Are Index Funds better than other Mutual Funds ?

I have read at some places that index funds are better than other mutual funds. An example is this blog. Index funds are investment schemes that invest in representative shares of a particular stock market. For example, a fund can have Index fund for BSE or NSE or some other exchange. These funds try to replicate the behaviour of that particular market. For this reason the NAV of these funds rise and fall with the market they are trying to replicate. The main advantage of these funds is that these are automated with no active management needed. So the entry load (the charges paid when you buy a MF) and exit load (the charges when you sell your units) and other charges are low. So, it is generally thought that Index funds earns an investor more profit as compared to other funds like equity diversified mutual funds. I decided to check this yr's results for the Indian market. Hardly 4 index funds have managed to beat the market in 2006. This is called tracking error when automated calculation misses the market behaviour by some points. The best performer has a growth of 49.8% in 2006. On the other hand, about 30 equity diversified mutual funds beat the markets with growth of the best performer being 61.6%. Even after deducting the charges, it is clear than equity diversified funds managed to beat the index funds hands down. Even after assuming that the total number of index funds available to investors is less than the total number of equity diversified funds, it is clear that Index Funds are no better performers than other funds. At least 2006 proved that. The same is true even if we compare last 2 or 3 yrs results.
Check the performance of Index funds here and the performance of Equity diversified funds here.

How do Mutual Funds calculate dividend

MFs normally pay dividend periodically if they are dividend based (D). Growth based mutual funds (G) pay dividends rarely. (D) type mutual funds pay dividend when they make a profit by the trading they have done in the market. It depends upon the fund managers how much percentage of the profit they want to reinvest and how much they want to give back to investors. That money being given back to investors, minus any taxes etc, divided by the number of Units is the dividend per unit. MFs give it a fancy percentage by calculating it from the face value of the unit which is 10. So even if the book value (that is present unit price) is, say 100, the dividend percent is still calculated based on 10. So a 25 dividend per unit would be called a 250% dividend, although it is only 25% of its present price, since it is calculated based on the face value of 10.
Growth oriented MFs pay dividend sometime if the fund has made profit and fund managers find extra cash which is not likely to be invested.

Mutual funds - what if they don't pay you dividend ?

I've mentioned in the earlier posts how Mutual Funds (MFs) pay dividend, and why it doesn't matter as far as your net wealth before and after getting dividend is concerned. In short, dividend is just your money that was in MF which is returned to you. The price of the MF unit comes down after the MF pays dividend. So, overall net wealth is same for you. It is just that the part of the money you had invested in MF is now in your bank. This could lie there if you are not careful. Which is not a great idea. For this reason, unless you need cash, dividend isn't a good option.

So MFs pay dividend which is good if you need money. What if you need money and your MF is not paying you any dividend? In that case you can sell some of your MF units. This is like paying yourself a dividend. The effect will be same as if the MF has paid you dividend! This is called Capital Gain. Funny how the terminology changes for same thing. It is your money in MF that you have invested. If MF gives some back to you, it is dividend. If you withdraw it is capital gain.

PS: I'm trying out a few online money making ideas I found on net and have given the links to the right side of this blog. I will evaluate them time to time and remove links I found aren't worth wasting time, or will add links that I find interesting. Two days ago I found myLot which pays for each message you post in the Forum. So far it seems to be working. Paying rate per message is low though. For about 50 messages sent they pay you $1. It is fun to try, but don't expect to earn a lot of money!

Online money making schemes

Lately, I've been trying to find out money making opportunities online. The only criterion of such an opportunity has to be that it is free to join and no investment is needed on my part. I've found many of them - some ask to sign-up for a course, some ask to send them some money to begin online business with them. Some are free to join and if possible, to make some money too. I will list some of the opportunities that I found interesting and easy to sign up and start up.
-- If one has a high traffic website then putting ads and earning money per click is the obvious way to go. Google Adsense, Yahoo Overture, MSN adcenter, BidVertiser, and Adbrite are a few of the more popular online advertising businesses which are easy to sign up and get started.
-- Then there are multi level marketing business opportunities online. Recently, I found an interesting one called Best Cash Rewards where one can sign up within minutes. It doesn't require any investment. One has to just watch a seminar of about 30 minutes a week, and refer other people to this programme. That's all one has to do. The more people you refer to this programme and the more people they refer in turn, the more you get. The companies giving seminar get a captive audience for half an hour. That is what they want and they are happy to pay on per person basis who attend the seminar. One can sign up for this programme by going to this page.

Feed aggregator

I was a latecomer in the area of feeds. I used to read all the blogs I liked by individually opening them in new tabs in my Firefox browser. This posed some problems. I had to remember each of the blog addresses I wanted to read. This meant I would often miss some recent blog entries by my favourite bloggers. This is not a very serious problem as blogs can be bookmarked. But still I had to open all the blogs one by one going through bookmarks. Now I read about 25 blogs religiously and wouldn't want to miss any new posts. That would mean 25 tabs in Firefox. As much as I like Firefox, it is a resource hog and opening 25 tabs would often make my computer less responsive.
Enter Feeds. A simple but powerful technique to arrange all your favourite blogs. Now I have installed a Feed reader called Sage. Whenever I want to read blogs, I just click on the Sage icon on the toolbar and all the blogs I have subscribed to show up on the left pane of Firefox. If I want to see if there is any new post I can just click an icon on top of the pane called Check Feeds and it automatically looks at every blog for new postings and updates the pane accordingly. If I go to a new blog that I like, I can just click Discover Feeds icon and it automatically discovers the Feeds in the blog and I can then add it to Sage. Two kind of feeds are popular: RSS and Atom. I wanted to make it simple for me by choosing only one of them, so I chose RSS feed reader but Atom is good as well. Many blogs don't have obvious Feed icons, but there are almost always hidden ones, for example in blogger/blogspot. Discover Feeds will discover them all.
It has made reading blogs a breeze. Just click any blog you want to read in the left Sage pane and start reading. Sage blog aggregator for Firefox can be downloaded from here.

Business and trademarks

A couple of days back I was discussing about Google with friends when one of them mentioned that Google has become such a well known brand that it has entered into Merriam-Webster dictionary as a word. I told them this is actually not a good thing for a brand. They didn't believe what I was saying. Having done a trademarks course I know a thing or two about it and explained it thus:
Google has created a unique product for search which is widely acknowledged as the best online search engine. It has a unique advantage over competitors now. Anyone wanting to search online would first think of Google search. This is because the brand differentiates it from competitors such as Yahoo or MSN. Users are well aware of it and so they prefer Google search over other engines. But if it becomes a generic dictionary word then it lose its value as people would start using the term Google or worse 'googling' for online search. It wouldn't matter to users then which engine they use. Google for them would mean online search. The differentiating factor that was Google's brand then lose its advantage. One could as well go to Yahoo search and say he is googling.
In the history of brands there has been many a cases where companies lose their valued trademarks because they become generic nouns. It is for this reason that companies tend to use their trademark always as an adjective. Google search, for example. It is almost always followed by a noun. It is for this reason that Google wouldn't be amused if someone tries to make a word 'googling'. Companies protect their marks for the fear of it becoming generic, sometimes even launching PR campaigns.
Some brand owners didn't protect their marks well enough and they have become generic nouns and some are almost on the verge of becoming one.
Some examples of tradmarks that became generic and hence lost the advantage over other products are:

Aspirin: The product name became generic noun and now companies use it just as synonym for a particular medicine.
Escalator: Was a brand, now a generic English word.
386 : This was Intel vs AMD case which Intel lost and also lost the advantage of brand 386.

Some trademarks on the verge of becoming generic are:
Kleenex : Tissue paper.
Xerox : People have begun using Xerox word as a generic word for photocopy. Xerox is fighting to prevent its term from becoming generic by launching PR campaigns.