Why Investors miss Targets

It is an accepted fact that equity (stocks and MFs) have the power to deliver handsome returns over long time frame. However, many direct equity investors lack the ability to deal with the complexities that is required in dealing in stocks.

No expert is able to predict the right time to enter/exit a particular stock. There are innumerable stories of success and despair relating to stock market. The biggest hurdle for the direct equity investor is the buy list. It is the easiest thing to do. The key to making profits is “it is when you sell that counts.”

Indian equity markets are aligning to global markets and with increasing number of Indian corporates raising money from abroad, the factors affecting a particular company have become more complex, more varied and all the more difficult for an equity investor to comprehend. Media is agog with buy list daily. However, this freebie is fraught with too many risks. One of the biggest risks being biased advised being doled out. This is more applicable to investors who take buy decision based on “tips” given by brokers and experts. This noise creates a halo around a stock and more often than not an investor falls prey to such noise. The resistance to buy decreases as the price increases. Past (price) performance however compelling cannot be the guiding factor to buying a stock or a Mutual Fund.

One more reason why direct equity investors buy is that every body is buying. This is commonly referred to as herd buying. The basic assumption being that so many people cannot be wrong. The other reason being momentum buying. The information about most traded stock, stocks with high delivery volume and the stock which has risen most are daily published by business papers. This supports momentum buying. However, the fact that this momentum can wane as quick as it had rose is seldom factored in by buyers. Buying suddenly vanishes and investors are left with stocks quoting at a fraction of the price they were bought. It may go down to zero as well.

It is rather more easy and simple to choose a fund. The fund manager is more suited to build and manage a portfolio of stocks as he has far more resources --in terms of money, information and expertise—at his command.

Rather than compare performance of individual stocks against the fund, investors should pit their entire stock portfolio against the fund and see if their stock portfolio has been able to beat the best of the minds in fund management. 2.50% Fund management charge and your advisors fees are a small price for a far simple way to create long term wealth. 

MAKE MONEY OR CREATE WEALTH---SEQUEL

Part 1 of the article Make money or create wealth dealt with the factors to determine your strategy. Part 2 will try to list do and don’t in the process of creating wealth:-

I am too busy to think about my investments

We are happy to learn that you are busy in your work. That you are working very hard to meet your targets to justify your Form 16, should not be a reason to let your money idle away in your bank account or fixed deposit. Your money should work harder than you do because it is this hard worked money that is going to help you achieve your goals; viz; buying the dream house, or funding your children’s education or building the retirement nest to see you through your retirement with “sar utha ke.” Neither will ad hoc investments made every now and then will help you much in fulfilling your goals.

I want to allocate funds to hot tips.

This can be viewed as a corollary to the above myth. There are people who tend to pay too much attention to every happening sector/stocks/funds/commodities et all. The first pre-requisite to an investment strategy is to have an asset allocation plan specifying allocation to different buckets like equity (including MF), debt, theme or sector specific funds, commodities etc. Stick to your defined asset allocation and you’ll be a happy man. Just because a particular fund or stock or even a commodity has moved does not make it investment worthy.

  

Align your investments with your goals.

Your investments should be in sync with your goals. In other words, your investments should mature around your goals. Neither too early nor too late, else it will defeat the very purpose of goal planning. One simple way to ensure timely fund availability is to start goal based sip for a period expiring around the same time your goals come up for payment. An investment plan without any goal is like boarding a Hyderabad bound train to reach Ahmedabad!

Appoint a financial planner.

Just as you have your family doctor or CA or better still your insurance agent, appoint a financial planner. A financial planner can not only help you in chalking out a financial plan but can also act as navigator—helping you to maintain your course and also take corrective measures if required.

I prefer to invest only in property

More often than not we have come across people who are fan of property investment. They believe that investment equals property. Have you ever wondered why property pays?? Simply because you usually invest in a property for 10 years and above. Time in the market is more important than timing the market has been proved true by property investments. Extend it to Mutual fund and you may end up with another earning member in the family by the time you retire.

India is one place where the economic growth shall be trending upwards for next few decades. Whether you just want to ride the wave and create wealth or micro manage your portfolio and attempt to make money--- the choice is yours. We only wish you would say “yehi hai right choice…”

How to make money in a volatile market

“Should I be investing at these levels? Is there any upside left?

“At these levels, the market seems to be poised for a steep correction.”

“Taking equity exposure at these levels would be foolish. Think it is better to stay in cash.”

If you have faced the above dilemma, then you are not alone—almost every investor is facing such dilemma. As the sensex fluctuates around 18000, investors are ecstatic on one hand and petrified on the other.

Investors usually ask us about the probable sensex levels achievable within say next year or so rather than trying to know the rationale behind our recommendation. More often than not, they feel investing in liquid fund is a better option for the moment and then wait for that “inevitable” correction.

Sounds believable, but sometimes the inevitable does not happen. Investors do not realize that more wealth is destroyed in waiting for the correction, then in the correction itself! We have been hearing of the impending correction ever since the sensex crossed 6k levels—and we’ve already reached 18k levels. Though we are not in any way suggesting that the sensex will keep on rising. However, what we do know is that the market is volatile and unpredictable. Else how can you explain the sensex movement from 12500 levels to 8900 and bounce back to 14000 levels all within a matter of few months.

So is there a way to use this volatility to our advantage??

Let us make a model—an extremely conservative and pessimistic one. We have assumed that the sensex goes up by just 8% over 2 year time frame.

The following table is constructed on the premise that the investment time frame is 2 years. Starting on 1/1/2007 at a sensex level of 13942; column A depicts movement of Sensex over 2 years at quarterly intervals. At the end of January 2009, assuming the sensex at 15063, the absolute return works out to be just 8% or 3.94% annualized.

Sensex	Date	Action	Units	NAV	Amount
13942	01/01/2007	Purchase	66.67	150.00	10000
10000	01/04/2007	Purchase	92.95	107.58	10000
12000	01/07/2007	Purchase	77.46	129.10	10000
10600	01/10/2007	Purchase	87.69	114.04	10000
11500	01/01/2008	Purchase	80.82	123.72	10000
10500	01/04/2008	Purchase	88.52	112.96	10000
11500	01/07/2008	Purchase	80.82	123.72	10000
12000	01/10/2008	Purchase	77.46	129.10	10000
15063	01/01/2009	Sale	652.38	162.06	105725

(Source: - moneycontrol.com)

Our MF scheme above exactly mimics the Sensex. The investor invests Rs. 10,000/- every quarter starting 1/1/2007 for 2 years, at the end of which he liquidates his holding. The CAGR of the investor works out to 23.41% against 8% returned by the sensex.

Conclusion

It proves:-

1. It does not matter whether the market is heated/overheated or not.
2. It does not matter whether or not it will post double digit return or not.
3. It does not matter whether there will be a correction or not post your investment.
4. It is possible to make money as long as the market is volatile and you invest at regular interval.

Sporadic or ad hoc investments are not going to be much helpful. It is regular investment alone that is going to get you another earning member in your family.

You need to do very few things right and avoid making big mistakes. The few right things that you need to do are:-

• Index level should not guide your investment decision. Rather your goals should be the guiding factor in planning your investments.
• Choose a diversified equity mutual fund with a good track record. You may if you want choose a core and satellite method in constructing your investment portfolio. Core portfolio may consist of plain vanilla diversified mutual fund while sectoral and theme-based Mutual funds can form the sectoral funds.
• Invest for long term and invest regularly. 

MYTHS OF SIP (SYSTEMATIC INVESTMENT PLAN)

SIP is an investment process which allows you to invest a fixed sum every month very much like a recurring fixed deposit with bank.

SIP is an automatic mode of investment which removes the ills of market timing from investments. Investors usually desist buying mutual fund when the markets are down and rather buy when markets are high, in other words retails investors buy high and sell low—just the opposite of what they should be doing.

We have realized that the retail investor has gradually built some mis-conceptions about equity investments via the SIP mode.

Myth 1:- Equity investment is all about SIP

Investors have started to believe or rather they have been made to believe that equity investment should always be done in SIP mode. We believe that if the investor is mature enough to understand the nuances of equity investing and is willing to stay invested for 10 years or so then lump sum investing may be made rather than SIP mode. SIP mode can be beneficial if say the investment horizon is about 5 years or thereabout.

Myth 2:- SIP works in direct equity

We have come across many articles which advocate buying shares of a certain value every month saying and terming it as SIP. Sadly enough this is not SIP.

Take Himachal futuristic Co. Ltd. (HFCL). The script had moved from about Rs. 20 to Rs.2500/- in a matter of a year and back to Rs. 20 levels in following year. Or for that matter take the case of Silverline Technologies which moved from Rs. 30 to Rs. 1300 to Rs.7/-. The moot point is whether you would have had the strength to continue buying through this period. Imagine starting purchases at Rs. 1300/-. You would be cursing stock market today (nobody likes to believe that they have made a mistake). SIP or concept of rupee cost averaging works with a portfolio and not a single stock.

Myth 3:- SIP works For Anybody But Me.

SIP works well in a well diversified equity fund and that too over long term. It may not work well only for people who either have a short term horizon or have not chosen a fund with good track record.

  

Myth 4:- Markets are at all time high and so not a good time to start an SIP.

We do not know whether 3000 is the right index level or 18000 is the right index level to start an SIP. However, what we do know is that SIP works. SIP returns vis-a-vis lump sum returns of select funds between the period December 2007 and March 2011 have been stated here below:-

Scheme	Period	SIP return (CAGR)	Lump Sum return (CAGR)
DSP BR Equity Fund	1st. December 2007—1st.March 2011	20.69%	6.25%
HDFC Equity Fund	1st. December 2007—1st.March 2011	28.45	10.01
Reliance Growth Fund	1st. December 2007—1st.March 2011	17.71	2.79
IDFC Premier Equity Fund	1st. December 2007—1st.March 2011	24.30	8.99
Franklin Prima Plus	1st. December 2007—1st.March 2011	19.19	3.80

So, it is time we break the myths about investing in general and SIP in particular. Let SIP be the second earning member of your family.

Happy SIPing!!

Difficult Times for EPFO account holder

Can you possibly imagine how would an EPFO investor be feeling today?

His hard earned money being parked with and managed by an organization which

• Still has archaic accounting system
• Poor Management of funds  
• Allows withdrawals in contraventions of law.
• In all likelihood, the EPFO is running a deficit!

 According to an article in The Economic Times of 8^th. April, 2011, Income Tax department has slapped a demand notice on EPFO to the tune of whopping Rs. 7,000 crores. The said demand has been made due to the inability of the EPFO to prevent pre-mature withdrawals which are not allowed under the Indian Income Tax Act, 1956. The liability could have been more had the EPFO maintained proper and updated records. Present system of accounting and recording transactions, does not allow EPFO to track pre-mature withdrawals.

Pre-mature withdrawals—of retirement funds—is allowed—without any taxes-- under Indian Income Tax Act, only under the following situations:-

• The employee should have been working or had worked for 5 years continuously for the same organization.
• Had the service been terminated before 5 years, then it must have been for reasons beyond the employee’s control.
• The accumulated balance standing to the credit of the employee should be transferred to another RPF account only.

Hence, there is no provision for pre-mature withdrawals of EPFO money—tax free unless one of the above conditions arises.

Employees are able to withdraw their PF balances, only because EPFO has not upgraded/modedrnised its accounting system.

The only solution to plug tax leakages lies with EPFO—aggressive fundamental reforms are needed to change the way a corpus of Rs. 170000 odd crores is managed by EPFO. Record keeping has to be improved—and so should the returns being generated by it.

EPFO presently has no system to track workers (or account holders) who have switched jobs. The archaic records do not offer seamless portability. These handicaps negate the very purpose of EPFO—provide & manage retirement money!! In absence of portability, the worker switching jobs is most likely to withdraw his PF dues rather than have it transferred to the new employer.

The only solution to EPFO woes is to offer workers an option to move to NPS (New Pension Scheme) which not only offers seamless portability with restriction on withdrawals, but also has institutional framework to generate superior returns-an obligation--of both the government and EPFO trustees—which is more often overlooked for short term benefits—viz; 9.5% interest only for 1 year (which in all likelihood will be taxed by government)

Do you want to make money or Create wealth!!!

Every fall in stock market gives an opportunity to introspect to find answer to the eternal question:- Why do I invest? Is it to make money or is it to create wealth???

But one may ask --isn't making money same as creating wealth?? No, there's a fine line separating the two.

Making money is just about bank balance while wealth creation is more about meeting goals of your life. Making money may not always lead to wealth creation, but the vice-versa always holds.

To know what kind of investment strategy do you adopt, analyze your strategy in context of the under noted broad points.

Do you take investment/divestment decisions based on market sentiments for the immediate/medium term outlook??

Stock prices are a function of company profitability which in turn depends on the economy in general. Businesses take fairly long time to become profitable. Infosys and Marutis of the world were not made in a day. So you need conviction—and a lot of it—to invest in shares and reap rewards. At times it pays to ignore the noise emanating from the business channels and pink papers.

Do you have the urge to leverage??

A stock market investor is always tempted to make some quick money in F&O since he has always heard his broker talk about big money waiting to be taken home by trading in the F&O. F&O trades may also result in a big loss is apparent only in hind sight. It has the potential of being one of the biggest wealth destroyer.

Does the index level guide your investment/divestment decision?

During the course of our dealings with our investors, we are usually asked whether this is the right time to buy or sell? Honestly speaking, we do not have and never have had an answer to such question! Imagine an investor who had sold off his holdings in Reliance diversified power sector fund at the NAV of Rs.9/- reached within a year of the scheme opening for ongoing subscription, since the outlook to the fund and/or sector was not very encouraging. The fund thereafter has grown investors wealth eight fold over last 6 years.

Do your emotions play any role in devising buy/sell decisions?

Do you feel sad having to see the market gallop away without your participating in it? Do you feel that the whole world except yourself has become rich? Do you thereafter enter the market guided by your feeling left out and trying to make up with the lost time(and profit).

We seldom realize that it is not our thinking that makes big money, but it is sitting. Even the legendary Warren Buffet has said that he would not be worried if the stock market were to open a decade after he bought shares. Facts like these tell us that trading will not help us create wealth.

Do you believe that trading in stocks will help you in building your portfolio?

Investors usually believe or better still they have been conditioned to believe that by regularly buying and selling shares/MFs, you can make money! The moot question is for whom? If you can make money by trading in shares/MFs, than there are equal chances that you may lose some or all also. Can you afford to lose sight of your goals or face the prospect of not being able to meet one or more of them?

If the answer to your analysis as above is positive, then it is time to change your investment strategy.

Wealth creation is akin to hand holding. We invest in companies or Mutual Fund schemes with a clear focus on our goals and our resolve to meet them. Equity as an asset class will deliver inflation adjusted returns but over long term. This “long term” has to be calibrated to your goals. According to an interesting study done by Fidelity, it was shown that over the last 16 odd years, there have been almost equal number of good bad quarters as far as equity returns are concerned. So theoretically, market (sensex)should be still trading close to 3000 levels. But it is trading at 18000 levels.

Why investors must look beyond returns

Investments today come with a shelf life. Rarely do we come across an investor who has held onto his/her investors over very long time. 
Investors tend to forget or overlook the fact that investment is not an end in itself but rather a process to meet your goals. Till a few months before, investors were willing to invest in the equity market since it was moving up. The flow of money turned off or even worse it reversed-- when the market took a beating. In other words investors bought high and sold low--doing exactly the opposite.

Returns or better still maximum returns is the mantra of the day. Any investment yielding less then acceptable return is jettisoned and fresh investment is made in share or mutual fund showing highest return. The fact that it is historical returns that is being displayed rarely comes to the investors mind. We at AIMS always advise our investors to look beyond returns and daily/monthly market movements--rather look at goals for the fulfillment of which the said investment was made in  the first place We re-produce an article "why investors must look beyond returns" here below:-

"Ask an investor, which investment avenue he wants to invest in and there’s more than a fair chance that he will say – the best performing one i.e. one that can deliver the highest returns. Sounds reasonable, doesn’t it? Why would an investor like to settle for anything less than the best, right? The trouble with such an approach is that it oversimplifies the investment process. As a result, emphasis is laid only on the returns aspect; vital factors like risk and suitability are ignored.

Far too often, investors and advisors alike are guilty of falling prey to the allure of high returns. The rationale being, investing is all about clocking the highest return, hence any avenue that can deliver on this front gets the thumbs up. Don’t get us wrong. We are not suggesting that returns aren’t important or that there is necessarily something wrong with an avenue simply because it can deliver a better showing on the returns front vis-à-vis other avenues. However, selecting an investment avenue based solely on its performance is certainly a flawed approach.

In the first place, such an approach erroneously assumes that the investment avenue (say a mutual fund for instance) is an end, rather than a means to achieve an end. While investing, the end should be a tangible goal like providing for one’s retirement, buying a car or simply wealth accumulation, expressed in monetary terms. And once the target sum has been established, appropriate avenues to achieve that end should be chosen. Conversely, if the investment process begins with the selection of the investment avenue, the investor ends up investing in an aimless manner and may never achieve his goals.

Second, by investing in an avenue based solely on returns, the investor runs the risk of getting invested in an avenue that might be unsuitable for him in terms of the risk involved. For instance in the equity funds segment, by and large one would expect a diversified equity fund (which invests its entire corpus in equities) to outperform a balanced fund (which invests around 65%-75% of its corpus in equities and the balance in debt instruments) in times when equity markets are rising. But from an investor’s perspective, the key lies in determining what’s right for him.

For example, assume that a balanced fund can deliver a 12% CAGR over a 5-Yr period; conversely, a diversified equity fund is equipped to deliver a 15% CAGR over the same time

frame. Say an investor wishes to accumulate Rs 500,000 for a holiday 5 years down the line. Now the investor has to choose between investing in a balanced fund or in a diversified equity fund. Should the investor decide to build a corpus using a balanced fund, he will have to invest around Rs 6,223 per month or Rs 78,705 pa. Conversely, opting for an equity fund will necessitate a lower investment i.e. Rs 5,792 per month or Rs 74,158 pa.

Most investors might instinctively opt for the equity fund option on account of the higher return (i.e. a lower investment amount). However, while making the choice, the risk factor has been ignored. On account of the debt holdings in the portfolio, the balanced fund is invested across asset classes i.e. equity and debt. Over the 5-Yr investment horizon, should equity markets witness a rough patch, the balanced fund will be better equipped to protect the investor’s corpus. In effect, the trade-off for the higher investment amount is the proposition of delivering during a downturn in markets. Before making a choice, the investor should first evaluate his risk appetite and then choose between the balanced fund and the equity fund.

Another reason investors opt for the best performing avenues is excitement. Yes, you read that right. There is a section of investors, which believes that the investment activity should be exciting; hence selecting investment avenues offering the highest returns is justified. For the record, investing has nothing to do with excitement; on the contrary, investing is serious business and is all about achieving one’s predetermined financial goals. Seeking excitement from the investment activity amounts to trivializing it.

In conclusion, investors would do well to look beyond just returns while making an investment decision. Sure, returns are important, but certainly not a parameter to be considered in isolation. The key lies in looking at the investment activity in totality and then making a decision. If not, investors run the risk of missing the wood for the trees.