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Return of capital vs Return on capital

As investors our focus should primarily be on return of capital ( can we get our money back)  but we tend to focus more in return on capital (what is the % we will get !) Tell someone to put his entire wealth in equities and they would shudder in horror, what happens if the markets crash would be the question. Which is why we dont put everything in equity but some in safe options like PPF, FD or even bond funds.  This is sensible especially for a first time investor, but as we mature as investors, some of us may be fine with high equity allocation as the capital itself grows in equities the most. These investors understand that equity is a rocky boat but are fine with it since it is the boat that creates wealth.  So, equities create wealth but with risk involved, debt safeguards wealth but with low returns and high taxes.

Trouble starts when we want high returns with low risk !  Which is what seems to have happened recently in Bengaluru ( where in people were lured into high returns ‘safely’. So these investors gave money to someone who advertised himself as commodities trader, investment consultant etc promising very high returns, and like all good MLM Ponzi schemes they paid the high returns for old investors from new investors capital 🙂 this continued till one day they shut shop. The people affected seem to be big businessmen, doctors, sports professionals etc, but no one seems to have asked any questions about whether the investments were regulated, the company had license etc. Even with all of that the high returns promised should have raised an alarm but no, in fact the high returns seems to have made the gullible blind into investing with out checking anything at all. This is not the first time, though, and will not be the last time.

Return on capital ( interest, growth etc) is very important, but return of capital is the most important thing. After all the capital is what one has worked and saved over a long period of time.  Being lured into unregulated investments, MLM Scams, etc may give high return on capital initially but chances of geting your capital back is almost nil.






How will the markets move?

The inspiration for this note from Swanand Kelkars article in Mint :How will the markets fare?

This is the most asked question by investors to advisors, truth be told, this is also the most hated question as  the correct answer is ‘ we don’t know’,  but this is seldom the answer. The market expert will say something like “3rd quarter GDP was up but the CAD came down which made the inflation outlook hazy increasing the chances of a …” etc while this sounds as if the person knows what he is talking about, in reality he is saying i-have-no-idea in as many words as possible throwing jargons all over the way.

Why does this happen, in any other industry, say you are  in banking or IT and are senior enough to be considered an expert, you would be telling if asked by a friend how is your industry, you can say this is where the industry is and these are the positives and negatives and this is how the industry can fare in future.Now this is itself tough in industries with clear data, growth projections etc. as things change fast. IT was supposed to grow at a healthy space but now many entry level jobs are being automated leading to slower growth.

In stocks markets however it is almost impossible to predict short term movements, as there are too many factors which are never clear in short term. However in the long term ( 7-10 years at least) equity markets are clear as sky, Companies sell products and make profits, the economy grows, and equity prices of these companies grow, the NAV of your fund which has these stocks grow, that is all.  While the returns can be higher or lower, one is likely to get a good return compared to other options.

But if you are investing for short term, say a year or two, it can turn out to be good or disastrous, we will know which after a year or two !

So, instead of focusing on how will markets move, which no one can predict, Focus on things you can control, your own finances, how much you can save and invest. Invest for the long term,  Check the portfolio once a year and think of how to earn more money in your profession and save more money in your expenses rather  than how will markets move. You are likely to be in a good place if you do that.

Merry Christmas and Happy holidays




Advisors real job

Being a financial advisor is a fascinating profession, many new investors think that our job is to find the best investments and we think that our job is to get the asset allocation ( between various assets such as equity, debt, real estate etc) right. For investors who have been our clients for long the conversations are always about upcoming financial goals, surplus available to be deployed, past real returns and likely future returns,  never about the best fund or investment. Less time chasing the best fund and even lesser time discussing direction of markets.

There is no point in getting 30% return in equity in 2017 when you have 10% of your assets in equity.

So, firstly i feel that  an advisors real job is asset allocation, not bringing you the “best” investment option. No one can with any accuracy say which asset / fund will do the best year on year.

Secondly and even most importantly the advisors job is to stand between the investor and his worst financial mistake. Some one i know ( im sure you know many like him too!)  had bought a large flat in suburb few years back, Now after almost 5 years he is paying the large EMI but receiving a small rent if he is lucky as most of the time the flat is empty. He can neither sell this now as there are at few hundred unsold apartments in the complex. So, he is stuck paying large EMIs for next 15 years or so and get small rents in the meantime and hope for some good time to sell it off.

A retired librarian who went to bank to renew FDs was sold pension plans and other policies instead with lock in ranging from 5-20 years ! Many of these investors though affluent lack a financial advisor and do piecemeal investing, they have a broker for real estate, some agent for PPF, banker for investments etc with the result that after some time, they don’t have a clear picture. They dont have an advisor but a salesman for each product.

Imagine if both  had taken some good financial advise, A real financial advisors job is to get your asset allocation right and stop you from making bad financial decisions that can not be undone for decades !

Yes we are all biased in one way or another but at least the bias of a financial advisor / planner is lower as client interest comes first and product sales is after that. And, no advisor / planner will suggest things with 20 year lock ins unless it was absolutely necessary ( annuity for retirement etc and even then only after explaining the lock in involved).A good advisor / planner will actively dissuade a client from bad investments.

Have a good advisor to get your asset allocation right, more importantly to stop you from bad financial decisions. If some one says he can get you the best investment year on year or makes some tall claims be rest assured that he is not likely to be a good advisor !




What about the new XYZ fund & other questions.

The wisdom of life consists in the elimination of non-essentials. – Lin Yutang.

Often, Im asked  what about this new equity fund which has come up. should i buy it?

Somehow the idea seems to be that the new funds like new cars are better or are cheaper. While it may be true that the latest car may have better features than an older one, it seldom is the case in mutual funds. A new fund coming in today will be buying stocks at today’s prices so it is same as buying an existing fund. What is more the existing fund has a track record to verify. We have funds which have completed 20 years and have given returns in excess of 18% p.a overall ( Note : it is overall, not precisely 18% p.a there might have been long spells lasting more than 2-3 years of zero or negative returns and some spectacular years of 30-40% return, IF one had stayed put through all that then the 18% pa becomes reality!) yet we want to move from one fund to another every few years.  Staying put may be much better than moving in and out of funds especially if you are selling because of a year or two of low returns to buy the new fund !

So buy new cars if you want but not necessarily new funds !

Second  question that comes up is : How many funds are enough, no make that i have 10 equity funds is that enough 🙂   Have been horrified sometimes to see 20 equity funds in a portfolio justified in name of diversifying risks, this is diworseification. Around 4-5 funds are enough generally. So some one having 20 equity funds is likely to get lower returns. not higher. More the merrier is sadly not a good idea in investing.

The third question from more experienced investors is : I have enough in MFs, can i invest in something ‘exotic’? Unfortunately investments are not like food stuff. If we want something exotic we can go to a fancy restaurant and order something that we can’t even pronounce properly and feel good about it ( there is even a restaurant in Chennai that locks you up in a cell and serves food inside it!). In investing such exotic stuff seldom works, ultimately all investing is based on one simple premise, giving up some money today in the hope of getting it back along with returns in future, that is all. So whether you invest in stocks, equity funds, Portfolio Management Service is all the same. In stocks we manage the investments ourselves ( mostly not in a good way!), in mutual funds we give it to a professional fund manager (hopefully if not in a good way, at least there are some rules and regulations they follow)  and the same goes for PMS too. Of course there are some differences and one may prefer MF over PMS or vice versa, something exotic for the sake of it seldom works.

Once upon a time ( hardly 10 years back i think, but it seems long now! ) there were art PMS sold by suit-boot bankers to rich clients. They were told that investing in art is a good,exotic and exclusive thing. Or so ,these well-heeled investors were led to believe. Sadly neither the bank which sold the investments. nor the Art PMS exist today. If we want something exotic it is better to head to the nearest super market or restaurant but in investing keep it the way it should be, simple.

Happy weekend.








“festival” sale

The festival season is upon us, online or offline where ever we go, we will be bombarded with ads that goes something like ” This Diwali light your home with 40 door fridge”.God knows how we can light up our house with a fridge or tv except when one is opened and other is on !

The festival of lights is now the biggest festival for shopping, again during Christmas we will have another shopping season thrust on us.  When we grew up the only set of new clothes we got would be for Diwali, and no one bothered what brands clothes we wore. Today even kindergarten kids have become brand conscious ! No wonder our parents saved every rupee they could, buy a house and educate us as well. Today we forward whatsapp messages on importance of savings and investing via 50k Rs mobile that we bought on EMI ( enriching the bank, as well as the mobile maker at our cost, of course !) and wonder how we can ever afford to save enough for retirement or childrens education.

Recently came across someone who has taken loans for a Europe tour, and has bought a second car on loan because his daughter felt that going to school in the small car was beneath her !

When did travelling to Europe, or buy a second car to keep up with fellow classmates became a must do?

Obviously having sky high expenses like this adds to stress. While it is perfect to have goals and work towards them, be it travel or a high end car, they must be well thought out, money invested for that goal month on month and then when it is enough used for that goal. So here instead of paying interest to the bank we are gaining returns by investing, and this teaches children that money can not be taken for granted. Money this way becomes a blessing for us to invest with respect and in turn grows so that we can enjoy its fruits.

So, from this Diwali at least, decide whether you will enrich others buying things you don’t need , with money that you don’t have , to feel good for a couple of days and feel bad months after wards paying the EMI to impress colleagues who are doing the same to impress you with photos of new cars and holidays abroad !

Instead sit and write down what you would like to do with your income, how you would like to save and invest and for what goals. This will not only light up this Diwali but many more to come with a sense of purpose and fulfillment.

Wishing you all a Happy Diwali & prosperous year ahead.









The Hare and Tortoise !

We all have heard the ‘ Hare and Tortoise’ story in school. Many of will immediately recall the moral ‘slow and steady wins the race’. We also must have thought this is not a real story but a fable to teach us the importance of doing something right and doing it all the time. Some one actually did test the story out, check the video


The moral of the reality, since this is not a story anymore, is that whether it is health or wealth, small but steady growth is better than running and stopping to run again. Many investors think they can time the market well by jumping in and out of the equity market / equity mutual funds but not many are interested in slow and steady purchases.

Last 10 years of SIP returns of a large cap fund like Franklin Bluechip has been a decent 13%, This Tortoise like investing has produced impressive result. Of course we cant foretell the future / Deposits may have given 9-10% without risk (but with taxes !)  etc but the point is that Tortoise won. While future returns are not in our hands one can i guess stick one’s neck out and say that the slow and steady Tortoise is likely to win again..

Happy weekend,


Behaviour vs Strategy

Most investors and financial experts focus on strategy. Financial media too focuses on strategy interviewing experts and asking what strategy they use etc.  Investors see all these and think that there is some secret strategy to make money and if we master that it would be great. Instead if we focus on our own behaviour we can succeed in investing better.

Behaviour is within – simply to invest for long term, invest when we have money. Strategy is without. Behaviour in investing is like the retired people we see at morning walks come rain or shine, strategy is about some new exercise or diet fad that we start for a few days after the New year  and then give up. Strategy may be good in theory but not many of us can do 100 pushups and live on oats and energy bars.

Behaviour is common sense – which unfortunately is not very common.  Financial media wants us to keep buying new things New IPOs, new insurance plans, new fund offers. But common sense says that all we need is few good investments be it Mutual Funds or stocks and stick to them for a decade or two. Just as advertisements make us feel bad about the LED tv that we bought last year as the new TVs are OLED or some such thing. So too, we are forced to check our portfolio, throw something out and buy something new to feel better. This works wonders for those who sell us TVs, phones, stocks and new fund offers but not for investors !

Behaviour is simple but not easy. It is actually simple to buy some good funds via SIP / STP and go on about our lives but the easy part will be tested when markets crash as they sometimes do, it wont be easy to see 3 years of nil or negative returns after putting money every month  in but those who stick to this behavior are most likely to succeed than the many strategists. Simple is seldom easy.


So focus on getting behaviour right, strategy will follow. Walking / jogging every day is tough but doable. hitting the gym for a few days and posting the pic on FB sounds cool but most likely will not be followed day after day, which is why gyms charge us annually or give huge discounts on annual fees they know most of us will quit after a week or month!

Investing and building a portfolio bit by bit is tough but doable.

Strategy is helpful of course but behavior is essential.







Investing during low interest rates

Indian savers have always preferred safety over returns but that is fast changing due to low interest rates. What they miss out is the inflation aspect, for the first time after many years we actually have a positive real interest rate. No one but Warren Buffett explains this beautifully :

”If you (a) forgo 10 hamburgers to purchase an investment, (b) receive dividends which, after tax, buy two hamburgers and (c) receive, upon sale of your holdings, after-tax proceeds that will buy eight hamburgers, then (d) you have had no real income from your investment, no matter how much it appreciated in dollars. You may feel richer, but you won’t eat richer.” ( Full article here )

So this is what was happening to us earlier, We were happy getting 9% interest with a 8% inflation so our real return was just 1% but it does not end there we were paying taxes on the 9% so got only 5.9% ( at 33% taxes) return whereas inflation ate away 8%. We assumed that our wealth was growing safely when actually adding inflation and taxes we were losing money.

Lesson  : Always aim for real return, which means post inflation, post tax,

So instead of ditching FD to buy equity funds because they give high returns ( but come with high risk too!)  please check the real returns and the risk you can take.

Think in terms of investing a portion in different assets not just FD or if FD rates are down ( optically not in real terms)  rush for equity funds chasing past returns. Asset classes are many it is never all FD or all equity MF !

Every asset has its place in your portfolio, just as we dont eat sambar rice 3 times a day 365 days a year. Ensure your portfolio has a good mix of fixed income for safety ( not returns, fixed income as we saw hardly beats inflation and taxes), Equity ( via equity funds for most of us) for real returns over long time periods. If we keep jumping from real estate to ULIPS to FD to equity mutual funds we can hardly make any meaningful returns.

Happy investing and Happy Onam.



The complete man made incomplete

Financial mistakes are made by us all at some point or another. Many of the mistakes can be corrected ( bad investment choices, ignoring inflation and taxes, etc)  or if not at least the loss of money can be made up over time and the lesson learnt for future but some money mistakes lead to more or less ruin and these are likely when we make an emotional decision without consulting others. The biggest contributor of this kind of mistakes seems to come from within family than without.

Knew some one who was a household help,  she lived in a small space underneath the stairs near our apartment with her husband. She had some property in her name but gave it to two of her sons who have built houses in the property but have no space for their parents. Luckily for them their daughter takes care of them. A similar story was made into the movie Baghban featuring Amitabh Bachchan sometime back.

And then i came across this news :

Vijaypat Singhania promoter of Raymond Ltd was one of the richest man in India but today seems to have been reduced to penury thanks to having given up not only his real estate but also his shareholding in Raymond Ltd worth about 1000 crs to his son. Though this is an extreme case it is no different from the household helpers story.

As a financial advisor I come across many parents who save and invest significant sums for their children’s education and marriage which is fine but our own retirement expenses should not be ignored. Rule of thumb ( an approximation and not written in stone ) says that one needs about 18-35 times today’s annual expenses today by the time one is 60 years ( click here for the article). How many of us plan for that ? If we bring the children up with a sense of entitlement and follow up with giving up most of our earnings than we are living on hope that they will take care of us in future, and as the saying goes, hope is not a great strategy.




Three type of investors

Investors are of many types. I list broadly the three types in the hope that you can see if you are one of them :

  1. I-want-the-best-investment-only-type : This investor has the need to own the best investment that there is, if equities did well over last three years he wants to be in equities and even there he wants the best fund. No second best fund will do. This is a great idea to loose money. None of us know what will be the next best investment in 3 years and frankly i don’t think anyone else does either. Searching for the top pick is a fools errand. 5-6 years back real estate was supposed to be the sure shot bet for many investors but not anymore. Searching for the next big thing is fraught with risks. Investment planning is all about having allocation to different asset classes and not being over exposed to one be it equity or FDs or RE
  2. Waiting-eternally-for-the-right-time /opportunity type : This guy is the opposite of the one above, he knows that equities can do well in the long run but some how feels that if he waits long enough an opportunity to buy low will come. The problem is that he never invests or if he does unfortunately it will be at the top of the market as he looses patience and goes all in at the worst possible time.  There is a solution for this investor, he first needs to invest in a liquid fund and move money periodically to equities and if by chance market does fall he can buy more.
  3. The-what-about-trump-effect-on-______ ( China / IT/ etc)-investor : This investor is alarmed by headlines of today forgetting that the headlines keep changing. Our own economy and markets have gone through terrible droughts, terrorist attacks, near war situations , global financial crisis and many other calamities but the fact remains that this hard working nation grows. Grows at 6-7-8 % does not matter, It grows relentlessly. If we wait patiently for every thing to be perfect before investing, we will never be able to. Moreover our financial situation is in our hands. What matters is how much we can save and invest and how we allocate that investments across assets to grow, rest is all noise. Though this blog talks about three types of investor there is a rare species called the fourth type.
  4. This investors does not focus on finding the top investments, he focuses on how much can he save and what are his goals. He focuses on what his in his control ie how much can he invest and how long can he stay invested and what is his asset allocation between safe and risky assets. He does read the headlines obviously but does not react to it as they are beyond his control and he tends to focus on what is in his control. For him investing is what they call in Hindi as ” Lambi race ka ghoda” or the horse that is meant for long races. The long race of our working carreers, our family,  and our own goals for children or retirement matter most than searching for the best investment, waiting for the right time or fearing the headlines.  We do hope that you are playing the long race in your control and not the short race that can go anyway.

Wishing a happy and fun filled weekend with family and friends.