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

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Archive for the ‘Basics’ Category

It’s real

Posted by Muthu on August 27, 2015

As you are aware, in April of every year, we provide comparison charts of various asset classes since 1979-80, the year in which Sensex was formed with a base as 100.

Just to refresh your memory I want to share here the annualised return of Fixed Deposits (FD), Gold and Sensex for last 36 years:

FD: 8.41%

Gold: 10.25%

Sensex: 16.93%

This shows equity has given 2 times the FD returns and 1.65 times the gold returns.

This number doesn’t convey the reality.

As I’ve repeatedly told you, what matters is real returns; the returns after inflation.

Inflation during the above period was 7.73%

So the real returns look like this:

FD: 0.68%

Gold: 2.52%


This shows equity has given a real return of 14 times the FD and 4 times the gold.

So when it comes to real return; which is how our wealth actually multiplies, FD and gold stands no chance in front of equity.

We’ve only accounted for inflation. What about taxation? FDs are taxed at the tax slab you belong to and gold at 20% of the indexed cost. But long term capital gain of equity is completely free.

So if we adjust for taxation also, FDs would not provide any real return and gold would provide significantly lesser than 2.52%. Whereas Sensex would still provide 9.2%.

You may be wondering about real estate. There is no reliable long term data for real estate. Real estate would normally provide around 3% above inflation. So what is true for gold above would more or less hold good for real estate as well.

Also one more thing. Sensex had a dividend yield of close to 2% over 36 years. That is not included in the above calculation. Equity is already a huge winner in terms of real returns and adding dividend yield would only make it returns further extra ordinary.

Go for the real wealth creator. Go for equity.

Posted in Basics, Gold, Real Estate, Stock Market, Wealth | 2 Comments »

What is the need of an advisor?

Posted by Muthu on August 16, 2015

Few years ago, some of you wanted to stop your SIPs or exit mutual funds completely. You were frustrated with lack of results in your portfolio. We counselled you with various examples and data; the need to stay the course. You are now reaping the benefits of the same.

Through our periodical writing, daily sms etc. we keep reinforcing the value of long term orientation, patience and discipline. Many of you have told me that these serve us good pointers to continue the journey with focus and discipline.

We don’t let you chase hot funds or recent performers, invest in the current sectoral or thematic fads; but completely stay focussed on the chosen portfolio. This ensures that you avoid typical mistakes people make in a bull market.

You are aware how many mistakes you’ve avoided in your personal finance by listening to us. These mistakes, if done, would have had huge financial and emotional costs. We add significant value to you by ensuring you don’t do things which can hurt you.

You’ve understood and internalised the power of compounding, time and equity. This has ensured that you’re in the path to achieve financial independence and create huge wealth. Some of you have already achieved financial independence by under taking the journey with us for last many years.

By making you to focus on SIPs for decades of your working life, we’ve eliminated completely the need of timing the market. Not only that the beauty of SIP is that, you buy more in bear markets and buy less in bull markets. This is against the crowd behaviour of buying more in bull markets and selling in bear markets. This has ensured you would end up in the small percentage of successful investors.

One key learning all of you have now is that all asset classes are cyclical. There is no such thing as permanent bull market in any asset class. What is important is that after adjusting for inflation, which asset class delivers better return over long run.

None of you invest for 3 or 5 years. The bare minimum tenure you have is 10 years and many of you are fine with 20 years or more. Some of you have even accepted the concept of multi-generational savings and investing. You don’t know how rare this trait is. Since most of you are first time investors and got exposed only to our philosophy and views; you’ve accepted this as a standard view. The unfortunate truth is most of the investors are not lucky to get this right view even after decades.

One’s you choose the path; we do our best repeatedly to ensure that you stay the course without any digressions. ‘Doing nothing’ is most powerful after a right path and investments are chosen. Most investors keep tinkering with their investments and move away from the path carried away by greed or fear. Ensuring that you do nothing with the chosen path and investment is one of our key jobs.

Shaping the behaviour, acting as a coach and hand holding during tough times are some of the things we always do for you.

You may wonder why I’m writing all these. I’m aware that you see value in what we do and that is why you chosen to be with us. Our blog is now read by thousands of investors and hundreds of advisors. I want this message to reach them so that these investors find right advisors and stick with them. For advisors, this would serve as a positive reinforcement on the value they bring to the table.

I take this opportunity to thank you for being our clients and want to reaffirm you that we would continue to add value to you as we always do.

Posted in Basics, General, Muthu's Musings | 5 Comments »

Some basics

Posted by Muthu on August 7, 2015

1) Have an emergency fund of not less than 1 year of your expenses.

2) Insure: Term, medical, personal accident and fire insurance for your house.

3) Don’t use revolving credit on your credit cards.

4)Simplify: have two bank accounts, one credit card and one demat a/c.

5) Write a will.

6) Don’t borrow except for buying a house.

7) Ensure the value of the house is not more than 5 times your annual salary.

8) Create a corpus of not less than 30 times your annual expenses before considering retirement.

9) Spend less than you earn.

10) Try to save at least 30% of your salary.

11) Invest regularly.

12) Invest for long term; not less than 10 years, preferably 20 years or more.

13) Never stop your SIPs, especially in bear markets.

14) Never forget that all asset classes would always be cyclical.

15) Equity would provide the best return over long run than all other asset classes.

16) Follow portfolio diversification.

17) Follow asset allocation.

18) Have an advisor. The reward is worth the cost.

19) Check and review your portfolio only once a year.

20) More than your knowledge, it’s your behaviour which matters most for success in markets.

21) Come what may; always stay the course.

Posted in Basics, General | 8 Comments »

Corrections are normal

Posted by Muthu on May 12, 2015

I wrote two pieces in December and March when the markets were at 26000 levels and 27000 levels respectively, falling close to 10% from their recent highs. As always, it is to reinforce the idea that how volatility and corrections are very normal.

Today market is again at close to 27000 levels (26877 to be precise). None of you called or wrote to me asking about this kind of volatility. I’m glad that all of us are together evolving and maturing as long term investors.

There is nothing unusual about volatility and corrections. This is the very nature of markets and having stayed the course even in bear markets, you are very clear about the same. Still I feel it is my responsibility to reinforce basic tenets of long term investing on a regular basis. As I often repeat, my role is to assist you shape your behaviour towards long term investing.

In this regard, I want to share with you what I wrote in February about corrections in bull market. At that time the market was at 29000 levels. I’m reproducing the piece below as it is without any changes. Please read on:

We are in a bull market. From when? Different people have different answers. The consensus seems to be when 21000 levels were breached decisively in late 2013. So we are in a bull market for last 15 months.

Bull markets on an average last for 5 years and bear markets for 3 years. This is only an average and averages can be deceptive. Many opine that this up cycle would last for 7 to 10 years and some even suggest that we are in a structural bull market which may last 2 decades. So we are in a bull cycle for next 4 or 6 or 9 or 19 years, depending on who is saying it.

I’m not writing this piece to share my opinion. The honest answer is I don’t know. All I know is if you regularly invest for long run in a portfolio of stocks (like equity funds), accept volatility and have patience; you would do very well. I’ve given you innumerable examples in the past to explain this.

There have been structural bull runs for long run in various economies and if we are lucky we may experience one too. One such structural bull market is when Dow moved from 777 on August 12, 1982 to 11,722 by January 14, 2000. Markets multiplied by 15 times in 17.4 years; annualised return of around 17%. Though this bull market lasted for nearly 2 decades, it went through many ups and downs. One unforgettable event was ‘Black Monday’.

On October 19, 1987 (popularly known as ‘Black Monday’), the Dow fell by 22.61%. This is the highest every one day stock market fall (in percentage terms) in U.S so far. Though many reasons are given including program trading, nobody saw it coming and no one knows why it happened! At 29000 levels of Sensex today, a 22.61% fall means; fall by around 6600 points. How we would react if Sensex in a single day goes from 29000 to 22400 levels?!

The whole U.S. market got paralysed and dooms day prophets mushroomed. Everyone predicted a great catastrophe. The funny part is market recovered and closed marginally higher in December than what it opened in January. So 1987 was actually a positive year for Dow! In the long term graph, this one day fall of 22.61% looks like a minor blip.

Even in our recent 2003-2008 bull markets, when the index multiplied by 7 times in 5 years, there were many corrections and steep falls. As Morgan Housel has mentioned, since 1871, the market has spent more than 40% of all years either rising or falling more than 20%.

Though the annualized returns from equities are good; we need to learn to live with higher standard deviation (volatility). A 20% rise or fall in a year is very normal. Sensex is now at 29000 levels. Going by this point, it can even swing widely between 23200 to 34800; which is perfectly normal. No explanation required. This is how it works!

As we say repeatedly, if you can learn to live with this volatility and even use it wisely, big money can be made. Withstanding volatility and having patience will really take you to great heights.

All of you have seen a bear market and had conviction to invest through those gruelling years. That behaviour of yours has got translated now into excellent portfolio returns.

Sharp corrections and steep falls would continue to happen in bull markets as well. Be mentally prepared for it. Show the same resolve you showed in bear markets when you face such corrections. You’ve to ignore corrections and continue to stay the course.

As I’ve mentioned before, in his 5 decades of managing Berkshire Hathaway, Buffett faced 4 instances when Berkshire’s market value fell by more than 50%. In our entire investing career we may have to face at least 2 or 3 such instances. The last time it happened in India was 2008. Counting that as one; be ready to face at least 2 more similar instances within next 20 years. If it doesn’t happen, it’s fine. If you’re mentally prepared, even if it happens, it’s all the more fine:-)

Posted in Basics, Stock Market | Leave a Comment »

36 years of performance: Sensex, Fixed Deposits, Gold and Silver

Posted by Muthu on April 1, 2015

April is the time for annual review. I would be sharing your portfolio summary along with my note. I aim to complete this task by end of this month. If any one of you does not receive the report from me by 30th of April, request you to inform me. I’ll take care to ensure that each one of you receive this.

Please note that for those of you who have become our clients after December 31’st 2014 would be receiving the report and review only in next April (2016). Three months or less is too short a period for review.

As always, other than the above, whenever you need a report or review during any time of the year, please feel free to get in touch with me.

For last 4 years, I’ve made it a practice to give performance comparison of various asset classes- Sensex (Equity), Fixed Deposit (Debt), Gold and Silver and the impact of inflation on them beginning from the financial year 1979-80. Why 1979-80? That is the year from which Sensex came into existence with base as 100.

Please find attached 3 files

a) 36 years return- FD & Sensex

b) 36 years return- Gold & Sensex

c) 36 years return- Silver & Sensex

1) Assume you’ve invested Rs.1 lakh each in FD, gold, silver and Sensex 36 years ago. As of 31’st March 2015 the value is as follows: FD- Rs.18.33 lakhs, Gold- Rs.33.54 lakhs, Silver- Rs.24.91 lakhs and Sensex- Rs.2.80 crores.

2) Unlike other assets mentioned above, Sensex has dividend yield in addition to capital growth. Assuming a dividend yield (duly reinvested) of 2% on an average, the Sensex return works out to Rs.5.13 crores.

3) To put it another way, during last 36 years:

Fixed Deposits has multiplied wealth by 18 times

Gold by 34 times

Silver by 25 times

Sensex by 280 times

4) In terms of percentage, the 36 years return (as given above) is as follows: FD-8.41%, Gold- 10.25%, Silver- 9.34% and Sensex- 16.93% (18.93% if dividend yield is as assumed above)

5) When we talk about returns, we’ve to talk about inflation too. The average annualized inflation for the above period is 7.73%.

6) If Rs.1 lakh has been kept under the mattress instead of being invested, it’s value has come down to mere Rs.5500 (i.e.) purchasing power of rupee reduced by whopping 94% over 36 year period.

7) What we should look for is real returns (i.e.) returns after inflation and taxes. Since tax differs from each asset class and income category, I’ve taken only inflation and excluded taxation. Inflation is common for all.

8) After adjusting for inflation, the asset classes have grown by following annualized rate in real terms: FD- 0.68%, Gold-2.52%, Silver-1.61% and Sensex- 9.2% ( 11.2% including dividend yield). These numbers matter a lot. This is what our wealth would have grown after adjusting for inflation. Since we know the tax details for each asset class and for our income, we can work out the return after taxes too. FD would automatically turn negative. Gold and Silver would have provided a negligible return. Only equity would have provided a real rate of return of above 9%.

9) Gold’s real rate of return of 2.52% is made possible due to rupee significantly depreciating between 1980s to early last decade. Otherwise we might have got even a negative return; as globally gold fell by around 70% during the above period. I’ll explain this by example. Assume the rupee dollar conversion rate is 1 USD = Rs.60. For illustration purposes, let us assume the price of 1 gram of gold is 1 USD. With the above conversion rate, the value of 1 gm of gold is Rs.60. Imagine a scenario when rupee depreciates by 100% (i.e.) 1 USD = Rs.120. The gold price remains the same at 1 USD. The value of our gold would increase by 100% to Rs.120 though the price has not changed in the international markets and we being the net importer of gold.

10) Please use FD for contingency or emergency funds. Let gold be part of social requirement and not exceed 5% to 10% of investment portfolio. Silver is again part of only social or cultural needs. Equity is for building wealth.

11) Real estate would normally give returns better than fixed deposits but lesser than equity. There is no reliable long term data available for real estate. From what I understand from reading, in the long run, real estate can be expected to give 2% to 3% more than inflation. If inflation is 6%, we may expect a long term price growth rate of around 9%. By providing 17% for nearly 4 decades, equity has scored well over real estate.

12) Please go through the workings and assumptions in the attached files. I’ve tried my best. It may not be perfect but would be a useful pointer. Request your opinion and feedback.

Posted in Basics, Gold, Muthu's Musings, Real Estate, Stock Market, Wealth | 5 Comments »