Acchhe din are for every investor

There was once a poor farmer in Assam—Anup-- who earned his living by selling the produce from his small plot of farmland. He was living under abject poverty. He was barely left with enough surpluses to buy better quality seeds. As a result he could not afford better education for his children.

Then one day he heard about a particular variety of bamboo which yielded better yields. He made inquiries with his fellow villagers about this variety of bamboo but everyone advised against the idea and advised him to continue doing what he had been doing all these years rather than trying the untried.

Anup however decided to try out the particular variety of bamboo. He took a loan from the village money lender and bought the seeds of this type of bamboo and sowed them in a corner of his field.

Time went by.

1 year passed. Nothing happened. Anup was a little disappointed. But he did not lose hope.

2 years passed. Nothing happened. Now Anup was disheartened. Villagers started mocking him.

Only green shoots were visible in the third year. Anup still prayed for “Achhe din”.

In the fifth year, the growth in the bamboo plant started. In next year he reaped a rich harvest of one of the best variety of bamboo. Not only did he manage to pay off his dues to the money lender, he was left with a surplus good enough to bring about a qualitative change in his life. “Achhe din” had finally arrived for Anup.

Now, how does the above anecdote relate to the Mutual fund and wealth generation?

Let me give a real life example of the role patience plays in wealth generation. I started an SIP in IDFC Premier Equity Fund (Growth option) on 15/11/2007. The choice of fund was solely on my conviction in

• IDFC Mutual Fund
•  Potential of the mid cap segment to deliver above average returns;without any active monitoring from my side. 

My friends, colleagues mocked me for choosing IDFC MF over bigger players like HDFC MF, Reliance MF.

However, I decided to go with my conviction and went ahead with SIP registration.

The investment-returns scenario played out as under:-

Year	Investment	Market value	CAGR
1   (15.11.07—15.10.08)	24,000.00	16,726.00	(-)12%
4   (15.11.07---15.10.11)	96,000.00	1,35,413.00	9%
5   (15.11.07---18.10.12)	1,20,000.00	1,82,945.00	9%
7   (15.11.07---20.10.14)	1,68,000.00	3,67,041.00	12%

To summarize, you need following for a successful and rewarding investment:

• Convictions in your belief—believe in what you do, believe in the lineage of the fund house; believe in the long term potential of the equity market despite its short term volatility. More importantly, believe in your financial advisor and his expertise
•  Select a fund that meets your risk profile.
•  Start an SIP and put it in an auto pilot mode. DO not monitor its performance on daily or monthly basis. Even a child needs 9 months to be born.

·         Achhe din will come as it is time in the market that matters rather than timing the market.

Things Lord Ganesh teaches us about Wealth Creation

o   Big Eyes:- To look beyond today’s needs & plan for the future

An investment is all about future. One needs to plan today so as to meet commitments arising in future. A typical working person will have all or some of the goals in life as under:-

1.       Buying  a home

2.       Children education

3.       Vacation with family

4.       Buying a car

5.       Children marriage

6.       Retirement

A person has a finite working life during which not only has he got to provide for current expenses, but also accumulate funds to meet future liabilities as stated above.

o   Big Head:- To plan big goals in life

Inflation raises the cost of the goal with every passing year.

For example The Fees and other charges payable by the PGP students of the 2015-2017 batch for their first academic year is approximately Rs.8,88,000/-. (IIMA)

Assuming there is no cost escalation for next 10 years; Mr. Sundar will have to accumulate a sum of Rs.23 lacs for his son who wants to pursue MBA. (Sectoral Inflation assumed 10%). This is just for the higher education of his son. His daughter wants to pursue medicine and will be seeking admission in next 12 years.

Then there are other goals also which also needs to be provided for.

o   Large ears:- To listen & act on professional expertise

Remember these are YOUR goals---set by yourself. You and only you are responsible for its achievement. Take professional help(Read:-Free advise can be costly).  Professionals like a financial planner are experts that can help you in working with your goals—taking into account your income, expenses & savings. They can help you by drawing up a financial plan for yourself which will tell you whether these goals are achievable or not. If not, they will also suggest remedial measures. Remember, fees that you pay will only be a fraction of what you will achieve—financially. 

o   Broken tusk:- Monthly sacrifice needed for pursuit of wealth

A small financial sacrifice made today can ago a long way to meet your goal.

Mr. Sundar eats out on Sundays with family with average monthly billing of Rs.10,000/- approximately. If instead Mr. Sundar eats out only twice and manages to save say Rs. 5,000/-, it can go a long way in meeting education expenses of his son. If he invests this saving of Rs. 5,000/- by way of SIP for next 10 years, he can accumulate a sum of Rs. 13.75 lacs (assuming a return of 15%)

o   The axe:- To Cut off portion of your income to save regularly

Today’s pain is tomorrow’s gain they say. Warren Buffet says-“spend what is left after saving, rather than save what is left after spending.” START AN SIP TODAY.(Read--yahi hai right way) SIP is the best vehicle to create wealth. Compounding works best through SIP. A monthly SIP of Rs. 10,000 can yield a corpus of Rs. 3.20 crores over 25 years (returns of 15%CAGR).

o   Large stomach:- To compound your investment & grow your wealth

Albert Einstein has described compounding as the 8^th.  wonder of the world. Compounding works best over long term. For example an SIP of Rs. 10,000 in DSP BR TOP 100 Equity fund since April 2003(a month after its inception) would have yielded a corpus of Rs. 47.30 lacs(against an investment of Rs. 15.10 lacs)---an annualized return of 16.99%.

Equities are the real gold over long term

TANK UP ON EQUITIES

In last 36 years	Sensex	Gold
CAGR (%)	17.10%	10.60%
Rs. 10,000 has become	Rs. 29.40 lacs	Rs. 3.80 lacs

The table above summarizes the returns of Gold and of S&P BSE SENSEX (‘Sensex‘) since 1979, when the Sensex commenced with a base value of 100.

Einstein said “Compound interest is the eighth wonder of the world. He, who understands it, earns it ... he who doesn't ... pays it”.

This has been experienced here in India. At 17.1% CAGR, Rs 10,000 has become ~290 times in 36 years, while in gold at 10.4% CAGR, it has become ~35 times.

A difference of ~7% in returns over longer term (36 years) has resulted in 8x increase in wealth.

The average inflation over this period has been ~8% (CPI). Thus, gold has given returns that are close to inflation, thereby merely preserving the purchasing power. On the other hand, Sensex has delivered nearly 9% p.a. excess return over inflation. Over long periods this has made a big difference.

The reason for this is simple. Equities over time grow in line with the growth of underlying businesses. As businesses comprise the economy, the nominal growth of the economy (real growth plus inflation) is a good proxy for the average growth in businesses.

The Indian economy has grown at a remarkably constant nominal growth of 15% p.a. No wonder that the Sensex CAGR of 17.1% is close to 15% nominal GDP growth.

Who is Smarter: FII’s or Local?

It is interesting to note that in the last 22 years or so that FII have been allowed to invest in stocks in India, the FII’s ownership has steadily gone up from nil to 24% today i.e. at roughly 1% p.a. The sellers obviously have been domestic investors.

The dollars received by the locals from sale of their shares have been thus invested in gold. Gold as was pointed out earlier has yielded near inflation (~10%) CAGR vs 17% CAGR for the Sensex.

In effect, domestic investors have been exchanging a ~17% CAGR asset for a ~10% CAGR one. This certainly is not a smart thing to do.

The way Forward

Outlook for Indian economy and Indian equities is promising. India is one of the best placed among large economies in the world in terms of demographics, demand, growth etc., in my opinion. India is a key beneficiary of lower crude oil prices. The savings from lower oil prices are near 2% of GDP on run rate basis at current oil prices over CY13 average.

Apart from lower oil prices, a strong, growth oriented government bodes well for economic growth and for businesses. Key decisions of new government so far give confidence that lower fiscal deficit is a priority and it should continue to fall. The government has shown with its actions that it will prioritize quality of supply of essential things like electricity etc. over the price of supply as bad supply can prove to be even more expensive; put in place a transparent framework so that India can harness potential of its vast mineral resources; simplify tax structures and improve tax compliance; and follow policies that will aim to lead healthy and sustainable economic growth.

From an equity market perspective, current P/E multiples of equity markets are reasonable – still below long term averages (see chart below). Further, corporate earnings are expected to be better than estimates as corporate margins are significantly below the long term averages and should improve as capacity utilization and business conditions improve. There is thus room for multiples to expand as growth improves and as interest rates move lower besides strong earnings growth.

To summarize, the outlook for equities is promising with a 3-5 year view.

(While the blue line denotes the Rolling PE, the red line represents the Sensex, and the horizontal line is the average.)

Summary

Equities are the real gold. Equities compound near Nominal GDP growth rates whereas Gold compounds near inflation.

So far, Indians have preferred Gold over Equities, which is not a very wise thing to do as explained above. They would be better off by doing just the opposite.

(An article by Mr. Prashant Jain—ED & CIO HDFC Mutual Fund)

Product Review—HDFC SLIC CLICK 2 PROTECT PLUS

“I've ensured that my family will never have to adjust (after my death)”

Consider this real life instance:-

Mr. Ravi met with a fatal accident at the age of 47. He left behind a family consisting of his wife; a son aged 15 years and aged parents.  The death claim on his term insurance policy of Rs. 10 lacs was settled within 15 days.

The dilemma facing the family was—how to continue with the daily life with just Rs. 10 lacs in hand and no other source of income?

HDFC Standard Life Insurance Company Limited has an answer. Its Click 2 Protect Plus policy ensures that the family continues to live a life with “sar uthaa ke jiyo”.

It’s a term plan with a twist. It ensures lump sum payment along with monthly income upon the death of the life insured quite unlike normal term plans which involves only lump sum payout as death claim.

This plan provides a benefit amount in the unfortunate event of death of the Life Assured anytime during the policy term. This amount would help the family to pay any outstanding debts or fund the day to day expenses, thus easing the financial worries of your family. In addition, it provides for monthly payouts to the nominee to meet regular expenses.

• Key features of this policy:-
• Minimum Entry age                                18 years
• Maximum Entry age                               65 years
• Maximum maturity age                           75 years

• Plan Options:-
• Life Option                 Death benefit is paid and policy terminates.
• Extra Life Option       Death benefit along with Accidental death benefit(if death is due to an accident
• Income Option         10% Death benefit is paid on death while the remaining amount is paid as monthly income for the next 15 years.
• Income+ Option       Basic Sum Assured is paid on death AND an amount equal to 0.50% of the Sum assured is paid for the next 10 years. This monthly income increases by 10% every year—if opted for by the policy holder.

Illustration:-

Premium for a 30 year old male for a Sum Assured of Rs. 1 crore and term of 40 years works out to Rs. 16,951/-(excluding taxes) (under income + option).

Upon death of the life assured the nominee will receive the following amount:-

1. Sum Assured Rs. 1 crore
2. Monthly payouts of Rs. 50,000 (@0.50% of the Sum Assured) for the next 10 years. This will increase @10% annually.

Cost of securing family’s future—roughly Rs.1500 per month---equivalent to cost of watching a movie in a multiplex with family--a must have policy for every family bread winner.

Product Review--NPS or Mutual Fund Retirement Plans

Can I afford to retire?

It's a question that starts haunting people after they are on the wrong side of 40: will they have enough money to live in comfort after retirement? If one starts early, invests regularly and chooses the right investment mix, there is no reason to be worried. However, these simple tenets are rarely followed by investors in India. Retirement planning typically starts in the 40s and low-yield options like bank deposits, PPF and life insurance policies form the biggest chunk of retirement savings. Stocks and equity-oriented funds make do with crumbs.

Union Budget 2015-2016 announced additional Deduction of Rs. 50,000 under section 80CCD for investment in New Pension Scheme. This is over and above current Rs. 1 lac limit available under section 80C. Those in 30% tax bracket will now be able to save Rs. 15,450 on investing Rs. 50,000 in NPS.

NPS might move up the popularity charts, but investors should not ignore the retirement plans from Mutual Funds.

So, how are the retirement funds from Mutual Funds and NPS different?

Asset Allocation

Existing Mutual Fund retirement plans:-

1.    Franklin Pension Plan; and

2.    UTI Retirement benefit pension  fund

invest up to 40% in equity.  Equity exposure under NPS is capped at 50%, and it reduces by 2% annually after age 35, such that by the time the investor reaches the age of 55, only 10% remains in equity. This may not be suitable for a young entrant who wants a higher equity exposure (which is desirable also). Reliance MF has recently launched its own Retirement fund which can invest 65 to 100% of the corpus in equities.  

While NPS restricts the equity component to Nifty50 stocks in the same proportion as their weight in index. MF retirement funds do not have such restriction. Restricting the equity component to Nifty 50 stocks can impact the overall fund performance should the mid cap segment run ahead, as large cap funds are not expected to clock above normal returns. However, the bright side of this is that the NPS portfolio will be less volatile.

Cost

NPS is currently the lowest cost pension product available. While NPS charges 0.01%, MF charges anywhere between 2.25—2.50% However, considering the superior performance generated by MF, the charges may well be justified.

  

Taxation

The biggest drawback of NPS is that it is subject to EET (i.e., exempt on investment, exempt on accumulation while taxable on withdrawals) regime i.e., withdrawals are fully taxable at the age of 60. (the entire corpus is added to the  income)

Debt oriented MF pension plans will be taxed at 20%( that too only on the returns part) However with indexation, the tax liability reduces significantly. Withdrawals from Equity oriented MFs are, on the other hand, completely tax free—provided the holding period of 1 year has been met.

Furthermore, the pension income is also taxable.

KYA Karein? (What to do)

Those under 30 will be better off with equity oriented MF retirement plans, as the equity component is much higher.

We believe that the existing debt oriented MF score over NPS for those close to retirement, due to higher equity component.

Our Outlook for 2015

First of all on behalf of AIMS, let me take this opportunity to wish you and your family a very happy and prosperous 2015.

The year gone by

2014 was an excellent year for all our investors. It was a year wherein both Equity and Debt markets performed well. The portfolios of most of our investors are displaying a stellar report card (15 - 25% p.a CAGR), for which you only deserve the credit. Many of you who have remained invested for the last 4-5 years didn't see much appreciation in their portfolio till exactly a year back. But 2014 made the entire difference and last 4-5 years of under-performance has already been covered. That's exactly the nature of Equity as an asset class. In investments, it is not your thinking that makes big money, it is sitting---our guiding philosophy which has been vindicated again.

"What is good for the client is also good for the firm" - T Rowe Price.

This is the philosophy with which Ace Investment Management Services was born 15 years back. Just like your portfolios have done exceedingly well, our report card also looks fairly dashing. Our assets under advisory have increased by nearly 50% in the last 1 year, thanks to your belief in us. Our SIP book is growing strongly and we are really happy about this as for long we have been advocating that SIP is the best way not only to make your money work harder than you do but also to create long term wealth.

It has also been our belief that the base of any investment portfolio has to be strong--by way of term insurance/personal accident insurance and health insurance. Health, they say is wealth. We have always believed and still do believe that insurance is more important than investments and it has to be given first priority.

Our Outlook for 2015

2014 was also a landmark year as far as the political mandate is concerned. After a good 30 years we now have a single Government at the Centre and the focus of Modi administration is clearly on development. The work has already begun and we believe 2015 will be a crucial year wherein many more reforms will be unleashed which will put India into a high growth trajectory.

Will we be benefited by this? Of course yes. When economy does well, can equity markets stay far behind? In 2014, Sensex has delivered a stupendous return of 30%. This was long overdue as markets have been quoting at below the fair valuations for the last 2-3 years. We hope the momentum will continue, though the strike rate may be higher / lower depending on various factors like short term sentiments, liquidity, global markets, crude prices etc. 2015 will also be a great year for Fixed Income investing. The rally started in the 2nd half of last year and is likely to continue this year on the back of the falling interest rates. We can expect double digit returns in Bond Funds in 2015 and also may be in 2016.

So what you should be doing?                 

Nothing.

Just maintain asset allocation. Have Patience and Discipline. Stick to your financial goals. Invite us once in a while for a cup of green tea or coffee though.

Basically, just chill and party hard (Your money is already working harder for you!!!)
Have a Rocking 2015!!!