Tuesday, August 21, 2012

RETURNS


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)



















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