How many women it takes to give birth to a child in one month?

photo courtsey: flickr.com

The question is as simple as it seems. A woman takes nine months to give birth to a baby. So, can we say nine women can deliver a baby in a month! Ridiculous, right? How can nine women do it in a month? Because it’s a process that takes up to nine months, it’s not a mathematics problem that needs algebraic solution. It is an art and a science.

I would say, very logical. Now, what if I put the same logic in investing? On an average, a well-run equity mutual fund garners above-average returns in about 5-6 years.

A quality large-cap equity mutual fund garners an annualized return of 15-20 percent in about five years (on an average), would that also imply that 15-20 mutual funds can do the same magic in one year?

Confusing! Yes, just like my first example investing follow the same rules of art and science.

My case to you is that- long-term wealth creation is not myopic. It is a process of savings, accumulation, diversification, and active monitoring.

What hinders the process is investor’s myopia- an average investor fails to think beyond the period 2-3 years, when holding for long-term. But, how can we ignore the fact that our ancestors accumulated wealth over long-term through regular deposits and holding in avenues including Provident Fund, Fixed Deposits and Kisan Vikas Patra. It is no strange that long-term ‘buy and hold’ works in practice. Anyone invested Rs.1 lac in 1977 in Reliance IPO could have yielded Rs.11.98 crores by 2011 (The Economic Times, 2012), an XIRR of 30%.

Today, information access is no big concern as it was a generation ago. Today everything is available in a pocket (mobile); unlike the times where flow of information remained limited.

But, strangely enough dynamism within financial industry has dwindled the faith of common investor. Today, no one talks about holding a stock for 10 or 15 years. Trend-based investing seems to be the norm of the day. Globally the average stock holding period used to be around seven years in the 1940s; which has dropped to below six months today!

I believe we need to re-learn the practice of ‘buy and hold’. Even a small SIP of five thousand rupees has a potential to grow to twelve lakh in next ten years, sixty one lakh in twenty years and forty three crore in fifty years at the average rate of fifteen percent per annum.

I am not against tactical allocation as our financial needs change with time, age and goals. We need to balance our emotions and follow a discipline per se to attain the long-term goal of wealth building. The hypothesis to understand the investing is not a one-shot game. It is a strategy that needs patience, discipline and self-control. 

Apart from myopic view, over-diversified portfolio also leads to un-optimized returns. A lot of investors ask me, what do you think, how many mutual funds are adequate for my portfolio: ten, fifteen or twenty.  I generally recommend- for a neat equity mutual fund portfolio you need to have following funds:

I        a.  A good-rated large-cap fun

       b. A quality oriented mid-cap & small-cap fund

     c.   One/Two sector-oriented fund (depending on risk appetite and economy)

That’s all! A maximum of five mutual funds will not only garner handsome returns but also keep paperwork and book-keeping to the minimum.

Generally, people have a tendency to hold bouquet of outperforming large caps and aspire to create a large alpha and beat the market. But, at the end, fail to satisfy the urge to beat the markets. The real culprit is- what seems diversified, in real sense it is narrowly diversified. How?

BSE, Bombay Stock Exchange has about 7,000 listed companies. Astonishing, right? But, more surprising is 90% of mutual funds are invested in just about 500 companies (mind you, not in any particular order). Now you understand, the universe for any HDFC or ICICI or Birla Sun Life largely remain the same, which particularly holds true for large-cap because the rate of participation is high which reduces the return potential as mutual funds/ FIIs/ retail investors (like you, me and other individuals) readily invest in them. So, these large-cap stocks remain overpriced and overbought, hence garner average returns over medium term.

Here’s when, mid-cap, small-cap and sector-oriented pay for valuation, participation and earnings re-rating. Particularly, sector funds are direct beneficiaries of economic cycle like any banking-specific has earned 20% over and above any large-cap fund over the last one year (November, 2014).     

       

The call for over-diversification needs to be controlled and key focus should be to keep the core equity portfolio as per the economic cycle and your risk profile. Because, AMCs keep showering new schemes as per market condition to lure investors and the distributors will try to sell you the schemes in one form or the other. But, the idea should be to keep the allocation spread across equities, debt and international funds as per asset allocation.

I believe, a portfolio of total 8-10 mutual funds shall offer efficiency in holdings. Make sure your portfolio remains align to risk profile, financial goals and economy to reap in objective of long-term wealth maximization. Remain long-term focused on your portfolio because long-term benefits needs long time horizon as well.  

Indian engine gains momentum

We stand a 1.5 years ahead of the month when former Fed chairman-Ben Bernanke threatened to withdraw its QE3 program in May 2013, which caused chaos in the world markets. During all the hustle-bustle of the global markets, we witnessed the emergence of Fragile Five- Brazil, India, Indonesia, South Africa and Turkey.

But today India has walked a long way, from being a fragile economy to a strengthening economy.

India as a nation was struggling with its high inflation, wide current account deficit, low economic growth and high fiscal deficit; just then ‘Fed tapering announcement’ led to fall down in currency rates and capital inflows. INR rate plunged down to Rs.68.86/$*, at 3-year low. FIIs become net sellers, withdrawing more than 1,60,000cr from India within 3 months of the announcement- de-motivating India’s growth story.

Statistics projected a weak picture of Indian economy- inflation hovering around 10% (second highest in Asia), twin deficits weakening India- with trade deficit at 11.3% of the GDP in Q1- 2012-13 and fiscal deficit was as high as 4.9% in financial year 2013-14 all leading to weak investments and low capital formation within the country-plaguing the economic growth to less than 5%.

But, a strong change as early as in September 2013 swept in, when strong leader Dr. Raghuram Rajan became the captain of the sinking Indian economy. With all the tough decisions including monetary policy tightening, restricting the import of India’s favorite metal-Gold; trade deficit now stand at 1.7% of the GDP (The Hindu, May 2014).

In May 2014, strong leadership became even stronger when Mr. Narendra Modi took charge as India’s Prime Minister. Market sentiment turned overly optimistic from being pessimistic, FIIs pumped in money as new wave of growth was expected through governing leaders. Pro-investment growth in the nation led to regain in confidence for investors.

As we look today, fiscal deficit is expected to in control as government reduces its non-planned expenditure and improves tax revenues. Furthermore, as international commodities prices eases and demand-supply gap lowers, inflation eased at 6.46% with a downward trend. And 10-yr G-sec yields eased to 8.28% as on 30 October 2014 from a high of 9.24% in August 2013. Also, currency rate stabilities at Rs.60-61/$. Manufacturing sector expected to grow as interest rate cools off and ‘Make in India’ gains momentum; GDP is expected to 5.5-5.9% in current fiscal year (NDTV Profit, 2014).

Today Nifty is at all-time high of 8,330.75 from the lows of 5,118.85 as on 28 August 2013. Moreover, DIIs showed turnaround in confidence through injecting 4,000 cr in month of October (highest since August 2013). Corporate earnings expected to improve as economic recovery expected to gain pace and government policies take action.

We lay our hands for long bull markets; 1-yr Fwd P/E trading at 17.09 and expected EPS growth rate of 9.5% year ahead. Are you invested? Or did the pessimism of currency crisis led to bearish sentiment and you pulled out the money at 5,000 levels and booked deep losses? Nifty has garnered an annualized return of 48.39% from 28 August 2013 till date; did its unpredictability astonish you?

* value as on 28 August 2013

A Diwali of Hope!

Dear investors,

A very happy and prosperous Diwali to you and to your family!

With this Diwali, Imperial Regalia opens its eyes to the fifth month of its subsistence.

The stock market is hovering around 26,720 as I write this newsletter, jumping 25% from the figure of 21,321 as in last Diwali.

Apart from historical political changes like single government gaining majority after 25 years, a lot has changed; but, what has been the biggest change is intangible yet quite visible - the attitude of India as a nation.  

From a country, which was floundering in scams since the past 60 years; we now stand united against the soft yet greatly perceivable virtues of cleanliness and safety. The nationwide campaign of ‘Swachh Bharat Abhiyan’ and a very altruistic step of allocating 10,000-crore rupees towards the crash victims and improving ambulance system to ensure safety and care on roads for general public are the examples of changing India.

I always envy Warren Buffet when he proudly states, that he won the lottery of birth by being born in America which makes him among ‘lucky 1% of the entire population’. But the scenario can be different now. Despite all the gloomy news from around the world (except America, of course!), India as an emerging economy has shown a great resilience. The reason for this come-back and positivity for the future is our young population. We as a developing economy are strongly driven by internal consumption; if directed proportionately we can and must lead to a robust manufacturing-based economy. I believe that, if necessary steps are executed, we shall witness the results in 2-3 years.

Upbeat earnings are expected in the month of October as results open-up. Thus, hope of better economic performance gains strength. Yet ‘Caution’ remains the world of the day and as the past has taught us again and again, we need to stick to our risk profile and asset allocation for time in now.

I shall assert that every investment must be treated as a business with a sole, undeniable and indisputable aim of maximizing the profits. Hence, it becomes a matter of utmost necessity that one should be aware of the past as well as the factors that can affect the future course of investments.

Treading cautiously on the road of sectoral recommendations, I would emphasize on the following sectors:

1.      Economic cycle- Banking & Finance

2.      Consumption-based- Automobile & Engineering

3.      Infrastructure-based- Transport & Logistics

4.      Export-oriented- IT & Healthcare

Since last Diwali, investors invested in any of the above sector have witnessed a dramatic turnaround, earning anything between 40%-135%. I believe, we shall see a prolonged bullish momentum take force as and when the policy changes come true.

Wishing you again, a happy, joyous and prosperous Diwali!

Pallav Saraswat

Too big to fall, yet struggling to recover!

Today, we travel six years from a Monday on which ‘Wall Street Plunged into chaos’ to a Monday where ‘World waits for white smoke from US Federal Reserve’.Yes! It was the September 15, 2008- Too big to fall, did fall! And today, too big the economies, struggle to recover!

Needless to say, the journey of these 6 years have not been easy, the year of 2009 witnessed European sovereign debt crisis- PIGGS emerged; in the Year of Snake, 2013, emerging markets went into currency crisis-Fragile Five surfaced. (Source: Economic Times, 2013)

As we stand today, US economic growth still remains below its 2005-07 levels, Euro-zone continues to battle to attain its pre-crisis economic output levels, Japan remains at risk of recession, China’s economic growth remain flat and India still struggles to reach its GDP at 2005-07 levels. On a whole, world economy has failed to recover and continue to witness stagnation with a growing threat of another financial crisis. (Source: Global Research.ca, 2014)

During all these years, market fell to as low as 8000pts from the highs of 21000pts; hovered around 15000-16000 levels, there were states of hopes, despair and fear; but as we stand today, market is varying around 26000-27000pts. Were we ready to wait for it or did our fears hit us harder? There was nothing wrong with been cautious. But, lot of us did lost hope; thinking that something is better than nothing we accepted and lived with those deep losses in our pockets. But, no one thought market would touch 27000pts, even when advisors demanded faith, hope and patience.

Today, even though economies struggle to recover, stock market has touched all-time highs during the years. With all the ups and downs, today, September 15, 2014 S&P BSE Sensex stand at 26,816.56pts from 13,531.27pts as on September 15, 2008 earning an annualized return of 12.07%. Sensex garnered an annualized return of 24.04% from its lowest in March 2009; on the other hand, 10-yearG-sec has yielded 0.61% since the date of crisis. (Source: BSE, NSE, Bloomberg 2014)

The question is on which side of the curve you were in? Did you beat inflation or got beaten by it? The answer lies in our behavior to ‘sell in fear and buy in greed’. Yes! We are fearful and greedy beings; we fear losses, yet remain greedy for profits, but as they say ‘there’s no free lunch.’ Returns demand risk, what makes the difference, is for how long?

Anyone who would have invested Rs.100 in S&P BSE Sensex 30 on January 8, 2008, and pulled out on September 15, 2008 would have got back ~Rs.65; similarly, withdrawn on March 9, 2009, actual money would have be just ~Rs.40. However, if kept it invested for 6 years, it would have been ~Rs.129. Total wealth would have grown by 29% rather than depleting by 35% and 60% respectively on absolute basis (Source: BSE, 2014).

We as investors, tend follow market movements rather than following market discipline. As statistics state, aggressive market sell-off was witnessed during Sept-Oct 2008 at 8000-13000 levels, whereas, aggressive market purchases were witnessed during Jan 2013/May 2013 and Apr-May 2014 at 19000-23000 levels; clearly indicating that we prefer to buy at higher index levels than lower levels. (Source: Moneycontrol.com, 2014). Did you invest after a rally or disinvest after a correction? Did you fall in herding trap? Did you believe, ‘This time it’s different?’ (Source: BSE, 2014)

I would just like to know one thing- Why was it difficult to believe that market would 26000-27000 levels, even when it reached 21000pts in January 2008, was it difficult to image after the market dropped around 8000pts in March 2009. Did you fall in the game of anchoring and adjustment? Yes, you did maybe that’s you never bought the story that market can reach 27000-levels! If you did, you could have invested today, because 6 years is not too long in equities. Today, are you invested for when market attains 100000-mark or is it that fear of losing money or else greed of making more still ruling your investment decisions?

I would just emphasize on the fact that, ‘we need not worry about volatility; but be cautious of the losses.’

SIP: Systematic Investment Plan

Union Budget FY2014-15- Impact of Budget Announcements

GOOD

   

For economy

1.       Focus on fiscal consolidation as Finance Minister sticks to the Interim Budget fiscal target of 4.1% of GDP; aiming for 3.6% in 2015-16 and 3% in 2016-17

2.       Aims for 7-8% GDP growth over 3-4 years through managing Current Account Deficit (CAD) and lowering inflation through controlling food inflation. Introduce measures to improve finance and productivity in agriculture and supply chain management (warehouse, storage, logistics) in food sector.

3.       Boosts investment and domestic production, government has reduced basic customs duty on various items used as raw materials, reduce dependence of imports in electronics and Special Additional Duty on various products shall help lower the retail price paid by the customers. Reduction in excise duty for retail footwear shall boost consumer goods. Increase in excise duty on tobacco products shall impact the sector adversely.

4.       Infrastructure development and boost real estate through developing 100 smart cities budgeted at Rs. 7, 060 cr. Development of transportation through development of Airports in Tier I and Tier II cities and expansion of gas pipe line through PPP model. De-bottlenecking the road clearances and aims to increase the investment in roads sector. Increase in investment in renewable and solar energy. 10-year holiday extended to power generation, transmission and distribution through boost the manufacturing sector. Introduction of e-Visas at nine airports shall boost tourism. Improve the financing in Micro, Small and Medium enterprises (MSMEs) sector shall assist in overall economic growth. Licensing of small and differentiated banks shall improve financial inclusion. Increase FDI in real estate (low cost housing projects) , insurance, defense.      

5.       Various initiatives, schemes and policies aimed for proper sanitation, irrigation, clean environment, education and sports. Encourage entrepreneurship and development of industrial corridors shall boost economic development.

6.       Operates all the financial products through demat account. Uniformity of the KYC norms increases operational efficiency.       

For individuals

7.       Basic threshold level for individuals increased from 2L to2.5L and resident senior citizens increased from Rs.2.5L to Rs.3L

8.       Maximum deduction limit for home loan interest payment increased, in case of ‘self-occupied property’ raised from Rs.1.5L to Rs.2L (if completed within 3 years*). It will boost real estate and home loans from banks.

9.       Annual limit for investment in PPF to be increased from 1L to 1.5L. Moreover, increase of tax savings u/s80C from 1L to 1.5L shall boost the household savings.

For foreign investors

10.    Income from Foreign Portfolio Investors (FPIs) from transaction in securities shall be treated as capital gains. Foreign dividends continue to be taxed at concessional rate of 15%.

BAD

For economy

1.       Retrospective taxation not completely eradicated through GAAR (General Anti-Avoidance Rules)

2.       Expenses like Sardar Patel Statue in Gujarat might adverse impact the fiscal deficit. Disinvestment in PSUs shall assist the government to finance the fiscal deficit. However, the privatization of PSUs shall improve the profitability of the sector. Non-plan expenditure to increase on subsidies like Fertilizers, Food and Capital expenditure on Armed Forces might widen the deficit.

For individuals

3.       Expectations of increasing health insurance rebate for senior citizens from Rs.15,000 to reduce cost of living remains untouched

4.       Education cess and Secondary & Higher introduced in imported electronics goods making them expensive

5.       Increase in jewelry prices as customs duty on half-cut or broken diamonds to be increased to 2.5% and basic customs duty on cut & polished diamonds and colored gemstones from 2% to 2.5%. Moreover, utensils to be increased in value as Customs duty on stainless steel flat products rose to 7.5% from 5%.

UGLY

For economy

1.       Net Effect of the direct tax proposals to result in revenue loss of Rs. 22,200cr shall adversely impact revenue and fiscal deficit

For individuals

2.       Debt mutual funds lose the sheen as long-term capital gains tax period increase from 12 months to 36 months and tax rate increased from 10% to 20%. However, makes FMPs and Banks FDs as attractive investment avenue

3.       Dividend Distribution Tax (DDT) to be taxed at gross distributable income reduces the dividend income received by investor.

	Debt	Equity	Gold
Positives	Duration-based strategy (income funds) is preferred due to taxation impact and aim of RBI to target inflation of 6% by January’16 shall reduce the interest rates and increase the value of long-term debt funds. With the prospective tax regime, FMPs above 3 years horizon and Banks FDs regain the sheen as investment avenues.	Hold for long-term horizon of 5 years and above focused on sectors like Infrastructure, Real Estate, Manufacturing, Financials, Agriculture, Construction, Transportation, Consumer Goods and Capital Goods. Systematic Investment Plans (SIPs) preferred mode of investment.	As an investment asset it can form as hedge against any adversity in domestic and international economy. However, holding as personal asset (jewelry) it is an expensive affair, if bill passes as it. Tax regime in debt mutual funds shall impact gold funds as well.
Negatives	Accrual-based strategy (liquid funds, ultra-short term, short-term debt mutual funds) look unattractive because of taxation effect and prospective outlook on inflation and interest rates.	Tobacco industry, Imported Electronics Goods, Aerated drinks, FMCG goods  and  Jewelry sector are adversely impacted by the budget policy announcement	Positive economic revival across world make Gold loses its shine as investment. Import duty was held at 10% makes the gold trade at premium to international prices. As global uncertainty and low and monetary/ fiscal levels manageable at domestic level.
Recommendations	Hold duration-based strategy with horizon of 2 ½ - 3 years horizon. However, for the shorter-term, dynamic debt mutual funds can be invested in. Additionally, to increase liquidity in the debt portfolio, arbitrage funds can be held. Alternatively, Real Estate Investment Trusts and Infrastructure Investment Trusts can be invested in for long-term.	Hold large cap funds with moderate allocation to mid & small cap with long-term horizon (5 years and above). Sector funds focused on infrastructure, transportation and Financial sectors seem attractive. Diversified funds can be invested in for 3 years and above horizon.	Invest as hedge to the portfolio with investment in gold funds or e-gold rather than utility asset. Small proportion is suggested as investment.

Budget is essentially focused on infrastructure, employment generation and improving savings rate; which shall positively impact the economic development, increase the savings, investment, capacity utilization and personal consumption. Thus, prime aim of the budget is to regain the economic growth focusing on execution, expansion of infrastructure and improve the human resource capability.

However, domestic risk of increase in fiscal deficit and adverse impact of El Niño Impact on Agriculture shall weaken the currency, increase the inflation as Current Account Deficit might be increase. Increase in inflation shall directly impact the interest rates impacting the investment. Widening of fiscal deficit might increase market borrowing, which will hit the debt market and decrease the yields on the same.  Geo-political risks in Iraq crisis, US Fed tapering, and Euro zone default risk shall lead to economic stagflation in international markets. However, over longer term horizon, economy shall witness higher economic growth and stability, the returns on investment shall higher.  Hence, long-term scenario is more positive than short-to-medium term conditions risked by inflation, interest rates, global liquidity and economic growth.

***

Be a true friend for today!

       “A Best friend knows how crazy you are and still chose to be seen in public with you.”

                                                                                                         -     Anonymous

Thank God it’s Friday! Any Friday morning unlike the five previous ones, brings with it the hope of much needed break from your monotonous and hectic work life schedule. The evenings are usually planned ahead of time; destinations pre-decided for fun unlimited.

The party begins at dusk not concluding before the dawn. In any such party or get together there is always some friend of ours who is overwhelmed and gets drunk more than usual. He has swigged down six and now can’t even walk straight.

Would you let your friend drive when he can hardly walk? The answer would be definitely a ‘No’.  You might drive him home safely or may call his brother to take him home or might even call a cabbie to ensure he is back home safe.

My question is why would you do that? The answer is simple-that you care. You care about his well-being, about his two little kids and his wife, as their future depends on your friend’s well-being.

In case of any fatality, the worse comes much after the accident. The wife finds it difficult to make the ends meet. The kids bear the brunt of trimmed cash flow. Most of all, their schooling is put in jeopardy. All those sweet-and-sour memories of birthdays, vacations, holidays, smallest of small occasions of celebrations take a big compromise.  The question is for what? Does our family, near-and-dear one really deserve this?

Your friend is indeed very blessed to have a buddy like you. You just saved him and his family from adversities of life. Your one responsible gesture saved them all from the imminent miseries and agonies which your friend was too drunk to realize.

But does your care-and-concern end here? There might be so many situations when you might not be there. The possibilities of a casualty happening are endless. You may not be there to protect him on every occasion. But you can take a step ahead to ensure that the odds of his family getting into despondency are reduced by a large extent.

Engage in a conversation with your friend about financial risk management. Put through his ears; make him aware of the financial needs of his family and fundamentals risks that should be covered during his lifetime.

a.      Cover the risk of loss of life:

Agreed, no one can stand in lieu of you after your fate. But, fact remains that your dearest ones have to move on. Undoubtedly, emotional void endures; nevertheless, you can ensure financial independence of your dependents and make them self-dependent so that they able to achieve their goals and attain happiness in life.  Simple ABCD by you, will aid him and his family resolve the complexities of life.

Ask him to Acknowledge his needs, requirements and liabilities- Browse through the internet- Chose a reputed life insurance company with a good claim ratio and select a cover 18x of annual package- Dish out the credit card and close the deal!

b.     Cover the risk on health:

Ask him to know the health insurance plans provided to you by his company. Know means, understand it! Increase the cover to an optimum sum assured of at least 15 lakhs. Don’t forget a family floater!

For complete protection, a must have is a critical illness plan, which pays the claim in case any critical illness is identified. Health plan pay the cost of treatment, while critical illness will reimburse any loss of income and any liabilities during the treatment.

Your protection is utmost, to shield your family from any future misfortune. Expense for today is an investment for tomorrow. Protection for their future is among the best contribution you can make your family well-being.

  

Yet, facts remain enlivened…

-        Statistically more than 80% of the people are underinsured for their life and health.

-        More than 80% people do not have a critical care plan; worse is they even don’t know about it.

-        90% of the people combine insurance with investment and get stuck with ULIPs or Money Back Policies in hope to garner high returns.

A small and simple message by you, can guide your friend towards a very important step- Financial security of his family. Honest opinion and a fine gesture, as trivial as a small discussion can make him re-plan his priorities and motivate him to act promptly to make a decision vis-à-vis ‘I know. I have to do. Was thinking of doing today; forget to do, but has kept as a first concern’ attitude.