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Keep walking

Tomorrows ‘cheerful’ headlines are being written today : “Mayhem in the markets” &  “Blood bath in the street ” are all time favourites. This will make investors bit nervous, but what is the data saying :

Sensex is currently 23000, it was 30000 at some point last year, and from that level is down more than 20%, this sounds scary, but is it so actually?  Let us see what scary things happened to investors who bought in at various points over last few years :

2 year returns :

In Feb 2014 , index was at 20400, if you bought back then and held the return would be around 6% p.a, not great but definitely not ‘blood bath’ or some such nonsense. this is for index, most of us invest in equity funds in a mix of large and multi-cap funds , let us see the returns there :

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3 Years  : Min 7.5% p.a & max 22% p.a

5 Years : Min ~7.5% p.a and max 18% p.a think the average returns would be around 10-11% p.a

10 Years : Min 10% for index fund ( which i don’t suggest for investors) whereas active funds is around 12% and max 16%, think the average would be 13% p.a

These are the returns one would have got as of yesterday by investing 3,5,10 years before. All the screaming headlines of blood bath and mayhem gave this kind of returns to patient investors,

SIP returns for the above period too have been same or higher than the above returns ( ~10% pa for large-cap funds and 15% for multi-cap funds over 5 years and 11% to 18% over 10 years)

So move away from the headlines, stay calm, cool and as the Johnny walker ad says Keep walking and keep investing for a healthy and wealthy future !

Data source : Valuresearchonline

 

 

Things that matter

Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it. – Warren Buffett.

Phrases like “market panic”, “mayhem” and “meltdown” are being seen in headlines over what is happening in China, which has been dragging the worlds equity markets down for some time now.

As investors hearing news like these, we have two choices

1, Does it matter?

It does matter if your investment time frame is a week, month or may be even a couple of years. But if we are clear on our asset allocation ( how much we invest in equity and debt ) and are investing for what matters most to us like our children’s education and our own retirement, what is the headline on markets today, this week or next month does not really matter.

2. Can we control it ?

Obviously not, what happens to China or oil prices and how it affects our markets is something which we have no control over.

Instead if we focus on

A. Saving more : Having a budget, saving at least 30 -40% of our income, not falling for the  ‘great online shopping sale’ that seems to happen every weekend. Having at least  3 months of monthly expense for a rainy day.

B. Investing the savings properly : Having a goal for the investments, investing for real tax efficient return ( ie post tax and post inflation return), Just as we earn monthly, investing the savings monthly helps us to create wealth.

C. While investing it is better to  avoid products that are  too complex. Avoid products which club insurance with investing, Keeping investments simple with bonds, equity via mutual funds is the best way to go.

Once we focus on the intersection between things that matter and things we can control, what happens in China last week or somewhere else next week becomes less of a concern.

 

 

 

Financial emergency box

The oft repeated but ignored idiom ” Save for a rainy day” really happened for many of us in Chennai.Though the city not only recovered from this punch from nature, it has more or less stood up thanks to thousands of volunteers, armed forces and workers.  Now comes the damage assessment and its financial impact, which is not going to be easy. Some pointers for the future & how you can have a financial emergency box :

  1. Keep at least 6 months expenses in an investment that can be sold easily like a short term FD or a short term debt fund.
  2. Digitize all documents from education records, passports, voter id etc.,  Make a pdf copy of all these and send a mail to yourself so that you can download them again when needed, you can also have a copy in file sharing apps like dropbox.
  3. Make a simple spreadsheet of all your documents details such as passport no, bank acct no, debit/credit card no etc and save them too. Use a password vault like keepass or Norton vault for storing passwords, if you are worried about the same being hacked you can memorize first part of password and save the second to make it safer.
  4. Consider householders insurance that covers the contents of the houses but ensure that the cover is against all types of calamities, no point in having fire insurance only but not floods since there was never flood in your area.

Saving 6 months expense may sound tough job but work on it, tracking all the data and digitizing it will be tough but do it still. Be prepared as the scouts,say.

 

 

 

Secret of Rakesh Jhunjhunwala’s success

Actually, it not a secret at all. But people are curious if we add the word secret 🙂

Rakesh Jhunjhunwalla is a regular on Forbes list of richest Indians and is a billionaire. He is as far as i know the only “investor”  in the list, in the sense that his wealth has come from investing, and not from running a company or inheriting wealth. Starting out in 1990’s with a small capital, RJ is the real big bull of Indian stock market.

Recently Mint newspaper did a cover story on the secret to his success, turns out that the secret is something all investors know but very few practice, which is holding investments for the long run. Mint analysis of RJs portfolio reveals that his highest returns have come from stocks that he held on for 10 years ( 3 stocks held for >10 years now account for 50% of his known holdings net worth ).

source : http://www.livemint.com/Money/r06HO0RUtK82ReZnxPzKwL/The-secret-of-Rakesh-Jhunjhunwalas-success.html

While RJ must have invested in other stocks which went nowhere over last 10 years too, holding on for more than 10 in these few stocks has resulted in great wealth ( almost Rs. 4000 crs !) . How tempting it must have been to sell when the value reached 100 crs, then 1000 crs etc ??

Compare this with the data that average investor in Mutual Funds hardly hold their investments for just 2 years, it becomes clear that why ordinary investors don’t get high returns.

Over last 20 years, many equity mutual funds have given 20%+ p.a returns, Just Rs. 5000 invested every month is worth Rs. 1.58 Crs against invested amount of Rs. 12 Lacs ( Rs. 5000 * 240 months).

So even a middle class investor can create serious wealth by investing regularly and holding on to those investments for long term.

We already hold our other investments for a long time, be it gold, even FD’s, while these are safe investments they seldom beat inflation and taxes in case of FD and making charges etc in case of gold.

We tend to look at short term volatility in equity and avoid investing but miss out that they create enormous long term wealth.

For many of us researching and holding onto stocks is a tough task given that we are not full time investors, so investing in equities via Systematic Investment Plan of equity mutual funds helps us to create wealth in the long term in the easiest possible way.

Hoping that many of us reading this start out on the path to wealth creation,

For more on SIPs :  http://blog.credocap.com/?p=285

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mantras for prosperity

No, No. I did not meant to write about mantras if repeated could make us all prosper. I had in mind some basic traits that make some of us more prosperous and others less so.

Buy stuff you need but buy carefully and not often : 

Don’t fall for the sale of the season, because seasons come and go and so will the ‘once in a life time’ sale, in fact once in a life times sales seems to happen every month these days. If you want to buy something badly write down the name of the product,date and the price. See if you still need it few months later if so, fine else, you dont need it. It was earlier tough to spend large amounts of money even if one had it, you had to withdraw cash and give wads of notes to the shopkeeper, it felt bad to spend so much. Now it is easy as first came debit and credit cards, and finally mobile apps. So it is easy to buy a new TV today with a swipe( only 6 EMIs ! ) on the app on the mobile phone which itself was bought using credit card !! So buy but carefully and not often.

Invest, don’t just save taxes :

We love the latest gadgets but stick with savings that was good in our parents generation, not ours. An 8% FD or 8.7% PPF won’t take you far, especially when your expenses rise much faster than 8% p.a. Savings like FD and PPF have a place but they can not be the only things we have. One could also start equity SIPs for 10-15 years for long term goals. Equities get all the bad name (volatile,risky etc)  but deliver good returns while other products have good name( safe, solid )  but deliver hardly any return post taxes and inflation.

Many investors are not aware that there are 80 C tax saving mutual funds too in which one can do a monthly SIP, making it easy to save taxes as the outflow is monthly, the returns could also be much better than PPF etc. Just to give an example PPF investment of 1 Lac made in 2005 would have returned Rs 2.15 after ten years while same 1 lac in a tax saving fund  would have returned Rs. 3.24 Lacs. This excess return of 1.1 Lac is not small, it is equivalent to the initial investment of 1 lac !! The tax saving fund returned 12.5% while PPF returned 8% which created 1 lac wealth with the same tax savings as PPF. Was this return smooth? no, but if you are invested for 10 years what does it matter if the returns were volatile.

So shortly and simply these 2 traits of spending less and investing better is likely to result in prosperity. Wishing you all a happy Diwali.

 

 

 

 

 

 

Healthy, Wealthy and wise !

Today the media will have a field day as equities crashed by over ‘1000’ points or 3% to put it correctly !. These are normal and Prashanth Krishnan in twitter mentioned that this has happened 55 odd times in last 15 years, I’m sure you don’t remember the last 3% fall, forget the first one !! Media works on the principle of bad news being good news for their business, more people watch TV and they can get more TRPs and advertisements which is more money for them.

As an investor, we make money by staying invested, ignoring the headlines and if at all there is a serious fall ( say 20% from top)  investing more if possible. We don’t make money by following headlines, in fact serious research has shown regularly following media ( be it on markets or politics is injurious to both your health and wealth, not to mention wasting precious time !) .

Be healthy, wealthy and wise !

 

Healthy – instead of seeing TV debates on politics, go for a walk !

Wealthy – instead of listening to “experts” on business channels, keep investing via SIP

Wise – Doing the above two will make you wise than most people you know !!

If you don’t believe me listen to what M/s Peter Lynch & Warren Buffett have to say on the subj. 🙂

 

What stock market?

What stock market?

Is your money stuck in a traffic jam?

Few days back i read this report in Mint about how much waiting in traffic jam costs you ?

http://www.livemint.com/Money/VX3SyEKsUZ8kYIldFVQXYL/What-is-the-daily-traffic-jam-costing-you.html

The report says you spend 20% more fuel waiting in a traffic jam. I was more worried about the time spent say half an hour one way stuck in jam, that’s an hour a day, time that can be spent better.

I thought about this from the angle of our financial lives, and what causes financial traffic jams and what is the solution.

 

 

Are you keeping too much money in Savings account ?

So, this money is stuck in large jam hardly earning 4% p.a interest ( which btw, is fully taxable).  Check when you need the money. If you don’t need it for a year FD is better, if not required for 3 years you can look at Bond Mutual FUnds that are more tax efficient than FDs and if not needed for 5 years or more you can consider balanced or equity funds.

Are you keeping too much in FD’s and Gold ?

I know people who have more or less their entire investments only in FDs. This is being too conservative like having a top notch SUV but never using it !. If the money in FD is not required for many years there are better ways to let it grow. This is the traffic jam most Indians are at today. FDs can be a part of your investment kitty but not only FD. It is a losing propositon basically as taxes and inflation eat away your interest.  Since they are safe people prefer them but just like we can’t stay at home all day since it is safe, similarly you can’t have all your money in FDs. The same goes for Gold – at least FDs give some interest, gold gives nothing, in fact takes away as you pay making charges for jewelry and locker charges to the bank.

A good portfolio has mix of investment that works for you?  FD for emergencies, Debt Mutual Funds for expenses coming up  in three years,  Mutual funds with debt and equity  for > 5 year goals and Equity Fund for > 10 year goals.

As in past posts let me remind that insurance is like seat belt or helmet only to protect you and not give returns so don’t invest in insurance plans with an aim to make money but only for security with a term plan.

See the chart below of how much equities ( represented via Sensex ) has delivered. I’m not saying the same returns will be repeated but saying there is no ignoring equities as it remains the best asset class for long term investors.

 

The above return is for the sensex. A better metric would be to measure equity mutual funds that have been around for > 10 years. Most of equity funds have delivered around 15-20% pa. So you definitely need equity investments if you would like to escape the traffic jam of Gold and FDs. At 15% returns, a Rs. 10000 monthly investment can grow to Rs. 1.5 Cr in 20 years.

In our daily routine, we can’t avoid traffic jams but atleast ensure that your money is not caught in one.

A word of caution : Equities as the link of mint article above is ‘slow cook’ product not suitable for instant noodle types ! You would need to invest regularly ( monthly) give it 10 -15 years to create real wealth. It is about becoming wealthy not getting rich quick !

Happy Independence Day, plan for your financial freedom this year.

 

 

 

 

Inflation is injurious to your wealth

“Now, here, you see, it takes all the running you can do, to keep in the same place. If you want to get somewhere else, you must run at least twice as fast as that!” – Red Queen from the book Alice in Wonderland.

Power of compounding is called the eighth wonder of the world, However not many of  realize that inflation is the Himalayan blunder that we all do without realizing.

Consider that you had Rs. 100 as capital in 2010, today in 2015 as per governments cost inflation index it is worth only Rs. 72. In other words you would have lost Rs.28 worth of purchasing power if you kept the Rs.100 hidden under your pillow.

If you reply, hey, i’m smart i saved the Rs. 100 in an FD for 1 year at 9.5%, Now i have Rs. 109.5 in the bank, you have just about preserved your  Rs. 100 here is how.

FD
Interest 9.50%
Inflation 6.70%
Taxation 30.9%( at highest bracket)
Net of Tax Return 6.56%
Actual Return post inflation and tax -0.14%

 

So, longer you run the FD more you will lose thanks to inflation and taxes.

PPF and other tax saving investments offer some hope as they are tax free and also investment is subj to tax savings, but they accept only upto 1.5 Lac per annum, this limit is not enough for people with higher income and savings.

Which is why the red queen in Alice in wonderland is right, you have to keep running ( by saving in FD) to be at the same place ( ensure your Rs.100 remains the same after inflation and taxes !!).

But, unlike the red queen you don’t have to run twice as fast as to go to someplace ( to get some real returns on your savings) but you have to make your investments do the job for you in two ways.

Debt Mutual Funds are allowed to be indexed for inflation so the net taxation is only 20% that too post inflation, and if funds like Monthly Income Plans which have 25% equity are considered, returns could be better than FD on a 5 year basis and taxes much lower.

This is however not guaranteed hence people stay away from it, people keep away by saving 100% in FDs,  This is not a either or situation, as one can invest a portion of their savings. For retired people without pension, guarantee may be paramount and hence safety of FDs needed. For those who are working and are several years away from retirement, MIPs can be considered.

Equity mutual Funds : Equities over long periods of time are best at beating inflation, and what is more are tax free too ( after 1 year of investments). On a 10 year basis, equities are better positioned to FDs or any other investments. They are risky but that goes down with both time invested as well and can be invested monthly too to avoid the risk.

So, if you would like some real return post inflation and post taxes invest in debt funds, MIPs and equity funds apart from FD, PPF etc.

Here is a post from the paper Mint making the same point : http://www.livemint.com/Money/lxge86upb1bpBHhVD3hWDO/How-tax-and-inflation-bites-reduce-the-FD-pie.html

Disclaimer : Tax rates and inflation vary from time to time, Returns from mutual fund are subject to market risks.

 

 

 

 

Saving investors from themselves

Saving investors from themselves:

First written in Industrial Economist in August 2013 when gold just had started its fall and real estate was still holding on.

Link to the original article here :Industrial Economist

The fault, dear investor, is not in our stars — and not in our stocks — but in ourselves…” Benjamin Graham

(Endearingly called father of value investing and more famously known as Warren Buffett’s Guru)

The year was early 2000, opened the business newspaper to see a front page picture of a large crowd standing in queue outside a bank, with the headline “ Investors queuing up to apply for shares of an unknown software company”. Cut forward to 2001, many software companies went bust.

Year was 2003, had told an acquaintance to invest at least some amount in mutual funds, but he never did. Suddenly in 2007 he found courage to buy into two IPOs ( Initial public offering for the youth & public issue for rest of us!  ) of a large industrial group. In 2013 those 2 stocks were still in losses. It is estimated that 1/3 of Indian investors have bought those 2 stocks only and are staring at a large loss.

How did this come to pass? People who refuse to invest, suddenly find courage to buy anything and everything that their brother in law tells them?. The fault as usual lies with us, we don’t follow basic rules ( the comparison we do, questions we ask, for mobile phones and tablets are never done before investing hard earned money).

Here are few basic thumb rules that we can use to not only save us from ourselves but put our money to good use

 

  1. Putting all of your eggs in one basket: Whenever I travel my father always advises to keep some cash and a debit card separately from the wallet so that in case the wallet is lost I still have some money & a debit card. The idea is same as not keeping all eggs in one basket. For some of us our house is the biggest investment but apart from the house one lives in the other investments needs to be well diversified ie some portion in bonds/ deposits, some in equity mutual funds/stocks, some in gold etc. At the height of the real estate boom of USA in 2008, an NRI told me that her servant maid owned 4 houses (all bought on zero down payment loans, of course) and finally had to sell all of them and still owe the bank money. Diversification is about sleeping well. The best of our plans may turn sour, hence diversify.

 

  1. Falling for high returns and low risk trap: whenever you hear someone saying ‘ 24% returns with no risk’ run as if a dinosaur is chasing you. Promise of high returns whatever may the business model be reeks of a Ponzi scheme (where capital given by one person is used to give  returns to another works till it goes bust)  any  investment that promises high returns especially within a short span is suspect.

 

 

  1. Not investing regularly : While we all understand Fixed Deposits and invest heavily there or in Real estate most never look at investing regularly in equity markets via monthly investments called Systematic investment plan( SIP). Indian investors invest little in their own equity markets but today foreign investors hold a large stake in many of our banks, manufacturing companies etc. The foreigners seem to have more faith in our future than us.

 

  1. Falling for the new-new thing, be it dot-com/software rage of 2000, Infrastructure stocks or funds in 2007, Gold in 2012 or may be real estate in 2013 buying into anything that is extremely fancied by most is a recipe for at best very low returns or at worst disastrous.

Happy investing!

Minimalism in life and investing

Profit from folly, do not participate in it – Warren Buffett

Simplicity is the ultimate sophistication. – Leornado Da Vinci (1452 AD)

More is better, is what we are led to believe, in both life and investing. In life through larger house, cars, phones, home theaters. This consumption is led by the belief that one needs ‘new’ things all the time, especially when there are three apps in your smart phone which keep reminding you to buy the new smart phone (on EMI of course!) or the LED TV.

Waste & want that is my motto.

Waste & want that is my motto.

 

But the problem, as the above cartoon says is that ‘ everything we get turns into something you have’ which is why Calvin says one needs to keep getting new things and so we shop till we drop. The old TV looks out of place, the home looks cramped, car looks dented etc.

This is indeed great for investors in those companies ( buying a new Iphone is sort of transfer of wealth from your end to shareholders of Apple and to the shareholders of the bank that finances your purchase 🙂 ), which is why Warren Buffett says profit from folly ( by being an investor ) dont participate ( by avoiding being a full time consumer) in it !

Minimalism is about getting more done by doing less.  If you have a hundred shirts to wear, you surely are going to waste lot of time wondering what to wear, have 5 shirts and the choice becomes much easy. Also maintenance becomes even easier. Have a house that looks cramped ? give away some furniture and make space, wardrobe is cluttered? give away clothes that you don’t wear anymore, you will get some space and help another person too.

De-cluttering  helps in life as well as in investments,  having too many mutual funds(because you read in paper they are doing well) , insurance plans ( brother in law in pushed it) , bank accounts ( nephew shifted three jobs and now you have three bank accounts and hope he stays there !)  is a recipe for confusion.

This weekend I plan to start with clearing up my desk of all the magazines and brochures, my investment life is simple enough have one investment account, 2 bank accounts   (one for regular expense and one for investment), one insurance plan and one medical plan.