What are the Hurdles to Invest and Earn Dividends from Foreign Markets?

Following are the general reasons why people prefer to save and invest and earn returns and dividends from their own country:

1. Familiarity and ease of transaction: People are more familiar with the general economic environment, laws, taxation and so many other related aspects prevailing in their own country. Even the service providers like banks, stock brokers, insurance agents and so forth are also well versed with the systems of the native country. So it is more easy to transact in one own country.
2. Legal Restrictions/ Hurdles: Many countries, including our own India till recently, have legal restrictions in investing abroad, primarily to conserve foreign currency reserves. Even in India until a few years ago there were restrictions, which were eased. Unless revised subsequently, Indians were permitted to invest only up to US$.2.50 lakhs per annum abroad. Even when this is legally permitted, because of political sensitivities surrounding issues like laundering of black-money abroad, even genuine investors may face harassment from various authorities.
3. Costs and Minimum holdings constraints: Once I was seriously exploring purchasing shares in the US, sitting in India. It is quite possible, technically. There are online brokerage firms that permit you to buy on US stock exchanges, but there were many minimum criteria that were impractical for a small investor from India. Suppose there is a minimum trade fee of $10 per transaction it translates into a whopping Rs.670 flat for one transaction that is totally unaffordable. There are many minimum criteria like ledger folio charges, minimum investment amount and so on which make it practically unviable for small Indian investors.

Having said this, Goldman Sachs, a foreign mutual fund operating in India is offering certain limited access to overseas markets through their 'Exchange Traded Fund (ETF)' products. Please see the picture below.

Similarly, a few other funds also may be offering avenues for limited investing abroad.

In conclusion, it is not impossible for investors to make investments and earn dividends and returns from overseas markets, but a few practical hurdles restrict scale of such transactions.

How can Investors Capture the Benefits of the Economic Prosperity of a Nation?

None other than businesses and corporations invariably capture the benefits of the economic prosperity of a nation.

Why?

Because economic growth comes from more incomes in the hands of population, who in-turn armed with more income, demand more goods and services, which businesses come forward to produce and render.

If an investor wants to capture this growth, what shall he do?

Naturally, he must invest in the shares and stocks of these companies!

Will property and gold capture the full economic growth of a country?

Yes, to some extent indirectly, but corporations directly capture maximum growth, directly.

In conclusion, the right way to derive investment benefits out of the economic prosperity of a country, especially a great and stable nation like India, is through prudent long term investments directly in the shares of good listed companies after learning investing or indirectly through ‘Index Mutual funds’ or ‘Exchange Traded Funds (ETFs)’.

How Frequent Changes to Mutual Fund Portfolio Affect Investor Interest?

Full and Actual Question from Mr.Sameer Mittal:

Does acportfolio of stocks in the mutual fund change frequently?

 

Answer:

Dear Mr.Sameer Mittal

A very fundamental and useful question as it touches the very foundations of investment philosophy. I will give you ten out of ten for asking this question. The real issue is not whether the portfolio is churned frequently, for the answer is yes, indeed the stocks in the portfolio change frequently; more important is to raise and ponder over the question, what is the necessity to meddle with the portfolio?

Legendary value investor Warren Buffett says, “If a share is not worth holding for 10 years, it is not worth holding even for 10 minutes!”, which means that only stocks that are worth holding for a lifetime should have found their place in the portfolio, in the first place! A frequent change in the composition of the portfolio is bad and detrimental to the interest of the investors in the mutual fund.

Next let us address the point, why does the fund manager meddle with the portfolio? The reasons are as follows:

1. Investors have a short-term investment horizon. They tend to measure returns based on the ‘Net Asset Value’ or ‘NAV’ of the units, which in-turn is entirely dependent on fluctuation in the prices of the underlying shares in the portfolio. The short term vision and unreasonable expectation of growth in the NAV exert extreme pressure on the fund managers.
2. The mutual funds instead of attempting to educating the investors, succumb to the performance pressure and resort to unwanted churning of the portfolio.
3. The fund managers also think they need to do something to justify their employment and the high salaries they are paid; how can one justify the employment and monthly pay-check if one has created a portfolio that need not be touched for a hundred years?

 

Mutual Fund Manager Juggling the Portfolio

Having understood that stocks in a mutual fund portfolio change frequently and the reasons for the stirring let us now study why it is not in the interest of investors:

1. The annual fund management fee which is about 2.25% is very high and pinches the pocket of the investor. On the other hand fund management costs of index fund or anexchange traded fund are less than 0.50%, precisely because there are no frequent changes to the portfolio.
2. The market dynamics are so violent and unpredictable, sometimes if you sell shares of a good company, the prices may undergo such an upward shift that you may not be able to buy the shares again - at least for a very long time; you simply miss the bus.
3. Frequent moving in and out of a company deprives the portfolio certain jackpot benefits like bonus shares, and extraordinary special dividends (for example Hindustan Zinc Ltd. declared 1200% special dividend on the occasion of Golden Jubilee celebrations) in addition to the regular annual dividends.

In conclusion the underlying shares of a mutual fund portfolio under go undesirable frequent changes which cost investors dearly.

With Best Regards

Anand

Please Note: This post is based on the question I had answered on the website ‘Quora’, which I thought could be useful to the visitors to this blog site also.

 

Why People Entrust Their Funds With Mutual Funds?

Full and Actual Question: Why does anyone place his/her funds in the hands of financial services companies?

Dear Friend!

I presume you ask this question in the context of entrusting our funds for investing and when you say ‘financial services companies’ you mean mutual funds, and proceed to answer the question.

Investing requires requires knowledge and experience. I would not very difficult to acquire both but requires consistent effort and time. Many cannot afford to study investing for themselves for various reasons and therefore mutual funds came into existence. Now over many years the mutual funds have acquired wide acceptance and today are managing funds to the tune of hundreds of billions of dollars globally, offering a wide variety products in the equity, debt and hybrid funds.

The problem with mutual funds is that they charge very high fees for managing the funds. ‘Exchange Traded Funds (ETFs)’ are a special type of mutual funds where the management fees are quite reasonable.

In conclusion since a majority of the people do not have the investment knowledge and experience, the entrust the job to specialists. Investment knowledge is not very difficult. If you want to learn investing, please first read the book ‘The Intelligent Investor’ by Benjamin Graham. Please also visit my blog ‘Value Investing’ and slowly and gradually you will become an expert and become rich and wealthy too. Happy learning!

Thank you,

With Best Regards

Anand

Please Note: This is almost a reproduction of the question I had answered on the website ‘Quora’, which I thought could be useful to the visitors to this blog site also.