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

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Do you know?

Posted by Muthu on January 6, 2011

I’m going to share today some of the interesting stats and facts I read recently in personal finance magazines and portals along with my inputs.

I’m thankful to ‘Nanayam Vikatan’ team for continuing to provide opportunity since 2008. My contribution has appeared in the Q&A section of the current  issue as well.

We are entering into a decade of high growth.

As mentioned earlier, our GDP is expected to multiply by 4 times and reach $5 trillion in 2020.

The savings during this entire decade is estimated to be around $10 trillion.

There are lot of predictions that Sensex is expected to cross one lakh mark before the end of the decade. Extrapolating the 19% annualized returns of Sensex for the last 30 years, this definitely looks possible.

The market capitalization of Sensex stocks in the year 2001 is Rs.7 lakhs crores. Now it is around Rs.73 lakhs crores.

At 19% annualized returns, if you’ve invested Rs.1 lakh in Sensex in 1980, it is worth around Rs.1.85 crores now. A return of 185 times in 30 years.

In the past, over a long term, many good mutual funds have beaten the returns of Sensex or their respective indices by a comfortable margin.

If you’ve invested Rs.1 Lakh in 1995 in one of the funds in our recommended list, it is worth around Rs.29  lakhs now. A return of 29 times in 16 years. An annualized return of 23.48%. 

We would be investing $1 trillion in infrastructure during next 5 years.

This is expected to take the economic growth rate to double digits.

When people talk to me about real estate, they talk about the growth in value of a particular piece of property.

No two pieces of properties are the same.

When you look at an asset class, you need to look at the overall performance as a category (like Sensex) and not few areas which have greatly appreciated in value.

Though the real estate sector lacks any reliable and broadly accepted indices like financial assets, some studies peg the annualized return of real estate as an asset class around 12%.

If you look at a particular piece of property instead of real estate as a whole, then we need to look at individual stocks instead of Index or indices.

I can give you 3 examples.

In 1980, if you’ve invested Rs.10,000 in shares of Wipro, it’s current worth is, hold your breath, Rs.465 crores. A return of 4.65 lakhs times in 30 years! Mind boggling. An annualized return of 43%.

In early 1992, if you’ve invested Rs.9500 in 100 shares of Infosys, it’s worth now is around Rs.4 crores.  A return of 4210 times in 18 years. An annualized return of 55%.

In late 2000, if you’ve invested Rs.3.82 lakhs in shares of Axis Bank, it’s worth now is around Rs.1.5 crores.  A return of 392 times in 10 years. An annualized return of 45%.

Who would have made this kind of money is not the one who is looking at stock price or NAV everyday but the one who reviews the performance once in 5 years. Buffett often says to look at not less than 5 year averages. We advice equity investments for a period not less than 10 years.

We can give many more examples of individual stocks like this.

But the right way of looking at equity asset class is not individual stocks, but index or indices.

The same way, when you look at real estate, it should not be individual piece of property, but the overall asset class.

Don’t get me wrong. Real estate should be part of one’s portfolio.

What surprises me is people’s obsession with real estate and gold and their blind belief that they are risk free and never goes down in value.

In Japan, where land is very scarce, I understand that the real estate price have crashed by more than 70% in last 20 years. Sadly even at current prices, real estate is a dream for many Japanese people.

A middle class person cannot imagine owning a home in Chennai today. This is a very unhealthy sign.

Indians are good at savings but very poor in investing.

There are more than 1 crore savings bank accounts which are dormant and have unclaimed balances. This is because I’m amazed to see people having as many as 12 to 15 bank accounts.

You don’t need more than 2 or 3 savings bank accounts– one for family expenses, one for investments and the remaining one for miscellaneous transactions.

In a fast growing economy, if you channelize your saving more into financial assets instead of physical assets, you help yourself and the economy. Otherwise, instead of you making money, foreign investors alone would get the opportunity to make money.

In 1994, there were only 0.8 phone connections per 100 people. Today it is 60 per 100 people.

Whereas in 1993, the total assets under management of mutual funds were Rs.47,000 crores. Now in the beginning of 2011, it is Rs.6.75 lakhs crores.

Considering the fact in 1993, the equity corpus and retail money was dominant in mutual fund industry, now short term debt corpus and institutional money is dominant. This indicates retail investor never participated in the excellent returns offered by the markets during the last 2 decades.

8 million investors out of 300 million+ potential investors is a pathetic number.

All over the world, mutual fund industry’s corpus are in multiples of bank deposits. Whereas in India, some report indicates, the corpus is around 6% of the bank deposits.

Even in EPF (Employee Provident Fund), the central provident fund commissioner has mentioned that 90% of people close the account within 2 years of leaving an employment. I can only wonder as to why with even a risk free product like PF, people do not want to think long term.

Somehow Indians are not used to long term in financial assets and that explains many lost and wasted opportunities.  

At the end of current decade, close to 70% of our population would be working population. A phenomenal number and would be the largest in the world.

In the current working population, only 10% work in the organized sector and the remaining 90% works in unorganized sector. Hopefully this number also would go up in the next one decade so that more employees get some welfare benefits too.

To summarize, I can tell you is that people who have missed the bus in the last decade have opportunity to make up in the current decade.

Invest in financial assets, invest for long term and in the interest of your own wealth, don’t keep regularly looking at what your investments are doing. That is your advisor’s job. You focus on your job or business or profession.

When I was investing for short term, I never made any money. Infact I lost heavily.

Whatever little I’ve today is the result of shift in focus.

I wish that in your own interest you develop a long term perspective.

Disclaimer:  Wherever mutual funds have been mentioned in the above article, please note that mutual fund investments are subject to market risks. Past performance may or may not be repeated in future. Please read the scheme related documents carefully before investing.

5 Responses to “Do you know?”

  1. Balaji Krishnan said

    Very nice one Muthu. Thanks for writing. very informative

  2. Vikas Sharma said

    Is it wise to invest rs.10000 in wipro shares today and leave it and forget it for another 36 years?
    Will it become atleast 100 crores after 36 years?
    I’m thinking of doing it this way…
    I already have sip’s and mip’s…
    Please guide.

  3. Muthu said

    As Buffett says, if past history is the only thing, then the richest people would be librarians.
    If I know whether Wipro would repeat a similar performance for next 36 years, surely I would invest more than Rs.10,000/-.If you are a good stock picker, identify the ones which have long term potential to create huge wealth.

    Since you’ve mentioned about SIPs, consult your financial advisor and invest in good SIPs for long term- 20+ years. You would be able to create good wealth through this process.

  4. saravanan said

    very informative and valuable suggestion. could u pl tell me what are the parameters u consider very essential which would make another scrip to yield 20 to 30% annualised return? Thank u so much…

  5. Muthu said

    I would suggest that you read Prof.Sanjay Bakshi. You would get answers for your query.

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