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e r y f e w thin ’t
do v s you d
on
Y o u h ave to l o n g a
‘’ fe so .”
h t i n your li things wrong
rig many
do too
Luckily for us, we do not need the intelligence of Albert Einstein to understand the power of compound
interest! This simple concept is taught in high school.
Here is an example :
Ÿ Imagine you invest ` 10,000 for 10 years. The rate of interest is 10% per year
Ÿ At the end of Year 1, you will earn ` 1,000/-. Thus your invested amount will grow to ` 11,000/-
Ÿ At the end of Year 2, you will earn ` 1,100/-... and so on.
Ÿ Finally, at the end of year 10, you will earn ` 2,358/- for that year, while the initial sum of ` 10,000 will
grow to around ` 25,940.
Basically it means that when you invest for long periods of time, you start earning interest on interest.
On the other hand, if you were earning simple interest, you would have only earned a flat sum of
` 1,000/- per year for 10 years and the total amount would have only grown to ` 20,000/-.
Just imagine this: You are a young 20 year old 'branded' coffee lover.
Now, assume one day you opted to drink the neighbourhood Udipi
restaurant coffee, costing ` 25/- over the fancy one, costing ` 125/-
Further, you invested this difference of ` 100 at 15% per year for the next
40 years. Can you estimate how much this ` 100/- would grow to?
Now imagine you saved and invested ` 100/- everyday. Do you still
desire that fancy coffee?
4
True investors are the real winners in the long term
Stock prices are influenced by innumerable factors, many of whom are unrelated to a company's
earnings. Often, these movements are random and difficult to forecast. However, over time, this
apparent randomness slowly fades away, and we can observe a sustained uptick in stock prices in
line with the underlying companies’ performance. That is why long-term investors emerge as true
winners, beating, both day-traders and the ever-present danger of inflation.
The graph below shows that if you had invested in stocks (as measured by the BSE Sensex) on
January 1, 1990 and stayed invested till January 31, 2019, you would have earned compounded
annual returns of 14.09% p.a., which means Rs. 10,000 invested on January 1, 1990, would have
compounded to Rs. 4,65,641 on January 31, 2019. The returns drop drastically if you missed the 10,
20, 30 and 40 best days.
Source: Value Research
16
14.09
14 (`4,65,641)
CAGR
12
9.72
10 (`1,49,281)
Returns (%)
7.35
8 (`78,828)
5.69
6 (`50,068)
4.40
(`35,073)
4
0
All days invested Missing best 10 days Missing best 20 days Missing best 30 days Missing best 40 days
A prudent investor is one who always remains invested for the long term and allows his money to
compound.
But how long is long-term ? While there is no concrete definition, we define it as a minimum
period of five years.
Equities can help you fulfil your long-term financial aspirations, provided you are willing to stay the
course and not sell in panic during market downturns. You could also choose to invest in equities
through equity mutual fund schemes via the Systematic Investment Plan (SIP) route. We also
suggest you consult your Financial Adviser before beginning.
5
Owning a business
vs owning Shares
in a business
- Warren Buffett
However, today the distinction between investors and traders is narrowing. Holding periods have
reduced to a matter of days rather than years. This has contributed to share prices becoming more
volatile. Other factors include:
Increased
Increased information
information flow,
flow, which
The advent of online trading which facilitates
facilitates quick
quick decisions. Growing importance of the
decisions.
and plummeting brokerage rates. financial media.
However, for long-term investors willing to hold on for several years, volatility is a blessing in disguise
as they can take advantage of sudden, unexplained plunges in stock prices to purchase stocks of
good companies at attractive valuations.
Investors may also opt to invest through equity mutual fund schemes which invest according to the
principles of value investing. The fund managers of many such schemes view their portfolio as a
collection of businesses and not just stocks.
Their portfolio will usually comprise of companies having all/a combination of the following
characteristics :
6
Also, such schemes will have very low portfolio turnover ratios, as the fund manager will prefer to
hold on to the underlying companies as long as the business fundamentals are intact.
Many investors look up to Warren Buffett as a talisman. He is the emblem of everything an investor
ought to be. His observations on investing are, both, humourous and thought-provoking.
A few of his views on stocks and the stock market outline why he is such a favourite...
However, while his approach to investing is simple, it is not always easy to implement. For such
investors, investing through equity mutual fund schemes could be the next best option.
A few facts
1956: Creates Buffett Associates Ltd. with $105,000. It was worth over
$105 Million when he dissolved in 1969.
7
Why should we prepare a Financial Plan ?
1. It helps us to know where we stand currently
2. It helps us to determine our goal
3. It provides options on how to reach there.
4. It helps us know what is possible and what is not.
Financial Planing
Plan Implementation
Course Corrections
Plan Preparation
Data Gathering
Goal Setting
Plan Review
8
Asset Allocation involves spreading your investments across various financial asset classes such as
fixed deposits, equities, real estate, gold etc.
1. It helps to reduce risk of capital loss, as different assets usually perform differently at the same
point in time.
2. It prevents us from getting unduly worried or ecstatic.
3. It helps in bringing about balance in our financial life.
How do we go about it ?
0.53
2019 (YTD*) 5.03
0.06
7.23
Debt: Income 2018 8.17
Gold 5.28
S&P BSE Sensex Index 27.91
2017 4.66
4.96
6.69
2016 10.10
11.84
-5.03
-6.08
2015 7.04
29.89
-7.41
2014 12.89
8.98
-4.43
2013 5.20
25.70
2012 12.51
10.09
-24.64
2011 31.65
7.98
17.43
2010 23.34
4.61
* as on 31 Jan, 2019 Source: Value Research
9
Specimen Asset Allocation Asset Allocation is only one part of the
10.70%
Financial Planning Process. It should be
done, keeping the other aspects in
Real Estate
Stocks mind.
Gold
42.50% Mutual funds provide a good way to
undertake asset allocation. A few
examples are :
46.70%
All this can be undertaken at a reasonable cost, without, usually, sacrificing liquidity.
The Financial Planning and Asset Allocation process may appear to be easy, but it is not always
simple. Hence, outsource this function to a competent Financial Planner, if you lack confidence or
ability to do it yourself.
Asset Allocation is only one part of the Financial Planning Process. It should be done
keeping the other aspects in mind.
10
Have you ever come across this notice in a restaurant :
“The owner eats here...”
Does this not make you feel more assured, about the quality of
food ?
1. The first kind manages your money for a fixed fee, without
investing along with you. In other words, he does not lose, even
if you lose.
Don’t you feel more reassured while you are entrusting money to the second manager?
11
Having ‘Skin In The game’ results in:
Before choosing a mutual fund, do not go merely by past performance statistics. Choose one
where the interests of the fund house are aligned with yours...
12
A good question...Unfortunately, there is no 'one' right answer.
Most often, we ask this question because we are terrified of the unknown.
What if I purchase today and...
oil prices or interest rates start rising?
Europe slips back into recession?
There is a war, etc...
Here is one statistic that may reassure you...The BSE Sensex was 100 on
April 1, 1979. It is around 26,000 currently. This amounts to an annualised
return of nearly 17% p.a.
For those who worry about losses due to stock market fluctuations, here are two charts. From
these it is evident that the longer you stay invested, the lower the chance of losses and even if
you had invested on days when the Sensex was at its highest value, you would not have lost
money, had you held on.
3,00,00,000 Monthly SIPs made on the worst day of the BSE Sensex 30 `2,84,45,543
Monthly SIPs made on the best day of the BSE Sensex 30
2,50,00,000
1,50,00,000
`2,62,69,793
1,00,00,000
50,00,000
0
1991
2001
2011
1993
1995
2003
2005
2013
2015
1996
1998
1999
2006
2008
2009
2016
2018
2019
1992
2002
2012
1990
2000
2010
1994
2004
2014
1997
2007
2017
13
Sensex Returns
Also, often, the risk of not being in the market is higher than the risk of being in it.
50,00,000
46,56,412
45,00,000
40,00,000
35,00,000
30,00,000
27,77,864
25,00,000
22,86,575
20,00,000
18,16,747
15,84,451
15,00,000
12,26,491
10,00,000
5,00,000
0
Missing 10 days Missing 8 days Missing 6 days Missing 4 days Missing 2 days Remaining
invested
14
BSE Sensex
40,000
35,000
Coming of the NDA government
30,000
Recovery with
25,000 Exuberant bull phase with glitches
plenty of NFOs, IPOs
20,000 Prices at LME crashed,
Coming of the
Fed increased interestrates
15,000 NDA government
The big bull-Harshad Ketan Parekh scam Recovery with
Mehta scam divulg divulged & tech
10,000 boom oges bust Black glitches
Debt overhang
monday in Euro zone
5,000 Tech boom
U.S. sub-prime crisis emerg
0 Lehman Bros.
1991
2001
2011
1993
1995
2003
2005
2013
2015
1996
1998
1999
2006
2008
2009
2016
2018
2019
1992
2002
2012
1990
2000
2010
1994
2004
2014
1997
2007
2017
S&P BSE Sensex Index (1991 to 2019)
40,000
35,000
20,000
15,000
dot.com crash
10,000 (2000)
5,000
0
2000
2002
2004
2006
2008
1990
1992
1994
1996
1998
2010
2012
2014
2016
2018
2019
15
The bottomline :
There is enough evidence to prove that equities have beaten other asset classes over the long term. If
you find it difficult to invest in stock markets on your own, opt for a mutual fund and invest
through the Systematic Investment Plan (SIP) route.
3,000
2,000
1,000
1991 1994 1997 2000 2003 2006 2009 2012 2015 2018
Source: Value Research
16
Nominal vs Real Return...
Your bank is offering you a 5 year fixed deposit 8% interest per annum. Excited? First ask yourself : Is
this what I am 'actually' getting? No... you are not. This is because of inflation and taxation.
While the effects of taxation are easily discernible, the impact of inflation is more insidious.
The 8% p.a. offered by the bank is known as the 'Nominal Return'. The rate that you receive after
stripping out inflation is known as the 'Real' Return.
In this case, if the current rate of inflation is 7%, your real rate of return this year, is approximately 1%.
If inflation is 7 % p.a., what you can buy for ` 100/- today, will cost ` 107/- one year from now.
17
Nominal vs Real Return...
Investment options offering you minuscule or negative real returns, mean that your investments are
actually making you poorer. In fact, the longer you remain invested, the poorer you may become.
Time is the enemy of fixed income investors.
Historically, investment in equities has offered higher real returns compared to fixed deposits.
Hence, it seen as a good hedge against inflation.
1800
1600
1400
1200
1000
800
600
400
200
0
1986
1996
2006
2016
2019
1988
1998
2008
2018
1982
1992
2002
2012
1980
1990
2000
2010
1984
1994
2004
2014
When we invest in equities we are purchasing a small portion of the underlying business. As
consumers, we often complain that companies are constantly raising the prices of products
and services. By investing in those very businesses, we can benefit along with these
companies.
If you find it difficult to choose the right companies for investing, you could opt to invest through
mutual fund schemes, preferably through the Systematic Investment Plan (SIP) route.
Do not get swayed by nominal returns. It is the 'real' return that counts...
18
Systematic Investment Plans
What is a SIP?
You could view it as a recurring deposit in a mutual fund scheme wherein you invest a fixed
amount periodically on any particular day (say, on the 10th of every month). This process could be
automated either by investing online or by issuing standing instructions to your bank, just as you
would in the case of your electricity / telephone bill. Yes... It really is this simple.
Befriend volatility
Yes... equities are volatile. However, the auto-debit feature of your SIP
means that you will keep investing during fearful times. Over time, you
will be happy that you were bold when the others were scared.
Continuously investing over a long period, helps you to actually take
advantage of market fluctuations.
SIP = DIP
By removing the emotional element from the investment process, the
SIP doubles up as a Disciplined Investing Plan. You could also call
this the Auto-Pilot mode of investing.
19
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