The typical equity investor in India is a seasonal investor, who tends to rush into a bull market and gets carried away with the good returns from diversified schemes," says Hemant Rustagi, CEO, Wiseinvest Advisors. This is a perfect description. And when the market gets volatile, like now, or when it slides, the retail investor, trapped without an exit route, pulls out of equity altogether, opting to go with small savings, debt instruments and other assured return, low-risk avenues.

Is there no middle path? For the conservative investor who would like to start flirting with equity, there are index funds. However, this option has been largely out of favour with Indian investors. And for obvious reasons. Returns generated by diversified funds have consistently beaten those by index funds. In the past year, diversified funds have given an average return of 49 per cent compared to 37 per cent by index funds.

Do those numbers tell the whole story? What's not immediately obvious is that at 37 per cent returns, index funds make an excellent low-risk, low-cost, low-involvement equity variant. "I advise conservative investors to start with index funds, learn to live with the volatility and then move on to other options," says Gaurav Mashruwallah, a certified financial planner.

Investing as they do in the securities of the target index in the same weightage, the chief attraction of index funds is that they are passively managed, because of which they are low-cost and have transparent portfolios. Says N. Sethuram, CIO, SBI Mutual Fund: "Index funds are purely for investors who don't want to take any market call; for investors who believe in passive fund management."

Why does passive management make sense? Because, as Mashruwallah says: "Active funds rise higher than the index, but also fall harder." So, while in a bull market, you might want to hitch your wagon to diversified funds, at the same time, an index fund provides the necessary hedge.

That does not mean that index funds can form the bulk of your investment portfolio or replace other equity altogether. Ideally, experts advocate a 20 per cent exposure to the index so that it complements your investment portfolio. To make the most of index funds, mix and match your options, going for index-plus funds as well, which are basically index funds that have the freedom to invest a small percentage outside the index. This means that for a modicum of extra risk, you can add quite a kicker to the fund's performance. For instance, HDFC Index Fund-Sensex Plus Plan returned 41 per cent in the past year compared to 37 per cent from the HDFC Index Fund-Sensex Plan. Similarly, LICMF's Index Fund-Sensex Advantage Plan posted 36 per cent against 31 per cent from LICMF's Index Fund-Sensex Plan.

The other option is exchange traded index funds. Says Mashruwallah: "Exchange traded funds have lower expense ratio than a regular index fund and perform better than them."

Take, for instance, the Banking Index Benchmark Exchange Traded Scheme (Bank Bees). This is an open-ended index fund listed on the NSE that tracks the CNX Bank Index. It is designed to give you returns that closely mirror the returns from all the stocks represented by the CNX Bank Index. The Bank BeES has given a compounded annualised return of 54.6 per cent over the past year.

The full worth of index funds can be reaped best in a mature market. Till then, however, don't ignore them; rather try to use them to give your portfolio a leg up without adding to the risk.

SMARTBYTES

What Does Free Cover Really Mean?

Free Rs 25-lakh accident cover on your gold card, says the ad. Do you know, though, that this only covers air accidents? For rail or road accidents, the cover gets considerably lower. And if you use your plastic sparingly, you might be in trouble when it's time to claim. Most banks insist the card must have been used a minimum number of times in the 90 days before the accident for you to claim benefits. And if you have any payment defaults or even a pending dispute on your bill, your claim will not be honoured. Multiple cardholders, though, can claim benefits from all their cards.

-Anand Adhikari

Hot tips: Law (left) with KBC winner Mandroop Ramdeora

Who Wants To Stay A Millionaire?

Winners are never abandoned. In an innovative new personal finance show with a twist, CNBC-TV18 has roped in winners of the popular Kaun Banega Crorepati show to its studio, where a panel of financial experts tells them how to invest their winnings. Called Kaun Rahega Crorepati, the show is hosted by Vivek Law, the channel's Editor (Consumer Affairs). Mutual fund managers, insurance experts, banking and personal loan officers find out the winner's investment portfolio and life goals, and then draw up a suitable financial plan. Says Law: "We tell them about tax breaks and cheap loans." The idea: take personal finance to the masses.

-Vaishna Roy

ULIPs: Yes, They Need Regulation

This will likely get the goat of most private insurers, but the IRDA's (insurance regulator) apprehensions that unit-linked insurance policies (ULIPs) are being MIS-sold are probably correct. Insurers typically pitch ULIPs against mutual funds, as investments with tax breaks and no lock-in period, plus regular payouts and assured returns. What they don't tell you is that payouts depend primarily on performance, as with any market-related instrument, and that ULIP costs are much higher. Against the roughly 1.5 per cent recurring cost that comes with a mutual fund, ULIPs come with about 4 per cent, charged to investors. Says Uma Shashikant, a capital market consultant: "What component of your premium goes towards investment and what towards fund reserves is not disclosed; yet ULIPs are being sold as assured return products." ULIPs are best-sellers primarily because of promised high returns, but companies don't disclose that you pay a high price for this. Says Shashikant, "The regulator should worry about disclosure, which is where ULIPs are erring."

-Vaishna Roy

TELECOM
The Right Call
Blazing growth is predicted for players in the still nascent telecom market.

The call of FDI: It's consolidation time now

A decade of revolution has come full circle. Thanks to the hike in foreign direct investment (FDI) limit to 74 per cent (from 49 per cent) and industrial delicensing, telecom is among the most exciting sectors today. Low prices have seen cellphones reaching taxi drivers and panwallahs and yet penetration is only 8-9 per cent-an indication of the huge potential for growth. Says Gurunath Mudlapur, MD, Atherstone Institute of Research: "Growth will be immense for wireless telecom service providers."

With just one in 10 people owning a phone and over 2.5 million users added each month, India is identified as a key market by global business. The government predicts 250 million telephones in India by December 2007, up from 110 million, of which over 65 million are mobile phones. Says Ravi Menon, Director and Co-Head (Global Investment Banking), HSBC Securities: "About 53 per cent of India's population is less than 25; this audience's first acquisition is often a mobile. In that context, the government's target of 250 million phones looks very gettable."

Getting there will require an investment to the tune of $20 billion (Rs 90,000 crore), which is why the FDI hike becomes significant. Says Mudlapur: "The FDI relaxation will help companies access much-needed funds for network expansion."

The FDI hike will also see increased M&A action, according to a recent Citigroup report. Last quarter, the Essar Group bought a controlling stake in BPL Communications for over Rs 4,400 crore, and consolidation will continue. According to Citigroup, GSM operators like Spice and Aircel, and CDMA ones like Tata Teleservices remain potential targets. Companies like Tata Teleservices (Maharashtra) and Reliance Infocomm seem ideal candidates for attracting large investments, say experts.

According to Mudlapur, stocks of Tata Teleservices (Maharashtra) and MTNL are good bets from an investment perspective. "There is very little downside risk in these stocks," he says. Citigroup has maintained a buy on Bharti Tele-Ventures, although indicating that the FDI limit hike will only have a neutral impact in the long term, as it will also increase competition.

-Mahesh Nayak

The Gold Rush
The housewife's investing secret: The gold she bought five years ago has today returned 75 per cent.

You don't have to wade through a maze of equity research reports or try reading Y.V. Reddy's lips for interest rate movements. Just talk to any Indian housewife for the hot investment tip. She'll tell you she's been buying gold for centuries now. And guess what, it makes perfect sense.

Who better to validate this than the market-savvy private sector banks? The average Indian family has always bought gold as ornaments or personal consumption items, but banks are now aggressively selling the yellow metal as a commodity in the shape of bars or coins in small units weighing 5 gm, 8 gm, 10 gm and 50 gm.

Although bankers refrain from making any future projections on returns, gold has been a fairly solid time-tested investment globally. If you take a five-year period, gold has given returns of over 75 per cent, based on reigning prices at around $467 (Rs 21,015) per ounce. Gold reached its 18-year high of $480.25 (Rs 21,611.25) per ounce in October this year, while in 1975 it traded at $175.80 (Rs 1,442 then). "As an investor, you have to look at a long-term time horizon," says Chitra Pandeya, Head (Liabilities), HDFC Bank.

While ICICI Bank launched its retail gold sales in early 2003, HDFC Bank, IndusInd Bank and the public sector Corporation Bank have joined the fray recently. While prices at all banks are based on the daily international bullion market, rates vary because of festival discounts or the cost of embossing images on the gold coins (see table).

"Gold fits well in your portfolio diversification strategy. You should park at least 25 per cent of your surplus funds in gold," says Moses Harding, Executive Vice-President at IndusInd Bank. For the risk-averse investor, equity is out of bounds, although the high-risk, high-reward avenue topped the returns list, with the Bombay Stock Exchange recording a 100 per cent jump since 2001. In contrast, the safe haven of the debt market is in a sad shape, given falling G-SEC (government securities) prices. Bank deposits are lacklustre-interest rates are 5-6 per cent per annum in the over one-year category, which doesn't even cover inflation hovering at 4.5 per cent.

Gold has proved to be both a good hedge against inflation and has given adequate returns, which is why it is gaining ground as an investment tool. India is the largest consumer of gold and now joins Japan, Vietnam and Turkey as the strongest markets for gold coins and bars. In fact, globally, gold backed exchange traded funds (ETFs), sold like mutual fund schemes, are popular among retail investors and the Indian government too has expressed interest in launching gold ETFs here.

For investors, that's good news because liquidity is a major concern. Banks don't buy back coins or bars from customers, and though jewellers are always ready to buy back gold, you lose out on the price. Once the Reserve Bank of India relaxes the norms that currently prohibit banks from buying gold from the public, selling will get easier for investors. One word of caution for investors though: wait a while. Gold is overheated, and with prices ruling at an all-time high, this is not the right time to buy gold.

-Anand Adhikari

Value-picker's Corner

MAXWELL INDUSTRIES; PRICE: Rs 125.85

Quick, who owns and markets innerwear brands like VIP and Rivolta? Answer: Maxwell Industries. With a corporate restructuring on the cards, this stock-trading at a P-E multiple of 24-looks pretty good. Maxwell also owns Microtex India and Lovable Lingerie, and the board has decided in principle to consolidate all group businesses into Maxwell. This will double revenues. Sales grew from Rs 158.55 crore in 2003-04 to Rs 180 crore in 2004-05, with net profits growing from Rs 0.55 crore to Rs 1.88 crore. The dismantling of quotas and a sharper export focus is also expected to strengthen fundamentals. Analysts advise a buy-and-hold approach for the long term.

-Sahad P.V.

Trend-spotting

Visa just released its performance figures, showing an impressive 38 per cent and 45 per cent growth rate in credit and debit cards, respectively, but it's still all uphill for card companies. A Visa-NCAER report shows that while total transaction volumes were about $23 billion (Rs 1,03,500 crore) in 2004, almost 80 per cent of this is from ATM cash withdrawals. The total spend on a payment card is still less than 1 per cent of the country's PCE (personal consumption expenditure). Clearly, the comfort level with credit is still very low in India. Says V. Vaidyanathan, Sr GM (Retail Banking), ICICI Bank: "The real challenge is to get the customer to use the card in the first place. Most customers are still uncomfortable with the 'borrowed' status."

-Krishna Gopalan