Wise Wealth Advisors

D.Muthukrishnan (Muthu), Certified Financial Planner- Personal Financial Advisor

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Your greatest edge

Posted by Muthu on October 15, 2016

Five decades ago, the average holding period of a stock in NYSE was 8 years. This means an investor held on to his investment for an average period of 8 years. The holding period now stands at around 4 months. Yes, an investor, on an average, holds a stock only for 4 months. In India, we don’t have any holding period data for stocks. But we do have data for equity mutual funds.

As per AMFI data, 25% of the equity investors hold the funds for a period of 6 months or less. 50% of investors do not hold for more than 2 years. The median holding period of investors is barely 18 months to 24 months. If average holding period for equity fund itself is only around 2 years, for direct stock, it should be much lesser.

From what Prashant Jain has mentioned last year, hardly 2% of the investors may be holding funds for 10 years or above.

We hope that better and detailed data is shared by stock exchanges and AMFI in the time to come.

The CRISL AMFI Equity fund index has never given a negative return for any 5 year period on a daily rolling basis since inception. So a bare minimum holding of 5 years would have ensured that there are no unpleasant shocks for investors. By holding for 6 months to 18 months, they are setting up themselves for disaster. By holding for a lesser period, not only they lose the benefit of long term compounding, but also get exposed to the negative effects of short term volatility.

Long time in the markets lead to excellent compounding. By holding for 10 years through few diversified equity funds, the probability of getting a decent return superior to other asset classes is high. Sentiment and liquidity decides the short term. It is earnings growth which decides the long term.

By holding for shorter period, we are clearly sending out a message that we are speculators. We would get the plus or minus of short term price movements. By holding for longer period, we are clearly conveying that we are investors who are looking for earnings growth. Over long run, earnings growth gets automatically reflected in prices in the right way.

Information, knowledge and analytical tools are available in plenty. In fact, we are all flooded with information all the time. There are thousands of professionals who keep close track of markets. It is unlikely that our knowledge would give us any edge in the market. Knowledge is no longer scarce but is in abundance and mostly free as well. What most people lack is the ability to stay the course with patience and discipline. A very small percentage of investors have the emotional maturity and right behavioural traits to hold on to their investments for long term. This gives them a superior edge in the market.

As individual investors focusing on your long term goals and wealth creation, you all have this edge. This is no small edge. It is your greatest edge. This is what separates a successful investor from a failed one.

A tiny portion of equity investors create good wealth. Rest all remain where they are despite being associated with capital markets. The key ingredient in successful investing is staying the course for long run through ups and downs. Once you narrow down on right investments then what matters most is your ability to hold on to them for a really long time.

Great fortunes are made by holding on to good companies and right funds for many years and decades.

Use your greatest edge.

Posted in Mutual Funds, Stock Market, Wealth | 2 Comments »

We are a tiny minority

Posted by Muthu on October 10, 2016

Wishing you and your family a very happy Saraswathi pooja.

The middle class in India is around 2% of the households. Elite & rich would be another 1%.

We roughly have 300 million households in India.

Out of this only 3% (9 million households) have the potential to invest in capital markets.

The total demat (including NSDL & CDSL) accounts in the country is 26 million. Many investors have more than one demat account. So direct equity investors in India will not be more than 13 million. Many investors have demat accounts in the name of their spouse, children and parents as well. So in all likelihood around 8 million families may have demat accounts.

Recently I read that CDSL have only around 1.25 lakh demat accounts with holdings above Rs.10 lakhs. Including NSDL, after removing duplication, around 2 lakh investors may hold shares worth more than Rs.10 lakhs. This is around 2% of the total investor households.

Coming to mutual funds, there are around 50 million folios. This includes both retail and institutional investors. An investor, on an average may hold around 4 funds. This means we have around 12 million investors. Many families have more than one person investing in mutual funds. This means around 6 million households.

There would be overlap of investors who both invest in mutual funds and also shares. So the total households in India who are investing in capital market would be around 8 to 10 million.

There are 10 million SIP folios investing Rs.3500 crores a month in capital markets. Again this may mean around 4 million investors and 2 million households.

You may be surprised to know that there are only around 5000 advisors (excluding insurance agents) in India.

In the absence of detailed data, we have to do certain approximation. Better to know something approximately than having no knowledge at all.

There are around 1.3 million people who read financial newspapers in India. The viewers of business channels are also around 1 million.

In such a huge country, we are a tiny minority.

That is why capital markets or its movements have no relevance or impact for a common man.

Even the optimistic estimates suggest that only 10% to 12% of Indian households would be middle class during next 2 decades. Adding elite and rich, around 15% of households have potential to become investors over next 2 decades. This is a best case scenario because we are assuming 8% economic growth for next 2 decades. Achieving this growth rate is no easy job.

Make use of the opportunity you have been provided to participate and grow your wealth in the equity market.

Don’t forget to count your blessings.

Posted in General, Wealth | Leave a Comment »

A perspective on our income and wealth

Posted by Muthu on October 6, 2016

I keep studying articles, books and reports on wealth, income and inequality. I’ve a keen interest in this subject.

We all know that as a nation we’ve a long way to go in coming out of poverty and raise the standard of living of our people. I came across different sets of data in this regard and wanted to share the same with you.

As per a recent Goldman Sachs report, the working population in India is classified as follows, based on average monthly income. I’ve taken 1 USD= Rs.66 for conversion.

Bottom 20%: Rs.2376 earnings per month

Next 27%    : Rs.4455

Next 23%    : Rs.11,875

Next 19%    : Rs.13,750

Next 6%      : Rs.29,617

Next 3%      : Rs.61,875

Next 2%      : Rs.62,915

Top 0.08%   : Rs.13,75,000 earnings per month

In Mint newspaper today, there is a small news item on a survey conducted by ministry of labour and employment. As per this, 68% of households in India earn less than Rs.10,000 a month. Only 2% of households have an income of more than Rs.50,000 a month. Just 0.2% of the households earn more than Rs.1 lakh a month.

National Council for Applied Economic Research (NCAER) has conducted India Human Development Survey. They have classified our population as follows based on household income. I’ve given below the income per month per household.

Poorest Quintile (Poorest 20%) : Rs.2750 earnings per month

2’nd Quintile                            : Rs.4636

3’rd Quintile                             : Rs.7401

4th Quintile                               : Rs.13,300

Richest Quintile (Richest 20%)   : Rs.13,301 and above.

I’ve shared with you in the past, global wealth report by Credit Suisse as well.

Only 5% of Indian population have wealth above $10,000 (Rs.6.6 lakhs). 95% of the population has almost negligible wealth.

Coming to the rich, as per latest new world wealth report, India has 95 billionaires (worth Rs.6600 crores+). There are around Rs.2.64 lakh millionaires (worth Rs.6.6 crores+, excluding primary residence). The breakup of millionaires city wise is as follows. I’ve given below only for few top cities.

Mumbai: 45,000 Millionaires

Delhi: 22,000

Kolkata: 8600

Hyderabad: 8200



Pune: 3900

Gurgaon: 3600

As far as middle class is concerned, it is around 2% of our population with an average monthly income of Rs.60,000. This includes 10 million government employees, around 1 million SME owners and 16 million working professionals. Out of this 16 million, around 4 million are employed in IT and BPO.

Hope this piece provides the perspective to put our income and wealth in the context of overall population.

Posted in Wealth | 6 Comments »

Easy to understand, difficult to follow

Posted by Muthu on October 2, 2016

We keep repeating that patience and staying the course are critical requirements in building the wealth.

Time and time again, we give real life examples to reinforce this point.

There is a fund by name ‘Voya Corporate Leaders Trust’ in existence from 1935 in USA.

It has completed 80 years of existence.

This fund is holding the same set of companies since 1935. It invested in 30 leading US companies equally in 1935. After that it has not made any changes to portfolio except for automatic corporate actions like merger, spinoffs, bankruptcy etc.

Currently the fund holds 22 companies.

I read that $10,000 invested in this fund on Pearl Harbour Day (7th December 1941) would have become $18 million now. This implies an annualised return of 10.5% over last 75 years.

10.5% may not sound very appealing. As we always say, you need to look at real rate of return. Real rate of return is nominal returns adjusted for inflation. During last one century, the average inflation in US is around 3%. That gives you the real rate of return of 7%+ for this fund.

In India, the long term returns from equity is around 16%. The average rate of inflation has been around 8%. So we’ve got a real rate of return of 8%. When inflation becomes 4%, if you get 12% return from equity, it would be equal to 16% return of the past.

Some say they got FD returns of 14% 2 decades ago. Getting 14% return when inflation was 12% is no great deal. It is same as getting 6% FD returns, when inflation is 4%.

So Voya corporate leaders trust return of 10.5% over 8 decades is a great thing. Who would have got these returns? I’ll share a Buffett quote here:

“In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president.”

Investors and their generations who stayed the course patiently despite all of the above would have got that returns.

We are not advising to buy and hold equity funds for next 8 decades. Portfolios do need changes depending upon performance and life situation. What we are trying to convey is that these changes should be as minimal as possible. Most of the time staying the course and doing nothing is the best thing to do. We are always there to suggest you changes as and when it becomes really necessary.

In good times it is easy to practice patience and staying the course. In bad times, it is extremely difficult to follow. Fear is such a strong emotion to derail the course.

By reinforcing these points continuously, we hope all you would be able to internalise and develop the required traits.

Staying the course is applicable in all situations except end of the world. But end of the world would happen only once and we would all not be there. So ignore repeated noises made by media every time there is a serious political or economic crisis that this is going to be the end of the world.

I hope this piece answers few of you who asked me whether to redeem all investments if there is going to be a war between India and Pakistan.

We know that this is easy to understand and difficult to follow. We are there to make you do the difficult job. Remember that what is difficult would be equally rewarding.

Posted in General, Mutual Funds, Wealth | 4 Comments »

We add 3% to your annual returns

Posted by Muthu on September 29, 2016

Thanks to those of you who got back to us saying that the relationship would continue to be the same. For others too, we hope same is the case.

Some of you asked me as to what is the need to be this elaborate.

The idea is to cover all possible questions which may occur to you in the context of changing regulatory requirements.

This is in continuation of our yesterday piece on commission disclosure. We mentioned that the difference between ‘Regular’ and ‘Direct’ plan of funds is roughly between 0.6% and 0.8%. This is based on the sample check I did for the funds we recommend.

We also highlighted that the returns you see in your portfolio are after expenses, which includes our commission as well.

We’ve explained in the past that based on qualitative parameters as to what value we bring to the table. I was trying to see whether it can be quantified. I stumbled on studies done by Vanguard in this regard. There are many articles about the same. All you’ve to do is to Google ‘Vanguard Advisor Alpha’.

For those of you who may not know, Vanguard is one of the largest fund houses in the world. Though they manage both passive and active funds, they are known for passive funds or index investing. In US, since most fund managers fail to beat the index, investing in index is considered an appropriate and low cost solution. Whereas in India, majority of the funds beat the index, even after expenses. We would continue to suggest investing in actively managed funds. But we do see a time in future, when it would be better to move to passive funds. Since you’ve taken this journey with us, we would suggest course change if and when required. Looks like that is at least some years away.

Vanguard believes and it is true for USA that most fund managers don’t create alpha (returns over and above the benchmark index is called alpha); whereas advisors are able to create alpha for investors roughly to the tune of 4% per annum. Since US advisors charge 1% of assets as annual fee, the alpha after fees is 3%.

This advisor alpha is created by proper portfolio construction, asset allocation, regular rebalancing, planning for tax efficient withdrawals and behavioural coaching. Out of the 4% alpha, up to 2% is through advisor’s behavioural coaching which helps the client to stay the course.

So as an advisor we add up to 4% returns to your portfolio. We subtract around 0.6% to 0.8% due to your investing in ‘Regular’ plan instead of ‘Direct’ plan. So on a net basis; we add more than 3% to your portfolio every year.

In one of the Vanguard literature, I saw the following example.

“Consider three hypothetical investors during the period between October 9, 2007, and March 31, 2014, each starting the period with a balanced (50% equity, 50% debt) $100,000 portfolio. The investor who moved this balance to cash at the 2009 stock market bottom lost $29,000.

The investor who moved to an all-bond position at the stock market bottom lost $10,000. But the investor who stayed committed to the predetermined asset allocation, in the end, gained $41,000.

The biggest value your advisor can provide is behavioral coaching.

To sum up, your financial advisor is there to counsel you, listen to your concerns, and, essentially, guide you on the right path. Your advisor works with you to add value throughout the course of your relationship.”

To repeat, we add 4%, subtract 0.8% and on a net basis add around 3%+. So you still stand to gain even after paying us (indirectly, by investing in ‘Regular’ plan).

So our suggestion: Please stay the course.

Posted in General, Muthu's Musings, Mutual Funds | 4 Comments »