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

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Market thoughts

Posted by Muthu on July 24, 2011

Good to write on personal finance nearly after a month. 

It’s 6 months since I’ve updated the pages in our portal and was working on the same yesterday.

I wanted to share some thoughts which came to my mind while doing the above work.

If you’ve invested Rs.1 lakh in Sensex ten years ago and simply sat tight, your money would be worth Rs.5.45 lakhs now- 545% absolute returns or annualized returns of  18.48%.

If you are a market timer who keeps hopping in and out of the market, merely missing 10 best days would have almost halved your returns. Missing 10 best days during the last 10 years would have given you an annualized return of only 9.85%.

Someone who hops, normally hops frequently. So if you’ve missed just 20 best days in the last 10 years, you would have earned a princely return matching your savings bank account.

There is no need even to talk about missing best 30 or 40 days because your original capital would have actually eroded, resulting in negative returns.

While updating the pages, I also observed one more interesting thing. One of the good equity funds we recommend has delivered 1644% absolute returns or annualized returns of 32.47% during the above 10 year period. This means if you’ve invested Rs.1 lakh in the fund 10 years ago, it is worth Rs.16.64 lakhs now.

Taking one step further, I checked how much Rs.5000/- invested every month for the last 10 years would have fared now. The value of the investment now is Rs.30.12 lakhs, annualized returns of 26.80%

I was also thinking about some who were apprehensive in investing in MIPs (which is a conservative debt oriented hybrid product) 3 years ago. In 2008, there was fear in investing in anything leave alone equity. The fear turned out to be unfounded as the schemes we suggested then have given annualized returns in excess of 14% during the last 3 years.

You would have observed how interest rates have been fluctuating between 5%+ levels to 10%+ levels during the last 6 to 7 years. Despite these cycles, the above MIPs have given annualized returns in the range of 11% to 12% during the above period.

Even while investing in debt (fixed income products), I always believe MIPs should form part of the portfolio.

It is important to understand the nature of the products in the portfolio. In raising interest rates scenario, MIPs would under perform. When the rates start falling, as the bond prices rally, there would be an excellent performance. By staying invested despite interest rate cycles, one can expect to earn better than other fixed income products and also a better post tax returns because of the difference in tax treatment.

Also in MIPs, unlike bank FDs or small savings, there is no tax on accrual; only on receipt. This facilitates better compounding.

Bank FDs also carry a risk. Though legally there is no guarantee (beyond Rs.1 lakh under DICGC), for all practical purposes I believe that none of the banks which is regulated by RBI would default on repayment of capital or interest. But there is some thing which is called as ‘reinvestment risk’.

When the interest rates are high, banks would be reluctant to offer higher rates not more than for a period of 2 years. This means they expect the interest to fall in future. When we go for renewal, we would not get the same high interest rates again but has to settle for the then prevailing rates. This is what the term ‘reinvestment risk’ means.

Post tax, bank FDs do not help us to beat inflation much. Any investment which does not beat inflation actually erodes our capital. The cruelest tax on our money is inflation. Even tax evaders are not spared of this tax!

We advise bank FDs, small savings etc. too as part of debt component of one’s portfolio. I’m just pointing out limitation of these safe products too.

Peaking or bottoming out of the interest rate cycles are difficult to predict. Given the last 6 decades history of inflation and interest rate cycles, looks like we may see softening of interest rates before end of next year. So it’s a good time to invest in MIPs with not less than 3 year outlook.

Ofcourse, if you have a 5 year outlook, good MIPs would not disappoint you and anytime is a good time to invest in the same.

However, the same cannot be said for equities. There is no need to time the market for SIPs. Infact the very idea is of investing through SIPs is not to time the market; but invest regularly for long term, completely ignoring the market levels.

When it comes to lumpsum investments, even when you’ve a long term outlook, it is better to invest when the valuations are cheap or reasonable. Entering the market with bulk investments when the valuations are high may not provide superior returns even for a long term investor.

Most people do  not make money in the market because they are euphoric and buy at peak and get depressed and sell at bottom.

If you observe, the markets are in the same level as it was 4 years ago in 2007. Though the index is at the same levels, the valuations have become cheaper due increase in earnings during the last 4 years.

Lumpsum investments made in equities now have potential to fetch good returns in next 5 years. As always, to be on the side of caution, I would suggest you still to take a 10 year outlook.   

In the next 10 years, our GDP is expected to increase by multiples of 4 or 5. The total balance sheet size of our banks, which was around $1 trillion at beginning of this year, is expected to multiply by 10 times and touch $10 trillion in 2020.

We are expected to be third largest economy in the world by 2030. In my opinion, next 2 decades is going to be golden period in the Indian equity markets.

If we can be disciplined and have right temperament, good benefits would accrue to us during the next one decade.

The approach we’ve towards markets and investments is most important than any esoteric models and techniques.

I’m confident that our family wealth would grow well in the next one decade. I’m not greatly impressed by possessions wealth can provide but definitely attracted by the independence it offers.

What I say for my family wealth equally holds good for all our clients who share our philosophy and approach.

There would always be some problem or another in the globe and even domestically. Reacting to every negative news would take us nowhere. Whenever market tanks you would definitely hear screaming headlines ‘investors loose lakhs of crores’.

Having a long term outlook, in the growth of Indian economy and hence the Indian corporate sector and completely shutting oneself emotionally to non stop flood of news, would create us good wealth.

Good investment is boring but would make you wealthy.

Since I’ve made some forward looking statements and discussed the past performance of some schemes, do not forget to read the disclaimer in our portal.

Tail piece: There is lot of small / tiny cockroaches in our kitchen and the maid is unable to do anything on the same. My wife completely took care of all these and I’ve to handle such difficult problems (?)  for next few months. Expert suggestions on how to drive away cockroaches is welcome.

One Response to “Market thoughts”

  1. Vikas said

    cockroach hit spray will work…i recently had this kind of problem in my kitchen…once i applied the the hit spray…hundreds of small-small cockroaches came outside and died…

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