Credo Capital

Yesterday, by any parameter was a remarkable day, every year we get few remarkable days like this, sometimes the news is good but often not. Britain voted in favor of exiting the European Union and this brought down the markets the world over.  This is like a country divorcing from a common union and will take years to resolve. Obviously, the markets were surprised  and went down (some 600 points on Sensex in India). The whole day there were conference calls, research reports, endless discussion on TV etc. I stayed away from almost all except for one report which focussed on what exactly is meant by exiting the EU, as per the report it is still not official as once it is announced, Britain has to negotiate trade agreements separately with all the countries since now EU negotiates as a block. This will take years to resolve and in the meanwhile as an investor there are only two things that we can do

A. If markets fall a lot, see if we can invest more or

B. Do nothing since markets are where it was about few weeks back, they were much lower in February as China was slowing down.

These things will keep happening, it was Raghuram Rajan last week, China few months back and we are hardly 6 months into the year. Investing in equities is never smooth and that is why it gives great returns, If it were smooth the returns wont be this good.

Shantideva  – a Buddhist scholar who lived in Nalanda during the 8th century said ” If you can solve your problem what is the need for worrying and if you can not solve it what is the use of worrying ” As investor we have very little control over what happens in the world but have control over our own emotions. Use it and invest wisely. Spend the time with doing what you love to do,  save time and money !!

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.

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?

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.

Tough to avoid traffic jams, easy to avoid jams in your financial life. Let your money work for you, Invest well http://t.co/B2q7NhYBw5

— Credo Capital (@credocap) August 14, 2015

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.

Equity is a sloooow cook. Look at return rates over a 35 year period in this graphic. http://t.co/GgVtcWgo11 pic.twitter.com/6wUWu2ZHml

— Monika Halan (@monikahalan) August 13, 2015

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.

Most of us dream of owning a high end car or bike ( Harley this or BMW that ) because those vehicles arguably are the best in class and are seen as exclusive.  This works exactly opposite in investments. Many people, especially the high net worth investors get caught in this trap of exclusivity-is-better while investing.

This was sadly discovered by the singer Suchitra Krishnamurthy who was a ‘privilege’ customer of a large foreign bank. Check the link for the full story.

http://www.firstpost.com/business/money/hsbc-suchitra-krishnamoorthi-case-the-moral-is-do-not-mix-insurance-and-investment-1964163.html

Sadly, this not an one off event and has happened to many. Even public sector banks are not immune to this disease of selling toxic investment products to their ever believing customers who believe that anything sold by a ‘government’ bank or insurance company is safe. Check out the link below for an example.

http://www.livemint.com/Money/57wQlkkdLuC8GvifojfdMK/How-to-shrink-50000-to-248.html

In investing, simple stuff works best. In the past highest return came from buying-and-holding on to investments like equity  mutual funds for 20 years( 16%+ p.a from equity funds).

But as one’s wealth grows, it attracts lots of attention foremost from your bank as they are fully ‘aware’ of your account balance.  You will be tempted with Gold Privilege Account, Private banking, exclusive relationship manager   along with free invitations to concerts, limitless credit cards and other such knick-knacks.

While buying any investment please remember that what matters most is

1. Where is the money being invested ?

2. What is the cost ?

3. What is long term track record of returns ?

4. How quickly can you sell?

5. What are the charges for selling?

Read all this in the application form before signing. Many who happily sign on the dotted line without reading do not realize that their hard earned wealth is being invested in things that can not be sold easily, has high costs and mostly low returns.

What is the solution for the investor then ?  Whether one is a HNI or not, I suggest sticking  to simple open ended equity funds that have been around for 10 years or more (only if you have the patience to wait for next 10 years at least). While mutual funds do not guarantee any returns, they are the most transparent investment products and are well regulated. While future returns can vary, they will likely remain the best option for wealth creation.

So next time when some one tries to push an investment plan along your way, please remember that it is not a good idea to mix investments and insurance, Term Insurance is what most of us require for protection and investments are for growth, keep it simple and separate.

PS :  I advise on mutual funds and hence am biased towards it and against other products. But most of what i write is from my personal experience of seeing  investors suffer after buying products with long lock-ins and low returns.

Myth No 1. Only rich can invest, for middle class only PPF and other savings makes sense :

Not really, while PPF and other deposits give around 8-9% p.a returns over 15 years  equity funds have given around 14%p.a to 20% p.a.

One lakh invested in equity funds ( see picture below) is valued anywhere between Rs.  7 lakhs ( for a very low performing fund)  to Rs. 15 lacs ( for a good fund) today, whereas the same Rs. 1 lakh in PPF is Rs. 3.9 Lakhs. The difference is Rs. 3 Lakhs, not small difference for a Rs. 1 lakh investment.

So any one from middle class can be rich, if they set aside a part of their savings to equity funds  and forget about it for 15,20 years. Of course PPF is safer, equity funds may not be, which leads to second myth.

Myth No 2:  Equities are risky.

Yes, but that is no reason not to invest in equity at all, by all means continue investing in PPF if safety is paramount but do invest in equity funds too and give it the same time as you give your PPF. Missing out on this 15%+ kind of returns is wrong, most of us in middle class can never become financially free if we continue to depend on 9% returns to get wealthy while we pay 10% interest on our home loans and 12% for educational loans.

Myth No. 3 :  It takes money to make money.

It does, till you see how little money it takes to make big money.

Rs. 5000 invested p.m ( or Rs. 166 per day if that gives you some ideas to save ) at 18% return for next 20 years can become Rs. 1.1 Crores, 18% is what equity funds have delivered over last 20 years, some have been higher at 20% too. Even assume we get 15% in future, it will be a cool Rs. 75 Lakhs.

To sum up :  Equity is the one asset class that is missing from an average middle class families portfolio today, most diligently stand in queue and invest in PPF, have some gold and real estate but nil to very little equities. If one gives the same time as PPF to equity funds and invests regularly think the results would be satisfactory to say the least.

Happy investing.

Picture source : Manoj Nagpal via Twitter @manojnagpal

The now famous ad from an online retailer has a song Whataydeal, whatafeel. For a few days the retailer had announced discounts hence the advt. The nice video of happy shoppers dancing to the song is a great ad which reinforces that we are always happy getting a good deal.

This sadly however does not happen in investing, very few dare to invest when markets fall, and no one for sure dances when markets fall !! Instead we have pictures of people gaping at the prices in front of stock exchange.

market at 50% off in 2009 but no one is dancing ! Image Source : Reuters

Newspapers use words like panic, mayhem, blood bath etc.

The investment gurus tell us that buy low sell high is the mantra to make money but that would require the investor to muster courage to buy when everyone is selling in panic.

So, is it impossible for an ordinary investor to get the deal which market offers ?

No, the simple way is to invest a fixed amount every month in an equity mutual fund that not only helps us to increase our wealth but also ensures that we buy more when markets are down ( since we invest a fixed amount, lower prices would mean more quantity) and less when markets are up.

Over the last 10-15 years, equity funds have delivered anywhere from 16% to 21% p.a. Anyone who invested as little as Rs. 5000 p.m for last 20 years has made Rs. 1.1 crore ( assuming a return of 18%)  now that is whatay deal & they are dancing their way to the bank !

If you want whatay feel in future, please do invest a fixed amount for next decade or two in equity mutual funds to get whatay feel returns !

Start with as much as you can and increase as you go, when you can save more, when you get a raise etc.

Not many will do this, those who invest in equity funds regularly are few and far between, it is much easier to buy some electronic stuff for Rs. 29999 only that they will throw away to buy another whatay deal product after couple of years( or is that too long these days 🙂 . But those who do invest, are likely to be seen dancing their way to the bank in future, singing whatayfeel 🙂

Note : though returns can vary etc. Historically equities generate the best return and that investing fixed amounts is the best way to invest in equities. Returns can vary but my take is that equities will remain the best place to invest in future too.  That said, Mutual Funds like anyother investments are subject to market risks. Past returns may not be repeated, future returns are not known etc.,

Image Source : http://in.reuters.com/article/2008/01/21/idINIndia-31510420080121

The letter below,written by a dad, whose 7 year old son saved 500 Rs per month and gave to his dad for investing. Think his dad wanted to teach him about investing in a disciplined way through mutual funds so gave this amount as pocket money. Before you say nice story and move on, as after all, what can Rs. 500 p.m grow to, a few thousands by the time the boy reaches college or gets married? Here are the numbers and they are startling..

College is 10 years away when he turns 17. by the time the little boy goes to college, it will be Rs 1.68 Lacs. Decent money, but definitely not enough for a good education that too ten years from now.

At 27, when the ‘boy’ is old enough for marriage the investment would have grown to Rs.11 Lacs good sum but dont think enough for the typical big fat Indian wedding even today, forget 20 years later.

Let us assume that since it is not enough for education, or marriage the dad will continue the Rs. 500 investment and the son after getting a job invests the same amount every month till he is say forty,

So the total amount invested is  Rs. 1,98,00 over a 33 year period ( Rs.500* 12*33)

Assume 18% return ( markets have given 20% in the last 20 years but let us assume 18%)

The total value is a whopping Rs 1.22 Crs.

All from Rs. 500 p.m invested diligently over a long period in equities as they give the best returns over long term. If it were just increased by Rs. 500 more to Rs. 1000( which is what you may be paying for your mobile bill every month!!) it will be Rs. 2.44 Crs. Agree that inflation would ensure that Rs. 2.44 Crs may not be enough 33 years later but it is better then not investing anything, right?

Now, what is your excuse for not investing, that you don’t have Rs.500 or Rs.1000 pm ?

“My wealth has come from a combination of living in America, some lucky genes, and compound interest.” – Warren Buffett

Though we learnt it in the 6th standard or so, understanding this is not easy, small shop keepers have understood it to make millions while many with degrees in finance struggle to understand it.

And how long would it take to get to 1 crore ??

I fear not the man who has practiced 10,000 kicks once but one kick 10,000 times – Bruce Lee.

Best selling author Malcolm Gladwell wrote that it takes around 10,000 hours of practice for anyone to be an expert. Bruce Lee seems to have found that out much before with the above quote!

As investors most of us are try different things to increase our wealth, which is not wrong but we also need to practice that one kick ( consistent investments over the years ) to make a meaningful difference. the one kick that i can think of in investing world is SIP, ( systematic investment plan which is fancy way of saying monthly investment!) that one kick once a month patiently done over last 20 years has made people ‘ Crorepatis’ without winning KBC !!

Let us see how one can do this. Franklin Prima Plus, an equity fund was started in 1994, completed 20 years last year. A monthly investment of 5000 Rs since Jan 1995, is worth 2.2 Crs today. All one needed was the patience to keep investing that 5000 Rs and not stop it for any reason. Even 2000 Rs, for 20 years ( 2000* 12 months * 20) precisely what i could have afforded from my salary of 5000 RS then, would be 88 Lacs today as against invested value of 4.8 lac’s. All this by investing amounts that one can afford and leaving it be for long term.

I’m telling this because young investors should not repeat the same mistake, salaries are much higher today, and people spend 2000 Rs on their phone bill every month, not to mention 1000 Rs for going to the movie in a multiplex.

So if you would like to practice one kick 10000 times and become rich slowly but easily, start investing today and keep investing for next 20 years or more, If you can increase your investment as your salary increases may be you can make 10 Crs or more with the same 18-20% returns, though i would be extremely happy with any return over 12-15%. As the return is not in our hands but investing monthly is ( one kick, repeated every month !)

Remember even Bruce Lee feared the man who learnt one kick 10000 times !!

PS :The 20% return mentioned above has come with years of low or negative returns (of even 50% once! ) and years of high positive returns (ranging from 30%+ to even 233% in one year! ) but those who stayed the course reaped the benefits. Future will also hold such negative surprises as well as +ve surprises, and the investor will be tested and tempted to quit, and as in past rewards are likely to be for people who hold on.