Sunday, August 26, 2012

Virtues of Long Term

We at AIMS have always believed in long term in equity investments. We have all along advocated that “time in the market is more important than timing the market.”

Equity as an asset class moves in a non-linear manner. Periods of exuberance is followed or preceded by long period of bearishness or stagnation. For example Indian equity market has been passing through a bearish/stagnation phase since January 2008; after witnessing a short period of immense bullishness.

Consider the following hypothetical example (Courtesy: Franklin Templeton Mutual Fund). However, although the example is hypothetical, the results are very much real and startling in reinforcing our belief in long term investing.

If you had invested in BSE Sensex for the last 15 (or 5475 days in all) years (period ended February 2012), had you:-

Ø  Stayed Fully invested, the returns would have been     11.12% CAGR

Ø  Missed 10 best day, the returns would have been               5.20% CAGR    

Ø  Missed 20 best days, the returns would have been             1.23% CAGR    

Ø  Missed 30 best days, the returns would have been         (-)2.22% CAGR

Miss 10 best days out of 5475 days, and your overall returns comes down to 5.20% from 11.12% CAGR. The returns turn negative if you missed 30 best days. (Statutory Warning: - Do not try to hazard a guess about which would be the best days. It may seriously impact not only your portfolio, but your overall financial health also).

Long Term Pays and pays handsomely—A study

We conducted a small study ourselves, to authenticate our belief in virtues of long term. We noted down quarterly Nifty returns starting March1995 to December 2011. Out of 68 quarters between March1995 and December 2011, there were 32 quarters with negative returns; while 36 quarters gave positive returns. The following conclusions can be inferred from the above study:-

o   There were as many quarters with negative returns as there were ones with positive returns viz: 32.
o   Of 68 quarters, there were only 4 quarters with +ve return on an overall basis. 
o   The outperformance of positive quarters was far higher than that of those with negative quarters. This explains why Nifty moved from 1182 to 4624 touching a high of 6134 on the way;
o   At a first glance, it would appear that the market should not have moved anywhere. However the fact that it made an all-time high of 6138(starting from a level of 1000) lends credence to the fact a lazy portfolio can yield the best returns as compared to an actively managed portfolio.

(The conclusion holds true more for Mutual Funds rather than stocks, since we believe that stocks unlike a Mutual Fund scheme have to be sold at one point of time.)


  1. Believe in long term in words and spirit.
  2. Rather than spend time and energy in trying to identify best performing schemes, select good fund houses with good past track record.
  3. Performance is historical and there’s no guarantee that it will be repeated.
  4. Do not try to time the market.
  5. Align your investments to your life’s goals.
  6. A brief bout of under performance or negative returns is not a good enough reason to move out of schemes. (Miss 10 best days out of 5475 days and your overall returns fall by roughly 65%. Eventually positive returns will play catch up.
  7. Focus on portfolio of stocks viz; Mutual Funds

Happy (Long term) Investing!!!

Thursday, August 23, 2012

Product Review


While watching TV the other day, I saw an advertisement about Bajaj Allianz Cash Rich Insurance Plan- a plan which exhorts audience to retire rich rather than just retire.

What a wonderful company, I thought, which now offers “CAREFREE RETIREMENT” to all and sundry. I decided to subscribe to the policy immediately, after all who would not like to retire rich carefree!
Here’s my holy grail of retirement I said to myself. I went online and googled Bajaj Allianz and sat down to do a little fact finding about the plan. 

I was a little apprehensive about the premium that I would have to pay, but then darr kea age' jeet hai.

The plan involved cash payouts in 3 tranches:-
·       Accumulated reversionary bonus at the end of the PPT(premium payment term)
·     Cash back period (a period after the end of PPT where the company pays guaranteed        Cash back @ 5% of SA.
·      Sum Assured plus Terminal bonus if any on maturity

How does the plan work?

The plan is a limited premium payment traditional (participating) endowment policy. The whole policy term consists of 2 phases (to be selected by the insured):-
§  Premium payment term; and
§  Cash back period

At the end of the PPT, the accumulated compound reversionary bonus is paid out. From the next year till maturity. Cash back benefit of 5% of SA plus annual cash bonus (if any declared by the company) is payable.

On maturity, the SA plus terminal bonus if any becomes payable.            

The features of the plan for me were as under:-

Ø  Age at entry (for me)                                    45 years                              
Ø  Premium Payment Term                             20 years
Ø  Cash back period                                        25 years
Ø  Plan maturity                                                 45 years
Ø  Sum Assured                                                Rs. 25 lacs

The illustration as generated disclosed the total annual premium payable by me as Rs. 1, 66,402.00 and the total maturity proceeds accruing to me till age 90 was likely to be Rs.75.27 lacs


On analyzing the policy in a little more detail, I came to know that over the next 20 years I would be paying Rs. 33, 28,040 as premium---for a Rs. 25 lacs sum assured policy.

Feeling a bit let down by the initial analysis, I decided to calculate the IRR (internal Rate of Return). It came to an abysmally low at 3.04%--even less than what my savings bank offers me.

At the outset sapnaa mera toot gaya….. (My dreams alas have been broken).

The first and foremost conclusion that I arrived at with a very heavy heart was that my retirement will not be as carefree as the company claims to be. That this plan is not worth subscribing for following reasons:-

§  The annual payouts of 5% of SA may not be sufficient enough to meet my post retirement requirement.
§  The payouts (in the form of reversionary and annual cash back) may not be worth the amount if inflation is factored.
§  In absence of the cost structure of the policy, it is not be possible to find out the actual premium invested as per IRDA mandate and hence the reversionary bonus which the company hopes to accumulate may fall short of target.
§  Finally, anybody but the life assured can hope to retire rich by buying this policy.

Final Word: - AVOID.

The views expressed as above are the author’s own personal views. The author writes articles about Finance and Investment/Insurance topics; however his articles do not create a financial adviser/client's relationships. These articles are meant for information purposes and are not substitute for the advice of an experienced financial adviser.

Tuesday, August 21, 2012


Almost every person we meet on our calls invariably asks us, “Should I invest in scheme X because it has given the highest return over the last 6months or 1year? Should we invest in scheme Y because it is the best performing fund in its category? People also chide us --being a CA and CFPCM --- for not being able to devise a strategy to earn 20-30% monthly returns from F&O segment of the NSE (since we also provide secondary market services). We have also witnessed clients redeeming their NFO investments just because it has not provided great returns within a year of opening for subscription!

It’s high time you ask yourself: - Why do you invest?

Is it just to earn money (returns)? If that be so, then I think most of us are doing pretty good job at the activity that we are presently doing, be it job or business!!

Or is it to meet your life’s goals? That too within the time frame. Goals like
·         Children’s education
·         Children’s marriage
·         Creating a corpus for your retirement
·      Or any other goal which you feel is important for you (may be a foreign vacation with family)

Making money cannot be the end in itself. What is that you intend to do with that money? Making lots of money without any specific goal/purpose is like boarding a train not knowing the destination.  So money has to enable you to fulfill some goals. It is only an enabler.

What are your goals, rather ask yourself: - “Do I have a goal?”

We all have some goals in life. Whether it is buying a second house, or daughter’s marriage, or creating a corpus for your retirement etc. In order to meet these goals, you should invest. Hence, instead of searching for investments which will give you highest returns, you should be asking yourself what is the optimum (and not maximum) rate of return (inflation adjusted) which the proposed investment expected to deliver and which will help me meet my goal within the required time frame.”

This brings us to another question: - Is “rate of return” the right term that will help me in achieving my goals? NO.

By “rate of return” we usually refer to the nominal rate. You also have to factor inflation. Inflation adjusted or real rate of return is what should be guiding us to our goals. For example, if your bank deposit is giving 9% interest for 1 year, and if average inflation that year was 10%, then your real rate of return is (-)1.81%--YOU ARE LOSING MONEY RATHER THAN MAKING ANY. 

Having identified a goal and initiating investment to meet the goal, would you be too disturbed if your MF investments returned say 18% and your friends MF investment returned say 30%? However, since you have been advised that to accumulate Rs. 1 crore for your daughters marriage, you need to invest Rs. 8000 p.m. for 25% at 10% pa CAGR—you will not be too disturbed by the relative underperformance of your MF investment—as it is still above your required rate of return. It’s just like Sachin Tendulkar getting out after scoring say only 25 runs. His overall run-rate is still much higher.

Your goals and required rate of return to achieve the goal should be the benchmark. If on the other hand, you had made the investment without any specific goal, then the only benchmark will be your friend’s investment –and you will in all likelihood switch out to your friends’ scheme on the basis of past performance knowing fully well that past performance may or may not be repeated in future.

Rather than looking for returns in 6 month or 1 year category, it is always advisable to look for 3-5 year returns.  Relative underperformance in the former category should not be a cause of worry if the fund has otherwise delivered better returns over the long term.

It’s time you looked beyond returns.—(read our earlier article here)