Read my previous post how to invest in this market
Evening Star shows you the shift of power from bulls to bears . Markets were near expiry and all the punters who were holding the stock from the time of strong rise which started , had to clear there positions and hence a sharp selling was expected . No Surprise that it happened today , As markets were rising , every short term long holder wanted to clear his positions , this resulted in panic selling and stock went down so much .
Now it has come to its normal levels and with this strong rally , it has good chance to move up in coming weeks . Dont over invest incase you want to invest .
You can put 10% of your capital in this and liquidate half position after you are in 20-30% profit . It can give some quick gains later . Dont be greedy , sell in profit once you are in 50%+ profit . otherwise one fine day again it will drop heavily and you will be left crying .
Why am I now suggesting to invest in this , last time I said stay away ?
Investing or trading should be done on high probability trades . This stock went up heavily and then corrected a lot to come back to normal levels now . This is a ideal time to take calculated risks , The risk/reward of this trade would be worth taking .
It does not mean , you cant loose from here , why not !! , but its worth taking that risk , because profit potential is very good . Have a logical stop loss and once its hit , get out with loss .. first loss is the best loss . Did any one make profits or loss on Akruti ? Share it with other readers , so that everyone comes to know about it .
Read my previous post how to invest in this market
If you are watching Markets , you must have seen the movements of Akruti City . This company is a Mumbai based Company . The shares of this company is on the roll from last 10 days . In just 1 week it has zoomed from 994 on march 9th to 2145 on Mar 18th , that’s roughly a week .
Note : Please vote on the question asked on the upper – left hand side of this blog .
Also see the update on Jaiprakash Associates after todays markets action on my analysys blog , click here
So, Now the company market capitalization (13421 Cr) is second highest in Real estate sector , just next to DLF (29229 Cr) . Its suddenly 3 times more valuable than Unitech !!
see list of real estate companies with market capitalization
My God !! , whats going on !!
90% of the equity is with promotors , and a very small fraction is with retail public , you can understand that everything going on is just the “kartut” (hindi word) of minority public .
Agreed that anyone who has entered the stocks some days back or 2 days back or 1 day back has made exceptional profits , But is it a right decision to invest in this as of now for short term gain or to ride the trend . A big NO!!
For sure some insider trading is going on with company , that’s the reason why stocks has gone mad . Retail Investors must not get very excited with these kind of things , These kind of sharp moves are not sustainable , to move in a healthy way , the stock must form a base (spend some time in a range ) and then start its up move slowly and with some corrections in between .
These kind of mad up moves without any pauses and slowdown are nothing but a bomb ready to explode .
If like someone who just entered the trade 1 week back and made 100% gains , other person can also loose 60-75% in just 1 week from now onwards . If you put money in this , Its not investing now , its Gambling !!
Suggestion : please stay away , Dont forget the mantra of “Not loosing money” rather than “Trying to get fast money” in stock markets . If you are bothered about lost opportunity , I can bet there more opportunities in market every day than all the combined opportunity in the world in all other aspects of life . Wait for just 1 day and you will get thousands of opportunities again .
see detailed news on :
Note : Please vote on the question asked on the upper – left hand side of this blog .
Came across a good article. Just reproducing the work here. This post talks about the Value and Price difference of some investment .
Margin Of Safety Principle
In his book, The Intelligent Investor, Benjamin Graham describes the concept of margin of safety as being an essential part of any true investment. He goes on to say that margin of safety is an element of investing that can be demonstrated quantitatively with sound rationale and from a historical perspective.
Graham’s definition of margin of safety is essentially the gap between price and value. All else being equal, the wider the gap between the two, the greater the safety level. Graham also explains that the margin of safety is important because it can absorb mistakes in assessing the business or the fair value of the enterprise.
As Graham says – “The buyer of bargain issues places particular emphasis on the ability of the investment to withstand adverse developments.
For in most such cases he has no real enthusiasm about the company’s prospects…If these are bought on a bargain basis, even a moderate decline in the earning power need not prevent the investment from showing satisfactory results. The margin of safety will then have served its proper purpose.”
From its origin, the calculation of margin of safety was never related to the volatility of the stock price of a company. The focus of most value investors has always been based on the intrinsic worth of the company in question–a bottom-up process that should be done without regard to current market valuation (which very few analysts are willing to do).
Even with a margin of safety, an investment can still go bad. This is not a failure of the concept of margin of safety principle, as the concept only provides assurance that the odds are in the investors’ favor that they will not lose money. However, it is not a guarantee that the investors will not lose money.
There are and have been many adjustments to Benjamin Graham’s margin of safety concept in the modern era. The way that Benjamin Graham calculated margin of safety years back was very asset-based, and probably quite different from how analysts today would make the calculation.
It is the inclusion of the concept that is important in one’s assessment of an opportunity, rather than the actual mechanics and particulars of the safety calculation.
Some value investors use a variety of measures in determining a firm’s safety levels. They are as keen on asset values as on earnings and cash flow, and may even consider intangible asset values like brands, reputations and intellectual property.
They also use a variety of measures just in case one of them does not hold up–the objective is never to be caught off guard. Based on these criterion, these value investors look for several different measures, such as break-up value, favorable dividend yield, price to cash flow, and discount to future earnings as supporting casts to Graham’s margin of safety principle.
Buying companies with a margin of safety prevents owning companies with a high burden of proof to justify their stock valuations. When a stock trades at a high valuation level, the expectations are so great and often so specific that a slight disappointment or an adverse change in expectations could be catastrophic. Buying shares with ample safety means buying stocks with the lowest possible burden.
Value investors also believe that margin of safety should incorporate an investor’s appetite for risk. The disparity of safety levels among investors is based on the amount of volatility they are willing to tolerate, the mistakes they are willing to accept, and perhaps the financial pain they are willing to endure.
The margin of safety principle essentially asks the question: What is supporting the stock price at its current level? or, Why shouldn’t the stock fall significantly from today’s current price? The Graham margin of safety is heavily conscious of what can go wrong, and not what the discount is to its fair value–the safety is thus purely based on the liquidation value of the current assets.
WallStraits uses the concept of margin of safety, with a debt of gratitude to Professor Graham–but we shift the primary focus from asset valuations to discounted future earnings. Our method is less tangible today, but more valuable as a predictor of tomorrow.
Because our DCF method entails making several important predictions 10-years into the future, we require a large margin of safety–perhaps 50% or more. Luckily, in a bear market environment, such as Singapore is currently experiencing, there are several fine businesses discounted by over 50%.
Upon satisfying the 50% discount to future earnings, WallStraits moves on to evaluate dividend yields (after tax), payout ratios, cash and debt levels, brand values, sustainable competitive advantages, management capability and other fundamental aspects of each business being considered for our portfolio.
We place rather equal emphasis on quantitative and qualitative issues. This differs from Graham’s search for pure quantitative net-nets (a price equal to the firm’s current assets less all liabilities–placing current value squarely on the value of property, plant and equipment).
Graham’s most notable student, Warren Buffett, demonstrated how vital it was to consider both the quantitative asset valuations and the qualitative business assessments to find true value stocks.
Buffett favored the discounted cash flow valuation because it included both the ability of a business to generate cash flow from tangible assets, as well as the ability to create value from intangible assets–like brand strength, intelligent management, and consumer monopolies. Buffett made famous the expression–I’d rather pay a fair price for a good business than a bargain price for a fair business.
WallStraits agrees that the ultimate investment is one undervalued versus its ongoing ability to produce profits and reward shareholders.
You can use your own logic and creativity to make personal assessments of the qualitative and quantitative forms for any business you consider for your portfolio–but regardless of your methodology–don’t forget to always think from the perspective of seeking large margins of safety.
Some days back I had talked about SIP and its characteristics using some examples , you can read it here . Today we will take that forward and see other important things related to Systematic Investment Plan.
So , We have that same last example where 1,00,000 was invested over 2 years using Systematic Investment Plan and without SIP in UNITECH. Can we measure how good our investment is at any point of time . For that I developed a simple indicator called IV ratio which is very simple , Its just the ratio of Your total investment divided by its current Value at any given point .
IV ratio = Current Value / Investment
So if your investment = 10k , has current value of 8k , IV ratio = .8 , If current value is 15k , IV ratio = 1.5
I have plotted a graph of IV ratio in two cases of SIP and NON-SIP . You can clearly see in the graph that , IV ratio for Systematic Investment Plan was always more than non-SIP mode.
At first , IV ration was declining for both mode, which is fine, because of falling markets, but still For Systematic Investment Plan it was high, which means, that you get better returns. Then in last part, when markets were volatile, IV ratio for non-SIP was stable, but for SIP it went up, which means that SIP was giving better returns at this point.
Finally Systematic Investment Plan mode generated worth of around 42k (IV = .42) and Non-SIP gave around 9k ( IV = .09)
Conclusion :
IV ratio is a simple tool to measure the performance of your investment. You can also use it to compare two different Investments mode over a period of time.
Now, let us see some other things in regard to Systematic Investment Plan. I have plotted the graph for IV ratio of SIP, and the investment value itself scaled down to 1. Blue line is the actual growth of investment and RED line is the IV ratio.
Some of the things to Notice here are
1. In the start (till 17-18) Investment was going up, but IV ratio was falling, which indicates Growth in value mainly because of your Monthly inflow in SIP, that means the markets are falling and eroding your investment, but the decrease in value is less than your monthly addition which you make.
2. From 18 payment onwards, you investment and IV ratio both are falling, which means that markets are falling at very high rate and your monthly contributions are smaller than the decrease in your portfolio.
3. from 31st payment onwards, you can see that IV ratio and your investment were going up, which means volatile and sideways market or small upside correction on up side.
At last, you can see that both the value converge to same value of .42, which is your IV ratio and your actual investment value, Because at this point total investment is 1,00,000.
Conclusion
IV ratio is the measure of how well your investment is doing in a given market, If its higher than yours friend, you can feel better because your have lost less for your investments. SIP results in higher IV ratio in markets which are not going up too fast.
Which means apart from fast moving markets on upside it makes sense to invest through SIP only. It protects you from volatility, develops from discipline, and your are more satisfied mentally.
Precious metals market is on a roll these days !! GOLD and SILVER are everyone’s Darling.
GOLD
Gold has given good returns from this year start and finally broke its trading range. Its expected to give good returns in future too.
SILVER
Silver has outperformed Gold in 2008 and is expected to do so in future too. But I am hesitant with an idea of buying Silver from some local jeweler. It should be bought from some recognized Bank only as per my view.
I don’t think that its a good idea to buy gold or silver in physical, People who want to do it to invest for marriage and all is OK, but still its only for Investment and to gain from the price appreciation in these metals, the best idea would be to go for ETF’s. They are easy, secure, more cost-efficient and tax efficient.
Some Notes
Silver ETF’s are still to come, currently we only have GOLD ETF’s, so given a choice of investments in precious metals, I would prefer GOLD ETF to Physical Silver even though Silver is expected to outperform GOLD in coming future.
Guys, When it comes to ETF’s, Benchmark mutual funds are the leaders, that company mainly focuses on ETF’s and manage them in a better way. So there ETF’s are recommended. (that does not mean, others are not good or can outperform them).
Today we will see some characteristics of SIP (Systematic investment plans) . this is first part of this article, we will have part 2 of this as well where we will discuss other important things about SIP.
Assumption :
We are assuming that investments were started from year 2007, It has both a part of Bull markets and Bear market, So i chose that time frame.
Let us first see an example where investment was made in NIFTY ETF’s. There are two friends Ajay and Robert. Both of them want to invest Rs.50,000 in markets with 2 yrs of time frame in mind. Both of them do not have that much cash in the start.
Robert believes that Markets are in Bull run and hence it has good chances of Capital appreciation. He does not want to miss this chance and decides to borrow money on loan from friends and family or personal loan and invest it.
What are his Characteristics at this point?
Its just like any normal, average investor, where investment decisions are based on emotions, without foresight and too narrow. They do not understand the cycles of market and they do not understand that markets moves up and down in every time frame.
On the other hand Ajay is an informed investor and does understand cycles of Market, He knows that markets run from up to down and the bull market which started in 2003-04 has already run a long way and can turn any time now. He understands that its a better idea at this point to not get into debt to invest in stock markets. He controls his Greed and will invest only what he has. Also he decided to invest 50,000 in 2 yrs. but a small amount month by money systematically.
Now lets see the capital appreciation which happened for both of them.
Summary :
Robert invest full 50k in the start around Jan 2007 with 2 yrs of time frame. Ajay also decides to invest the same amount but he breaks it in smaller chunks and wants to do it using SIP on his own.
Monthly Investment Growth in NIFTY ETF from Jan 07 – Jan 09 for Rs.50000
Lets look at what happened ?
Markets continue to rise and Robert sees his investments grow from 50k to 75k within a year. Ajay also sees his money grow to 35k, on an investment of 25k. If you see at this point, Robert has made very great returns on his investment compared to Ajay.
But after that see what happened. Markets started going down and investment of Robert kept coming down with markets and at the end it was at 35k. With Ajay it was a different case. His investments went up and down both sides and finally ended at same point at 35k.
What is Drawdown ?
Drawdown is the drop in the value of investments from its High. If 10k investment go up to 15k and then fall back to 12k. The drawdown is High(15k) – Lowest point after that (12k) = 3k, OR 20% drawdown.
Things to notice
Roberts Portfolio :
You can see the behavior of Robert’s investments. It was too volatile. You can see it going up and down and here and there. I am not saying that it didn’t move and made profits, It made good profits at one point of time, but Robert must be smart enough and courageous to take his profits even if markets are going up and there are chances of making more.
People who want “more” and “more”, eventually not even get “what they had”. Have a target and BANG !! Once it moves at that point, be unemotional and take the profits. Markets is a place where money is flesh and everyone is Vultures. If you leave it open for a long time, It will be taken by some one of other.
The other thing is Psychological issue.
Because investment moved so high, and then so low, Robert must be feeling bad and too conscious. He must be regretting a lot on not taking the profits. This has bad effects on investment decisions.
Roberts Drawdown :
His 50k goes up to 75k (high) and then it moves down to 38k. Draw down of 41k which is 49.3%, this can have devastating affect mentally, as one sees his investment grow to 75k and then drop to 38k and finally end at same point 38k after some volatile movement up and down.
Ajay Portfolio :
You can see the consistency of Ajay portfolio. It moved up and up all year whee markets where rising. and once markets started going down and was volatile, his portfolio was also volatile, but not very high, Its volatility was very low and finally it was almost at the same point as in the start of the year.
Infact you can see that his portfolio was rising still when Roberts was declining.
Ajay’s Drawdown :
This highest Drawdown seen by Ajay portfolio was from high of 39k (20th payment) to low of 35k, which is just 10.25% drawdown. You can get a feel, How difficult or easy it must be for Ajay to see this.
The point here is not Who made more money or Lost more. Infact you can see that they both were in loss of 12k on an investment of Rs.50k, But the journey was not same for both of them.
While Robert worked too hard and saw wild swings. Ajay made systematic investment and continuously saw his money go up only with minor drawdowns, which was easy to handle psychologically. This is true for any investments weather it is Shares, Mutual funds or ULIPS investments.
Now’s let see and example for the same period, weather these two same investors have made investment in UNITECH.
Why UNITECH?
I have taken this example because it shows what I want to show, the power of systematic investment. Here both of them are investing Rs.1,00,000 (1 lac) in Shares of Unitech. Roberts invests 1 lac in the start of Jan 2007, where as Ajay makes weekly investment of a fixed amount in such a way that it adds up to Rs.1,00,000 at the end of 2 yrs.
You can see the behaviour of portfolio for both of them.
Robert
Investment : Rs.1,00,000
Mode : One time investment
Final Value : Rs 9,000
Time frame : 2 yrs
Drawdown : 91% (Rs 1 lac , from high of 1.1 lacs to low of 10k)
Ajay
investment : Rs.1,00,000
Mode : Weekly investment (weekly SIP by self)
Final Value : Rs.42,000
Time frame : 2 yrs
Drawdown : 70% (28k, from high of 40k to low of 12k)
Weekly Investment Growth in UNITECH from Mar 08 – Feb 09 for Rs.1,00,000
Conclusion :
Now the main question? What is good One time investment or SIP? The answer is both are good inp different conditions, and it depends on your Risk appetite too.
When you don’t have clear indication of trend and are not sure where markets can go, the best idea is to invest through SIP. That will save you from volatile markets and small down moves too.
SIP will definitely miss out on returns in BULL markets. But it will work best in Volatile markets and falling markets. SIP is not a way to avoid losses, its a way of investing, where you feel more disciplined and average your cost of investment of long term.
Watch this video to know the magic of SIP:
The examples I have taken were biased because of the idea I wanted to communicate.
Anyone who did one time investment in 2004 would have made more money than someone with SIP, till 2007 at least because of the rising markets.
You must have seen in first example that Ajay’s portfolio was at 35k in the start of 35k, and even at the end of 2009, it was at same point even though markets fell from 20,000 levels to 10k levels and was too volatile, there comes the power if SIP (the money you pump in fights the falls in markets at least).
Part 2 : This is first part of this article, we will have part 2 of this as well where we will discuss other issues and things regarding the second example we took (UNITECH)
Request from Readers
If you are on twitter, try to post this article there, so that your friends can read it. I also have a small complain from my readers. please recommend this blog to your friends and any one you know and needs it. I feel this blog needs more readership and deserves too. You can help me promote this blog to others, please pass it on to others. Thanks
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I am finally back from vacation, I feel bad for not writing anything for these 11 days .. I have written a post on GOLD Breakout here , People interested in investing in GOLD may be interested. Let me talk about IRR and ULIPS today.
When we see talk about ULIPS, people generally see its returns over some years , where as its not the true indicator for its actual returns , What we need to see is called IRR.
What are ULIPS ? , read here
What is IRR ?
Actually IRR is not only related to ULIPS, its a general concept. IRR is Internal rate of Return, It means returns after adjusting all the costs and expenses. IRR alone is not a single thing we should look at, Its calculated by assuming fixed rate of return like 6 or 10%. The other things to look are its actual performance too.
What are good ULIPS in markets currently ?
Some weeks back there are was a survey and study by outlook money on best Ulips, Birla Sun Life’s ClassicLife Premier and Kotak Life’s, Long Life Wealth Plus were some top funds compared on the basis of IRR. this article talks about the best ULIPS in detail, click on this to read more.
Full article related to ULIPS can be read here
Understand , Choosing a good ULIP is just 5-10% , the main part is how your manage it . how to take care of the advantages provided by ULIP, If you just want to buy a ULIP and sleep for 10 yrs , ULIPS is not for you then . you must buy Mutual funds Instead .
Manging a ULIP is the main part , If you manage a bad ULIP very well , you can earn good returns, but you can loose money by buying Best Ulip in markets and mismanaging it .
How to manage a ULIP ?
Managing a ULIP over a long term is very simple but not easy . You have to do some simple things . Always use switch facility when you anticipate the opportunity .
When you see markets are very high and there is lot of euphoria in market , Decrease your Equity allocation and shift it to Debt . And when you see dull ness in market and everybody is too afraid in markets its the time to shift your money in Equity .
Watch this video to learn how to manage ULIPS:
How to make sure that this is done easily ?
You should find out your Equity : Debt allocation ratio which suits you , which is comfortable for your risk appetite . Once you choose it . Make sure you maintain it once it goes out of sync . So suppose you decide that your Equity:Debt ratio will always be 75:25 . and suppose after an year , you see that it has changed to 65:35 . You should shift some of your Debt part to Equity and bring it back to 75:25 .
You can read how Equity Debt rebalancing helps in long term
This way you will make sure that if Equity has gone up (because if good market performance) , you are shifting some money back to Debt (because now chances to correction is high) and vice versa .
The main advantage of ULIPS is the you can shift between Equity and Debt without any tax liabilities , If you buy Mutual funds and do it , you will pay tax every time you buy and sell it in short time frame (1 yrs) . So until you utilize Switch facility well enough in ULIPS , you are not taking best advantage from your ULIPS .
So as a general rule :
– Increase your Debt allocation once markets are too high and every body is rushing to buy shares in stock markets .
– Increase your Equity allocation after markets are down a lot and there is lot of fear among investors (this is a good time to buy cheap stocks).
– Increase your Debt if you are too confused about what will happen .
Final Note :
If you cant invest for more than 10 yrs and cant look after switch facility and cant monitor markets at broad level , You should stay away from ULIPS, the best thing for you would be to invest in PPF each year and invest in Equity Diversified Mutual funds through SIP every month and review it at least once a year .
Please dont buy ULIPS for just tax savings , dont get out of it in 3-5 yrs . there is 3 yrs locking , but even if you get out in 4th or 5th year , there are heavy penalties you have to pay to get out , which your agent never tells you , Only after 5th year there are free exits .
ULIPS are not bad products , they are only bad if you dont manage it well and buy them for wrong reasons .
You are 25, and want to retire at 60, after 35 yrs. You earn anything more than 10k+, and can save more than 2k per month for investing if you wish. You might be earning 30k or 60k or whatever, but I am considering an average urban Indian who is earning 10k or 12k or anything like that and can save more than 2k per month.
Now, What would you like to do?
Choice 1 : Start now and invest total of 8.4 Lacs (8,40,000) distributed in a span of 35 yrs (till your retirement).
Choice 2 : Or after 15 yrs, when your salary is increased and you have good money, then Invest 72 lacs (72,00,000), in a span of 20 yrs (start when you are age 40).
In Choice 1 you will have to invest 2,000 per month for 35 yrs, so you invest total of 2000 * 12 * 35 = 8,40,000 (8.4 lacs)
In Choice 2 : You invest 30,000 per month for 20 yrs, so you invest total of 30000 * 12 * 20 = 72,00,000 (72 Lacs).
In choice 1 you pay less than 12% of what you pay in choice 2. I am sure that you must have got a hint by now that which choice will lead you to generate more money, But it has to have some assumptions.
Choice 1 : You are investing for 35 yrs. What is the return we should expect in this case, In last 29 yrs of history, Indian Equities have returned 17.5%, So we will expect same return of 17.5%, but I am expecting it to be much more.
Choice 2 : In this case you are investing for 20 yrs, we can easily expect close to 15% returns in this case.
Lets reveal the secret and see the numbers now.
Choice 1 : You pay 2000 per month for 35 yrs @17.5% CAGR, total amount at the end : 5.9 Crores
Choice 2 : You pay 30000 per month for 20 yrs @15% CAGR, total amount at the end 4.5 Crores
The graph below shows how the money increases with each choice (Early start and Late Start, I spent 2 hrs figuring out how to plot this graph using gnuplot (linux command for plotting graphs … man, it took me so much time to just do this)
CLICK ON THE GRAPH TO ENLARGE …
Now, What is the Learning?
This article is for people who think they don’t earn much money to invest, There are many who earn 7k, 10k or 15k per month and there are many who earn 30k, 40k, 50k per month. People who earn less often think what can 1k per month do, they fail to see what will happen in long term, they do not appreciate power of compounding.
Wealth is generated by people who invest smartly and with discipline, not who just earn lots of money.
Where to invest?
If you are a regular reader of this blog, then you know the answer, if you don’t, then let me tell you, Its Diversified Equity Mutual funds, take a SIP and invest small sum of money every month, The more you can contribute in the start, the lesser you need to invest in later years of your life.
For example : If you can invest RS.4000 per month (Instead of Rs.2,000) in the starting years of your career like 10 yrs, then you can stop investing for rest of 25 yrs and still generate more wealth (around 7 crore), considering same interest of return.
Is it practical to put 4k for starting 10 years and then leave it for 25 yrs, May be NOT !! .. People tend to take the money out when they require it and never give compounding any chance to show its strength. But if people leave it, they will see how amazing and powerful it is.
Why do you believe me and whatever I write here?
Ans : You never believe me or for that matter any one when it comes to investing and your money, you just choose to learn from me and check the authenticity of what I say, you can read what I tell you and what I write, Ask your self if there is any logic behind anything or not.
When I say expect 17.5% CAGR return in 35 yrs time duration, Its because equity outperforms every other asset class in long, and it has happened over centuries.
When I say that if you invest X amount every month @r% return for t years, you will get A amount at the end, you should go and check using your own calculations to see if the figures are right or not.
One of my readers was confused with the question “Which mutual fund should he invest in through SIP ? ”
He started an SIP of 1000 in Reliance Regular Saving mutual fund , suggested by an agent . How was his investment? It is a mistake or a good decision? This is a common problem with investors .
Let me today give you a simple way to think and a methodology to choose mutual funds for your investment depending upon your requirement . In this article we will only talk about investment in Equity Diversified mutual funds for long term (5+ years) .
Question : What does the return from mutual funds tells us? and how do you interpret it?
Ans : Understand that the returns of a mutual fund shows you how did it perform over than period, How did it manage his funds and took there investment decisions in good times and bad times. It means that you should see its performance in good times and bad times.
A simple analogy can be how do you want your wife/husband to be like, One who is really great in good times and excellent person to be with in Good Times, when everything in life goes great.
Or you want a person who is there with you in good and bad times, supports you in good and bad times. When times are good, everyone behaves good and performs well, There is a saying “Don’t judge people by there Sunday appearances”. Look at a bigger Picture.
Looks how a mutual fund performed in good times, in bad times, did it invest according to there plan, Is there management excellent. It does not matter if they were No 1 or No 2 this year or that year.
But if they were just good in every year, and perform well above there benchmark, and keep performing over time, Its bound to be become an excellent long term consistent performer.
Question : What about the last 3 yrs returns of a mutual funds?
Answer: It will give you a good indication, but not an overall picture. If you see 3 yrs return, you have to understand that out of those 3 yrs, 1st and 2nd years were strong bull markets, where any dog and cat has also performed very good if not excellent. and in last year they gave very bad returns.
So ultimately they will be in positive returns in 3 yrs. You should also look at there 5 yrs return and 3 yrs returns. Both in synergy with each other.
When you see Reliance Regular Savings Fund you can see that its 3 yrs returns are 7.82% which is very good compared to other funds (this fund is Rank 2/135 in the 3 yrs category ), but when you see its 1 yrs returns, you can see actual face, the returns are -51%, if you see the rank for 1 yr, its 127/210.
you can see that its allocation to mid cap and small cap companies is very high, It can give you good returns but also it has very high risk. Please understand that i am trying to say that this fund is good or Bad. No !! I am trying to tell you what to see, how to interpret.
What factors should you keep in mind before choosing a Mutual Fund?
People get excited by seeing returns of years 2003-2007, that was in range of 35-50%. Which is not possible in long term. Now from this point on (2009), the returns in long term will be in range of 12-15% (max 20%). Its difficult to see this kind of bull run in another medium term (5-7 yrs).
Now you should just expect normal 12-15% kind of returns in long term.
So, whom should you rely on, On mutual funds who launched them selves near 2001-2002 and gave great returns from there onwards because they them selves don’t know how they gave them.
Or shall you choose those mutual funds who have seen all types of markets in India and continuously gave much better than average returns from long term, They performed in good market, bad market, quiet market and roaring market.
So the things you should look at mutual funds are :
1. Long term performance, It should figure out in top 10-15 at least over 5 yrs returns.
2. They should have a track record of consistently outperforming its Bench mark (this shows that they did better than what they were based on and tracking ).
3. See that its management is good, Don’t just buy Any Idiot MF just because it returns 45% last year, but you have never heard of its parent name. Some long term Great AMC’s are DSP, SBI, Sundaram, HDFC, KOTAK, PRINCIPAL, HSBC, RELIANCE (In order of my liking), Make sure you dont follow this, it is just to give an idea. DSP is one of the best and old AMC in India, dont look only for Indian names.
4. Once you shortlist some mutual funds, then look for its portfolio allocation, see how it has put its money for large, Medium and small cap companies. If its concentration is high on Mid and small cap funds, it means that it has more than average risk, but potential for very great returns also, choose it if it fits your risk appetite.
For people who just want to take a short route and want to choose some mutual fund based fast, but with not great accuracy, you can just see the list of mutual funds appearing on 5 yrs returns list or since inception returns (Should be greater than 3-4 yrs at least) and choose any one of them.
This will make sure that you have not made a bad choice, if not great.
Some links :
To see the rankings of mutual funds and compare them on different parameters
2. In the right side, you can see “Compare Fund”, choose “Open Ended” in the first box and for the second part choose “Equity Diversified” or “Tax Planning” or any other thing which you want to compare. and now click on Go.
3. You can now see a list with different parameters like Snapshot, Performance, Portfolio etc etc.
4. Click on Performance and then you can see different parameters like 1 month, 6 months, 1 yr, 3 yr, 5 yrs and ranks. You can sort them by clicking on 5 yrs or 5 yrs ranking to see the ranking. Example. When you click on 5 yrs returns on the top, you can see the ranking either in ascending or descending form (click once again to see in different order).
5. In the same way you can choose different parameter also.
If this article helps you in anyways, please comment to tell if you liked it and learned anything important from this. I would be glad to hear from you. If it helped u anyways, this article would be considered as success.
I write this article on Saturday, 3:00 Pm after a chat with one of my readers. I am now getting ready for a Trek next morning. Looks like I have written for next 2-3 days of my quota, huff … Feeling tired now. (kidding).
Disclaimer : I think Reliance Regular Savings FIf this helps you in anyway und is a good fund. But there may be much better choices for long term. I hold no mutual funds other than some tax saving funds.
Lets play a game, the name of the game is “Game of Trading”. I am stock market and you are investor. You have got 2 chances of investing you money, One time I will give you 200% return and other time I will give you -80%, or in reverse order, so it can either be
200%, -80%
OR
-80%, 200%
You have to decide in advance that how much percentage of your total capital you will invest each time (invest capital) and how much you will keep safe money (safe capital), you have to decide for both the times in the start only.
Lets analyse different cases.
Case A : You choose invest capital as 100% first time and 20% for next chance
Case A.1 : Return was -80% first time and 200% next time.
Case A.2 : Return was 200% first time and -80% next time .
Case B : You choose invest capital as 20% first time and 100% for next chance
Case B.1 : Return was -80% first time and 200% next time.
Case B.2 : Return was 200% first time and -80% next time.
You can see that at last A.1 = B.2 and A.2 = B.1 , so it means that order of your invest capital ratio does not affect your result , it both the cases it can either become 28 or 252 (depending on the return order) …
What should you do?
100% and 20% choice will always loose in long run, if you play this game over and over again for long run, Understand that in this game, you can make it “high risk high return” Game or “Extremely no risk, low return game”, And your choice of your invest percentage will decide which game is it.
Characteristic of “High return High risk game” : Its possible to make great money in short term, but in long run you will loose.
Characteristic of “Low risk, low return game” : You will Not make great return in short term, but with compounding effect, you are bound to be a winner in long run.
Let see if we can choose a ratio (invest percentage) can give us some profit irrespective of the return order.
Lets choose 25% invest capital :
Case A.1 : Return was -80% first time and 200% next time.
Case A.2 : Return was 200% first time and -80% next time.
You can see that in any case your 100 becomes 120, which is 20% return.
What if you choose 80% invest capital : In that case at last you will have 93.6 (calculate yourself). So what should be the best percentage capital to deploy each time in this game.
I tried to make an Equation, with all variables
p = profit times (2 or 200/100)
l = loss times ( -.8 or -80%/100 )
C = Capital at the start
T = Trade factor (.25 means, 25% of the capital will be invested at any time)
We want to find optimum T, given any p and l (assuming that the trade will be done 2 times)
So, If you calculate the total capital after the 2 trades (do the math), you will get
Total capital = C (1 + pT) * (1 + lT)
So our original capital is getting multiplied by (1+pT)*(1+lT), and we have to maximize this number.
lets say I = (1+pT) * (1+lT)
I = 1 + plT^2 + pT + lT
If we do some differentiation here with respect to T (people who don’t know differentiation, just leave it), and put dI/dT = 0
2plT + p + l = 0
T = – (p + l) / 2pl
So the best valeuof T is -(p+l)/2pl ..
For our earlier example , p = 2 , l = -.8
we get – (2 – .8)/ (2 * 2 * -.8) = .375
Which means, 37.5% of capital will be invested everytime, and with that our capital will become 122.5 and that is the max you can make without risk.
What if return = 200% and -90% , in that case p = 2 , l = -.9 , so T = 2 – .9 / 2 * 2 * .9 = 1.1/3.6 = 11/36, means investing capital will be 30.555% always and that will give us max return.
What is the point i am trying to make?
In any given situation of making money, there may be a big risk of loosing it, we should always use these kind of tools and always be safe. Don’t try to be very bold in stock markets.
People who make killing in the start often get killed somewhere on the way and people who make respectable and sufficient money with satisfaction become winner over long term.
Summary
When you do Investment or do trading, you should never put all your capital into it, one bad trade or investment and you will be ruined forever, better to risk only that much capital which can not take out of of the game, but just hurts a bit.
Take small and risk-less profits if possible, Investing and trading is all game of probabilities. Use math’s and logic to take smart decisions like discussed in this article.
“There are old investors and there are bold investors, but not both”.
