Tag: Mutual Fund

List of Best Equity Diversified Mutual Funds for 2009

Posted on by Jagoinvestor

Which is the best Equity Diversified Mutual Fund ? . I am going to list down some of the best Mutual funds which I have figured out from Valueresearchonline.com . I am listing down 6 Equity Diversified Mutual Funds and 3 Tax-saving Mutual funds . I will highlight the main points of Mutual funds like its History , its performance and its Portfolio Allocation.

Best Equity Diversified Funds

These funds are suitable for people who are looking for long term investments and are ready to take the risk of mutual funds .

DSPBR Equity-G

  • 12 year old fund , Return Since Launch is at an excellent : 24.6%
  • Strong 5 yrs return at 33.4% beating its benchmark by impressive 8.4%
  • 50% Portfolio in Small and Mid cap Companies (Risky Fund, with High Potential)

DSPBR Top 100 Eqt Reg-G

  • 6.5 year old fund , Return Since Launch is mind boggling : 36.8%
  • Strong 5 yrs return at 30.6% beating its benchmark by 6% .
  • 80% Portfolio in Large and Giant Companies
  • Looks less risky Fund compared to DSPBR Equity-G

HDFC Top 200

  • 13 year old fund , Return Since Launch is excellent : 25.3%
  • Strong 5 yrs return at 31.8% beating its benchmark by 7% .
  • 65% Portfolio in Large and Giant Companies and 30% in Mid caps . Well Diversified Fund
  • One of the best funds available with long term Track record . Must Have

Magnum Contra

  • 10 year old fund , Return Since Launch is excellent : 27.6%
  • Strong 5 yrs return at 35.86% beating its benchmark by astonishing 11% .
  • 55% Portfolio in Large and Giant Companies and 35% in Mid caps and Small cap .

Reliance Regular Savings Equity

  • 4 year old fund , Return Since Launch is 21% even with the bloody market Crash.
  • Strong 3 yrs return at 21.5% beating its benchmark by 12.5% speaks for its potential in Future .
  • 45% Portfolio in Mid caps and Small cap makes it a Risky and Aggressive Fund .
  • With minimum investment required of Rs 500 , It can find a small corner in one’s Portfolio
  • Only for Risky Investors , Its a new Fund and hence does not have Strong and Long track record like its seniors .

Sundaram BNP Paribas S.M.I.L.E. Reg

  • 4.5 year old fund , Return Since Launch is 22.5% even with the bad markets.
  • Good 3 yrs return at 16.5% beating its benchmark by 7% .
  • With close of 75% Portfolio in Midcaps and Small cap makes its Fund with heart of real Risk takers . Don’t get into this if you don’t like messy markets . It can take your heart our of your body and play hide and seek with it .

You should see this Video to understand how to choose a good mutual fund on your own

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Best ELSS Mutual funds (Tax Saving Mutual Funds)

These are tax saving Funds , used for saving the tax under Sec 80C upto Rs 1 lac . Suitable for investors who want to invest for long term and also require tax saving .

Sundaram BNP Paribas Taxsaver

  • One of the oldest Tax saving Funds with 10 yrs of Strong Track Record
  • Return Since Launch is 22.3% .Strong 33% return in last 5 yrs beating its benchmark by impressive 6.5% .
  • Very good performance in last 2-3 years in falling markets with 17.3% return in last 3 yrs which is almost double of its benchmark returns .
  • Well diversified amoung Giant , Large and Midcap companies makes its a Good fund .
  • A little aggressive fund with 55% portfolio in just 3 sectors of Energy , Finance and Construction , betting on India’s future ..
  • A very flexible fund know for its adaptability with any situation makes it suitable for every kind of investor.

Canara Robeco Equity Tax Saver

  • One of the oldest Tax saving Funds with 16 yrs of Good Track Record
  • Return Since Launch is 15% which is decent enough in such a long term .
  • Very good performance in last 5 years with 30.5% return beating its benchmark by impressive 7% .
  • Mind Boggling 60% return in till date in current year (2009) shows that some great potential is building in this fund .
  • Well diversified amount Giant , Large and Midcap companies makes its a Good fund .
  • High Concentrating in midcaps (around 50%) makes it a risky Fund .
  • Minimum Investment of Rs 500 makes it an attractive choice for Risky Small Investors .

HDFC Tax Saver-G

  • This one is the quite genius who does not shout much about its achievement . Not much appreciated among its peers but has one of the best long term track record which has ability to put all the tax saving funds in shame .
  • One of the oldest Tax saving Funds with 13.5 yrs of excellent track record.
  • Return Since Launch is 34% which is an unmatched achievement in itself .
  • Close to 29.5% returns in last 5 yrs beating its benchmark by 6% .
  • It is now becoming more aggressive by increasing its allocation in Midcap funds .

Note : This is not an exhaustive list of Good funds . There are many good funds which are not here . Its just a Compilation of funds which I personally feel are good ones and have ability to perform in Future . All the funds have high Equity Allocation and can be very risky . You should invest in these only after understanding your Asset Allocation and Risk-appetite to handle the ups and downs of its performance .

I will come up with the compilation of some good Sectoral Funds , Debt Funds and Balanced Funds later . Watch for it 🙂

Comments Please and let me know which fund is your favorite and why . If I had to choose 1 fund , it would be Sundaram Tax Saver because I did a detailed Analysis of it myself and It went ahead of SBI magnum which had number 1 position from long time .

Source : ValueResearchOnline

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New Mutual Funds Charges from ICICI

Posted on by Jagoinvestor

ICICIDirect has revised its brokerage charges for Mutual funds Investments . Some time back SEBI abolished mutual funds entry load , In this post we will see the new charges by ICICIDirect and analyse if its good or bad . The new revised charges look good to me . In case you don’t know what is SIP , Read here

So ICICI Direct came up with this Rule . If your Mutual Funds portfolio with them is

Your Mutual Funds Portfolio Above 8 Lacs with ICICI


So , it means you can just invest through ICICI Direct website and your brokerage would be Nil and you wont pay any thing in charges .

Your Mutual Funds Portfolio is Below 8 Lacs with ICICI


You will have to pay lower of Rs 30 or 1.5% of the amount each time if you go for SIP . On a lump sum investment , you will pay Rs 100 .

Is it Good or Bad ?

If your SIP payment is High

This revised charge structure will be very good for you if you are making Higher SIP payments like 10,000 . In that case your charges would be Rs 30 each time , which is 0.3% , which is 87% cheaper than earlier cost (2.25% entry load) . Even with 5,000 SIP , your charges would be .6% , which is much better than what you were paying earliar and this all with the convenience of doing everything online yourself .

Read why SIP is best for salaried class people

If your SIP payment is Small

If your SIP payments are less than 1,500 , then your charges would be 1.5% , which is near 2.25% , what you earlier paid, you are still benefiting , but not to great extent . Now its you who have to decide

  • if you would like to go with direct Mutual funds investing yourself (without any charge at all)
  • You can find some other agent who charges less than 1.5%
  • You are ok with 1.5% charges and comfort is more important to you .

Suggestion to people who have lot of Mutual funds in your portfolio

In case you have too much mutual funds in your portfolio and your SIP payment in each of them is small , the better thing would be to prune out most of them and consolidate your mutual fund portfolio to maximum 5 funds and better to more payment in each , for example if you have 15 mutual funds of Rs 1,000 each , change it to 4 mutual funds with 4k payment to each or Something like that . It will help in management of funds also and also help you reduce the charges .

There may be some other agent or web portal who are not charging at all for mutual fund investments through them . For people who are yet to open a Demat account and also looking for Mutual fund investments , Opening a ICICI Direct Demat account may be worth looking into .

What is most Important

Don’t try to put too much thinking in this , less charges are good , but its not the main thing , you must concentrate on your Asset Allocation and Portfolio Rebalancing and choosing a good mutual fund for you . So if you getting a good advice , its worth to pay good fees for that , don’t try to save that small amount just for saving it .

Please comment what do you think about this ? Do you know of some other alternative route through which the commission will be better than this .

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SEBI ends Entry Load on Mutual funds Schemes

Posted on by Jagoinvestor

Cheers !! .. SEBI now says :

“Investors will not have to pay an entry load for investing in mutual fund schemes anymore. They will instead pay a commission to their distributor or advisor directly and the quantum of the upfront commission would be mutually agreed upon.”

Entry load on mutual funds

More Competition and hence little cheaper for Investors

Now agents will not be getting commissions from Mutual Funds companies which means that now there is direct competition among Agents. The agents can only ask for more if he really gives good service to buyers else they have to settle with a low commission which will be decided by customers.

This means now we can bargain with the agent on commission percentage and if he is not ready with what we offer him/her. We can look for someone else who is better and fits us.

Higher Quality of Service and more transparency in Market

Now agents will have to deliver much better quality of service and be more transparent with investors as their bread and butter is directly linked with Investors and not with the Mutual Fund Companies.

Lots of agents will now move to sell ULIPS rather than Mutual Funds

This move will also force lots of mutual funds agents to shift their focus on ULIPS and similar products which have commission linked with premium paid by customers rather than fee based model like we now have in case of mutual funds. This means more miss-selling in ULIPS is on the cards.

See the following New Video To understand
Update: thanks to income.portfolio for this.

AMC’s are allowed to use 1% of redemption in mutual funds for commission to agents and all the marketing costs. Its the money from exit loads which has to be utilized in commissions and other marketing costs. Most of the mutual funds have less than 0.5% of 1% of exit loads at this point and with this rule of SEBI, it can not go above 1% in future. Also it can be “up to 1%”. So this 1% will be used for every type of cost incurred by mutual funds.

Now most of the funds will have exit loads only if investor gets out in short term like 6 months or 1 yrs. Hopefully it will not be after 1 yr. So its a concern for those who are short term investors. Its not a matter of concern for long term investors as far as I think.

Also, now there is no need for PAN Card for investing in mutual funds up to Rs 50,000 through SIP as per SEBI new rules.

I am out for a 2 day weekend Trek to Kumaraparvata. So no article till Monday morning. I will post the 2nd article of “How a newcomer should start in Stock Markets?” Read Part 1 Here .

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Why you should be careful while investing in NFO?

Posted on by Jagoinvestor

Here comes a new NFO!!!

In this post we will discuss why one should really be cautious about NFOs and why in general its better not to invest in any NFO. Have you heard about NFOs and IPOs hitting the markets while markets are doing bad? Why is it so? this is a question we must answer to.

NFO

The reason why most of the NFOs and IPOs hit the markets when markets are doing extremely good is to exploit the emotional buying of investors. Its a common thing that investors tend to get in rising markets then falling markets.

So when markets are flying high and all kinds of NFOs with fancy names (some good funds and some junk funds) will hit the market claiming how different they are and how they  are ought to be a huge success.

If you are a new reader , you may like to read some terms and terminologies

Understanding NFO’s

No Proven Track Record:

Every NFO will come with its own idea and logic, but investing is never easy and you can see true colors only after few years. They can be success or failure!

So why to go for something which can either fail or succeed, instead why not go for some existing fund which already has proven its mettle, which has given superb returns over long term and has excellent management. These funds have high probability to continue their performance.

Its like: what would you prefer? Take risk of marrying someone you don’t know or someone who is already a good friend and you know him/her over years?

Cheap NAV at Rs 10:

Most NFO offer comes with NAV of Rs 10 and the biggest myth of investors is that its a cheap fund and hence better than a fund with NAV of 20 or 100. NAV growth is nothing but growth of investments and it does not matter what NAV rate is! Rs 10 NAV mutual funds and Rs 100 NAV mutual fund will grow with same rate if their investment quality is the same. There is no reason to invest in a fund that has low NAV.

Myth of High Dividend from Low NAV Fund:

Majority of our “Educated” Agents will tell you that buying low NAV fund will help you in getting more Dividend (if you choose Dividend option) because Dividend is declared on number of Units held. So you will get more units of mutual funds if you invest in low NAV funds!

Whatever he says is true, but he himself does not know that it’s the investor’s money coming back to him and NAV value will again go down by that much value. So in real money terms, there is no benefit of dividend option. See difference between growth and Dividend options

Agents will market it very well and try to push the NFO’s for Sale:

Everyone wants to make money! What other product can be better for a mutual funds agent than an NFO!!! Agents get High commission on selling NFOs and hence they will do anything to sell it. They will spend money aggressively for Marketing as its taken back from Investors eventually and not the AMC. Caution, Be-aware!

Does that mean all NFO’s are Bad?

No! Every existing mutual funds was NFO once upon a time. You should go through the NFO Offer prospectus to find out whether the offer seems interesting and logical enough for you to invest in it. Only then you can go for it. But just understand that only a handful of all NFO’s become good funds.

So out of 1000 mutual funds only a few like 20-30 will be extremely outstanding funds. So the decision is yours! Do you want to take the chance? Or you want to wait and let it show its true colors before you get into it.

Which is the new hot NFO in the Market?

Reliance Infrastructure Fund is the new name in the market these days. All the things which I talked above applied to this too. Before Investing in it read about it in acute detail. I will provide my short view on this.

Reliance Infrastructure Fund is a Sectoral Fund (Infrastructure). This sector looks attractive over next few years. The picture would be more clear after the Budget is out because that’s when we exactly know what is Govt plan in this particular sector.

If its a bad news then the stocks in these sector will take a hit and suddenly it can become a reason for suicide for its investors. Why not wait till the budget and then 😉

We also have some good Infrastructure funds in the market with proven record like UTI Infrastructure Fund and TATA Infrastructure Fund. It depends on you now what you want to do? The Fund will also put money in derivatives segment, which can again make the fund more risky and rewarding. Read more about Reliance Infrastructure Fund NFO details.

Conclusion: Investing in NFOs can be like shooting in dark for retail investors! A better idea for them is to invest in something which has more probability of performing well. NFOs can be extremely successful because of their unique idea or investing style but its too tough to choose them successfully. Better to avoid them!

Here are my 2 day trek pics , Have a Look. I am putting the best Pic taken by me 🙂

Before anyone asks, I must tell that its taken by a normal point and shoot camera 🙂 Its just a result of Interest and Willingness to take some good pic + Macro Mode 🙂

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Short Review of few Mutual Funds

Posted on by Jagoinvestor

I did a short and crisp review of some mutual funds for a friend . thought of sharing this here.

Franklin India Prima Fund – Dividend

151/208 138/157 61/75 are the ranks for 1 ,3 and 5 year . Not a great one to cheer about .
Risk Grade: Above Average
Return: Grade Average

Tata Infrastructure Fund-G

Not a very old fund but its a good one. Infrastructure space can be a big hit considering 4-5 yrs time frame and with the blessings of UPA. Better diversify money in this space along with other infrastructure Mutual Funds.

With 25% CAGR returns since launch , its looks good.

Franklin India Flexi Cap Fund – Dividend

Numbers look good but there are better funds available.

Birlasunlife Frontline Equity Fund-Growth

Extremely good fund to have in portfolio. It has shown strong performance in all the time frame of 1 ,3 ,5 yrs and 30% CAGR return since launch. Better to stop Franklin India Flexi Cap Fund and redirect the money to this one.

HDFC Equity Fund – Growth

Again a good fund to have in portfolio.

What would I do If I were at your place.

– Stop Franklin India Prima Fund
– Stop Franklin India Flexi Cap Fund – Dividend (5k)
– DSPBR Equity or DSP Black Rock top 100 or HDFC Top 200
– Increase your Exposure in Birla Sunlife Frontline Equity Fund
– Share your 10k in UTI Infrastructure and Tata Infrastructure

Do you know difference between Divident and Growth options in mutual funds ?

General Recommendation

  • If the investment is for long term wealth creation dont go for Divident option
  • Monitor and review your mutual fund once every 6 months
  • Not sure if you are allocating money in mutual funds after understanding your Risk-appetite or not . Check that out, No Debt side ?
  • Do not have more than 5-6 mutual funds
  • Look at other sectoral mutual funds on banking and financial sector with long term view

look at a video explaining how to choose a mutual fund

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Disclaimer : Information taken from valueresearchonline.com and analysis and views are personal

How to Calculate Net Present Value (NPV) and how to use it?

Posted on by Jagoinvestor

In this post we will talk about How to think and calculate Net Present Value of a transaction involving Financial Payment, and why its important to understand the concept.

net present value

Consider the following Example :

You have to lend Rs 1,00,000 to one of your friends and He is offering you following choices.

Choice 1 : He will pay you Rs 18,000 per year for next 10 yrs.

Choice 2 : He will pay you 13,000 per year for next 15 yrs.

Choice 3 : He will pay you Rs 8,000 per year for whole life.

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Which one should you choose?

Here you have to take a decision of choosing from one of the choices. The logical decision here will be to go for choice whose Net Present Value is Highest. You have to understand the time value of money. Rs.10,000 received today is much more valuable than Rs.10,000 received 10 yrs later, even Rs 15,000 received after 10 yrs.

So you have to see that which choice has the highest worth if you calculate its Value today.

So how do you calculate the Net Present Value in this case, where you have Rs X receivable every year for n years. Here you also have to consider present rate of returns which you can assume at 8%.

So We have 3 variables

X : Amount received per year

n : Number of years

r : Present rate of return

NPV = X * [(1+r)^n – 1]/[r * (1+r)^n]

Calculating through this formula, we get the Net Present Value of the choices as

1. 120781

2. 111273

3. 100000

Net Present Value of the last choice is simple , how much money do you put in bank today that will fetch you 8,000 per year forever? If X is the amount than at 8% interest you get 8,000, so

8% of X = 8,000

.08 * X = 8,000

X = 8,000 * (1/.08)

X = 1,00,000

If you see the total amount received in all the cases you will realise that the choices with lesser NPV will give you have higher Total amount.

For Case 1 : NPV = 120781 , Total amount received = 1,80,000

For Case 2 : NPV = 111273 , Total amount received = 1,95,000

For Case 3 : NPV = 100000 , Total amount received = Infinite (The amount is paid forever)

Calculate NPV for your self, see this calculator

But you have to understand that “Total amount received” is not important. What can you do with the money is more important? So the real Indicator is Net present Value of Money. You have to understand the Difference between Price Vs Value. Price is what you pay, Value is what you get. Value is important not Price.

Real Estate Case

If you go for a home which cost Rs 50 Lacs @9% Interest for 20 yrs. Your EMI will be around 45,000 per month.

I found this amazing Apna Loan , EMI calculator, Its nice

You will actually pay total of 45,000 * 12 * 20 = Rs.1.08 Crores.

Now you may feel that the cost of house is Rs.50 Lacs ,but the amount outgo is actually 1.08 Crores and may feel bad for this, But this is ridiculous. Because you are not paying 1.08 worth of money in your entire tenure, 1.08 is just a number.

Its worth is still 50 lacs only spread over 20 years and the numbers sum up to 1.08 crores.

If you calculate NPV of the Home loan money which you are paying , its exactly 50 Lacs . Calculate it with (.75% interest and 240 as tenure, as its a monthly and not yearly) .

Note : There can be other situations also where we need to calculate Net present value with a different formula, but for this post we are only discussing the examples and scenarios where you need to pay or receive a fixed amount after every fixed period for some tenure.

Conclusion :

You can also use this concept for taking decisions in scenarios where you have different choices of payments, choose the one which has lowest Net Present Value, like in the example we took , For the friends its more beneficial to go for the 3rd option.

So the moral of the story is that dont pass this post link to your friends with whom you have financial relations 🙂

Questions?

Should Banks state net present Value of the money customers pay as loan , so that people come to know that they are getting fair value for there money?

Read interesting note on Home Loan EMI, Read how Home Loan EMI is Calculated?

Readers, are you getting a horizontal scroll bar when you view this blog? If its irritating for many people I will fix it? It depends on your computer resolution how does it look to you, for me, it works fine.

One Common question that every beginner investor has – Is Direct Equity for you ?

Posted on by Jagoinvestor

This is one of the questions which everybody wants answer to . You can do it , but it will require some effort, learning and dedication. Also you will have to develop some kind of discipline and change your attitude a bit.

We shall first see who all are into Direct Equity Investing. They are Mutual funds , FII’s , Big experienced Investors with high experience and qualification . These people are 24/7 doing this job of researching the companies for long term investing . And even these people do mistakes and even they can predict markets directions always .

Direct Equity

So now you can be one of the two kind of people.

1. Someone who has no interest in the markets and have no desire to learn things on his/her own.

They want to earn better returns than debt, but at the same time without bothering much. Then you better invest in mutual funds (SIP would be a good idea).

That way you can get returns over long term and don’t have to put much effort (apart from choosing good mutual funds in the start and monitoring them once in a while in a year, which is not a big deal).

2. Someone who is ready to take more risk and can also devote some time to do his own study of stocks (not a big one, but basic atleast).

He has better than average interest in these things and also enjoys the stuff. If you are one of those than you can put some money directly in shares of companies after your own research and understanding, it can be any way you are comfortable with. You should learn some basics of Fundamental Analysis and then apply it.

For example: I can say, that After RPL – Reliance Merger, Reliance will be among the biggest refineries of the world (it was anyways, but now in better position), It has lots of exploration projects going on and company’s is in safe and great management (as per the current information).

On the top of it Company has great valuations, and is available at many years low price and now overall markets are near its bottom. Just by looking at these facts, you can understand that it would make sense to BUY Reliance for long term, better accumulate it over the next 6 months, to catch the volatility too.

Can we go wrong and it may not give us good returns?

Definitely yes, Markets are the place where you should expect the unexpected. But at this moment that’s the best we can do and should do.

Can you do better than Fund managers of mutual funds?

Some people may answer yes , and may be they are true, But personally I would say at this moment I can’t do better than them. Reasons are as follows:

  • They are doing it from last 10 yrs, I might be doing it from last 6 months or 1 yrs (personally i dont do any ).
  • They are highly expert and qualified people. I learned accounts till my 12th only and it really sucks for me.
  • They have access to internal information and resources to do better research. I don’t have it.

So, I may be able to pick a company once in a while which gives 100% in 6 months against there 20%. but over long term, chances of there sustaining in the business is very high. So think long term. Don’t over estimate yourself.

You should understand that i am not trying to tell you cant do it. I am just trying to make sure that you understand your position in this game and your abilities to do things.

I personally like to do things on which i am good at and transfer the responsibility of other things to experts in that field. If I want the joy of it anyways, I will take a small portion of my portfolio and will play with direct equity. That is allowed 🙂

Watch the video given below to learn everything about Direct Equity:

Why Mutual funds Makes sense for Retail public?

Mutual funds are the products which are formed on the philosophy that many inexperienced and uninterested people who have money but no knowledge will pool all the money together and hire a person who has experience, understand the markets well, and can take better decision.

This person also has all the time dedicated to investing, so that thousands of investors don’t have to monitor the investments and the returns which will be generated will be distributed to investors after paying this fund manager for services.

So it makes sense you any one like you , who may be a Software engineer, Doctor, businessman or another person, who has no time for all this investing thing. Its you who have to decide who you are?

Don’t fell in the trap of high returns, With high returns comes the disaster too.

“Good return with some risk is much better than Exceptional returns with catastrophic losses”.

I hope this article will prove helpful to your. Leave your views about this article in the comment section. You can also ask me if you have any query.

DSP Black Rock Top 100 – A good old Equity Diversified mutual fund

Posted on by Jagoinvestor

Let’s see a good Equity Diversified mutual fund today, DSP Black Rock Top 100, is an old fund, Its name was DSP ML Top 100 earlier, but now its renamed. It comes from one of the best Mutual funds houses DSP Black Rock.

The fund has very good record and consistently outperformed its Benchmark. To get more information see here

DSP Black Rock Top 100

Returns

If you see last 1 years returns its only -35%, which is much better than others who have given close to -50% return.

1 yrs : -35%
3 years : 1.2%
5 years returns : 15%
Since Inception : 29%

It has consistently outperformed its category average by good difference. Which is one the evaluating criteria.

Portfolio

Its portfolio is well diversified with high concentration on Large cap companies (50%), which is good.

Derivatives usage : There is one point to note in the portfolio is that the fund also uses tries to take advantage of Futures (derivatives). This is a smart action, considering Fund manager understand the risks. Else it can be disaster.

Rating

Its rated as 5 star fund and is places in Low risk High Return Grade by value research online. Though we should not put lot of focus on ratings, its one of the things to look at.

Conclusion : Overall the fund looks good. We have not done any detailed analysis but see it in a way which should be done at the minimum level by an average investor. The main thing is not the product, its the usage and utilization . You can take a normal fund and make most out of it using SIP and portfolio re balancing.

Please do your own findings and see if the fund fits your risk-appetite and criteria. People who want to invest money for atleast 3-5 yrs and without putting lot of efforts on monitoring the market , can invest there money using SIP in this Fund.

Keep the money invested for at least 3-4 yrs, and keep monitoring the fund performance minimum once every 6 months.

If you want to check one of my favorite scenes from movie “Socha na Tha”, see this

 

Magic of SIP in Mutual Funds , Part 2

Posted on by Jagoinvestor

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.

SIP - 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.

Magic of SIP in Mutual funds , Part 1

Posted on by Jagoinvestor

Numbers Speak !!

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.

SIP - Systematic Investment Plan

 

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)

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Read continuation Part 2 of this post here