What the market has taught us

 

 A financial guru has said: -

 “Don’t try to buy at the bottom and sell at the top. It can’t be done except by liars”

 Attempts at timing the market can make investors worse off in the long run than riding out the inherent volatility.  This is simply because it’s hard to precisely forecast how the market will move in the future—unless your advisor is an astrologer who can see & predict the future.

A significant chunk of investor gains over a long period of time is actually the result of only a handful of highest-return days or as we call them, the best days. Miss a few of these and your long-term investment returns can take a big hit.

We looked at the Nifty 50 daily returns from the start, July 1990 till November 2019. Assuming that someone invested ₹10 lakhs in the market at the start of this period (30-years approx.) and stayed put all through, then he would end up with ₹4.30 crores today.

	Invested entire period	Missed 5 Best days	Missed 5 worst days
CAGR	13.70%	11.40%	16%
Value of Investment	4.30Cr	2.40 Cr	7.90Cr.

Since 2000, there have been only 8 years when the stock markets did not reach a new all-time high. More recently, from 2013 onwards, the stock markets have seen a new all-time high in each of the last 8 years except the year 2016.

Profit booking is a mirage

Profit booking is justified only if you can re-invest the booked profit at a higher rate of return, or if you are able to make your seed investment free of cost. Otherwise profit booking merely serves to meet your belief—even if is erroneous.

Profit booking involves reduction in unit holdings. So, when the bullish trends re-appear in the stock market; you make less gains as your unit holdings have reduced owing to profit booking. Let’s explain this by an example.

There are 2 investors holding say, DSP Small cap Fund.

                                                                                 

Mutual Funds are a great vehicle to create wealth over long period of time—and not a money-making platform as is normally perceived.  MF investments has the potential to create 2^nd. Earning member in your family who works for you when you don’t. It ensures you do not outlive your retirement corpus.

We at AIMS have always believed that a lazy portfolio strategy is the best strategy to derive maximum benefit from MFs. It has worked for our personal investments. It can do the same for you too.  Remember, it’s time in the market and not timing the market that creates wealth, as proved by Uncle Buffet

Rejig your MF investments TODAY so as to make the most of the “century belong to India” theme that is currently unfolding.

A case for investing in DSP India TIGER Fund

 02/12/2023

We try to make a case for investment in MFs in infrastructure sector and particularly in DSP India TIGER Fund.

We have short listed funds to create a sample for peer group comparison—as under

·         Funds should have a minimum corpus of Rs.1000 crores

·       Funds should have a minimum rating of 2*

·         Funds should have performance of 10 years in the list

DSP India TIGER fund is a top-notch performer in our opinion. Read on----

The fund –set up on 11/06/2004—has a corpus of Rs.2466 Cr. Next only to ICICI Prudential MF and Nippon India MF.

Now coming to performance, DSP India TIGER fund has featured consistently in top quartile performance.

It has returned (CAGR unless otherwise stated) as follows:-

 

CAGR	Period	Rank
15.76%	15 years	3/15
18.56%	10 years	6/19
20.33%	5 years	6/20
36.99%	3 years	7/20
33.03% (Absolute)	1 year	8/21

 

It has one of the lowest expense ratios in the peer group—2.07.

It has a standard deviation of 16.23 (range of variance of returns from the mean average returns) It has a beta of 0.60 thus indicating that it is less volatile. Every rise of 1 point in the sector—the fund will only rise by 0.60. This implies that the fund effectively protects the downside. The fund manager has been able to generate an Alpha of 9.37 (returns over and above the benchmark due to his expertise and experience.)

Compared to DSP, ICICI Prudential Infrastructure fund has not been able to match the performance of DSP. Although it has a bigger corpus of 3345 Cr. Its performance has been non-consistent. It has a peer group performance ranking of 7/15 (in the 15-year period), going up to 11/19 in the 10-year period. The rank markedly improved to 4/20 during the 5-year period and again deteriorating to 11/21 during 1 year period. A higher alpha of 9.77 has been generated due to higher range of variance (standard deviation) of 17.90 and a higher beta of 0.72 compared to DSP.

On the other hand, while Nippon India Power & Infra fund has also been a consistent performer, its risk stats do not match with that of say DSP. Despite a higher range of variance of 17.18%, a low beta of 0.67, it could generate an Alpha of only 6.80 (compared to 9.37 of DSP)

 

 

So, who would you like to go with?

Myths of Profit Booking in MF Investments

Myth of Profit Booking

During our interaction with our clients, one query –in different words but with same intent—invariably pops up “why don’t you book profits every now & then?

The logic (?) of profit booking is:-

Investor needs a feel of the money he’s making

Markets may tank suddenly wiping out his portfolio gains.

Profit booking reduces the risk of exposure to the market.

Et all

Profit booking involves reduction in unit holdings. So, when the bullish trends re-appear in the stock market; you make less gains as your unit holdings have reduced owing to profit booking. 

Let’s explain this by an example.

There are 2 investors holding say, DSP Small cap Fund.

 Who won by booking profit? It’s for you to see.

 Profit booking assumes price movement at a future point in time, in favour of investor. This is hardly the case in real life. Retail investors in their zeal to encash at the top (perceived), usually ends up buy high sell low. It (profit booking) is precisely because of this reason that FIIs control roughly 25-30% of our market.

Fund Underperformance more often than not leads to nervous investors exiting the fund in a hurry.

Fund performance over a period of time goes through phases of over performance, stagnant, and under performance.

Even if one picks a fund that would beat the index over the next 15-20 years, it will go through periods of underperformance.  When a fund starts underperforming, we never know if it will recover, beat the index, or continue underperforming. The fund manager may be unable to protect his job before his fund recovers. The legendary fund manager of HDFC MF—Prashant Jain—confessed in an interview in 2020 that he was on the verge of losing his job due to his funds underperforming. But luckily his funds recovered just in time and he got to keep his job.

Many investors— aided and advised by their advisors—and advisors exit an underperforming fund and shift to a fund that is currently the best performing fund.  This strategy sounds logical, but it guarantees under performance. You enter a fund when it has already performed well, stay in it until it underperforms, exit it to invest in a better performing fund—and the shift in and shift out continues. You are taking underperformance from every fund that you are investing in. and then you blame the market. Frequent exit & entries of funds also incur a tax liability, which further reduces not only your return but also the probability of beating the index.

 We believe that the issue of out performance or rather under performance should worry investors in mature markets like USA, UK etc. India is a growing economy and this growth and out performance is expected to continue at least for the next 30-40 years.

So, the market will reward you handsomely for simply sitting on your investments. This is aptly put as

"It is never your thinking that makes big money, it is sitting."  

So, rather than spend sleepless night thinking about profit booking, aim for wealth creation and put up a Do Not Disturb board around your portfolio.

 

 

 

 

 

 

 

 

 

 

 

 

 

THE ILLUSIONS OF HIGH RETURNS

 

THE other day we got a query from a client of ours who was disappointed with five-year SIP returns of equity funds that are published in a personal finance magazine. This client of ours had pulled up the table that listed SIP returns of all equity funds and had observed that there were some which had 5 year returns as low as 12% per annum and some others had returns in the range of 14-15% per annum.

The “safe” returns that one gets nowadays means one’s money becomes approx.one-and-a-half times in 5 years. In contrast 15% a year corresponds to doubling one’s money in 5 years. Is it possible to be disappointed by 15% a year over five years? Well, it is possible to be disappointed by almost anything in this world, as you will no doubt recall from those childhood occasions when your parents would see your exam marks. It all depends on where you set your expectations.

However, we’re not blaming anyone who has unrealistic expectations from equity returns. The fault actually lies with the History of high inflation and high nominal returns that India has, coupled with the general difficulty in doing mental math involving compounding returns. How do inflation and past high rates affect how we think about investment rates? For one almost everyone remembers a time when it was possible to get 10% a year from a bank fixed deposit. Older people may even remember getting 12% or more in PPF.  Now a days, the highest interest rates between 7 and 8% are the norm, with the upper end of that range already being quite rare.

What is the difference between 10% a year and 7% a year? With the routine number sense that most people have the difference is 3%. And yet it is actually much more. The number 10 is 43% more than 7. The amount you earn at 10% in a year is 43% more than what you earn at 7%. Then comes the compounding. Over 5 years 10% a year earns you roughly 52% more (one and a half times) than what 7% would

To people who are familiar with the basic arithmetic of saving and investing all this is trivial stuff, self-evident and hardly worth mentioning. And yet it’s far from self-evident to the vast majority of savers. They feel that an equity mutual fund’s SIP return of 15% is roughly speaking in the same range as bank FD’s because they feel that FD rates are around 8 and used to be 10 at some point. These illusions are in a direct way a byproduct of high inflation and high interest rates. If you adjust for 6% inflation, then the bank FD got you 1% and as SIP in a middling equity fund 9%. You should try the above calculations now.

This demonetization how high inflation and nominally high interest rates create the illusion that fixed-income assets like bank and other deposits are investments. In reality they are not. They can barely preserve the value of your money There are many who have lakhs lying in savings accounts. This money is nothing but a donation to the bank. Savings’ accounts are the most misnamed financial products in INDIA as there has never been a time when they had interest rates even remotely near the inflation rate. Again, people let money in accounts because a 4 or 5% number looks like something. There is no solution to this except to be aware of it and not let big numbers trick you. The first step towards real and useful financial literacy is to be aware of inflation and compounding and always look at investments after mentally adjusting for these. It is not difficult and there are few things that are useful.