the funds.

SEBI’s move is likely to change the pattern of institutional investments into liquid-plus schemes – the probable volatility in these schemes, however nominal, will have to be factored in by a savvy treasury manager. In addition, the expected pick-up in credit off-take would affect inflow into mutual funds, as banks lend money to borrowers at higher rates.

These are interesting times for the mutual fund industry. Before the new valuation guideline comes into effect on July 1, the MF industry will need to have evolved further. Keeping volatility in mind, fund managers in these emerging times require to be sharp witted and quick to respond.

Clearly, the texture of short-end money market funds will have to evolve. Institutional money would be difficult to come by in a relatively plain vanilla commoditized liquid/ liquid plus scheme. The challenge is to create products that are relevant to evolving regulatory conditions and changing customer requirements. As standardization is brought into the industry and independent agencies monitor the methodology of valuing debt instruments, old products need to be tweaked to fit the new regulations, while new and innovative products need to be brought into the system.

The financial industry, meanwhile, can benefit from the innovative minds that are gearing up to make the fund industry more competitive and efficient.

Market expansion is the order of the day and for this, innovation, both in products and schemes, is key. The need is to strengthen distribution systems and retail penetration. Distribution now needs to get energized and service-oriented, with targeted products that cater to diverse end-customers such as temple and charitable trusts as well as individual customers.

There is likely to be a wave of structured products that would start catering to the emerging B2B segment. As institutional customers get more evolved and the options in the conventional MF space cramp up, there would be an impetus to adapt international products for the Indian markets.

Interest in structured products seems to be reviving, more than a year after the Lehman Bros debacle – taking, of course, into consideration the recent hard-bought wisdom that the more complicated the product, the less transparent the risks. According to research conducted by Barclays Wealth, 69 per cent of advisers considered that structured products had become more attractive to them in the past year. In India too, new structured products are finding more takers, marking the increasing confidence in such products

Along with the challenges to change and adapt, is the increasing potential waiting to be tapped, as the world of potential investors grows by the day. Client focus and forward thinking to fit new aspirations and a new generation of retail investors with increased levels of awareness could mark the emerging arenas in which the mutual fund business will have play.

Disclaimer: All views expressed in this blog are my personal and in no way express or implied, of that of the company I work with, or have worked with in the past.