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

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Archive for the ‘General’ Category

It’s review time

Posted by Muthu on March 30, 2019

Other than our regular meetings and interactions, at the end of every financial year, we make it a point to send you portfolio reports along with our review.

Yesterday was the last working day of the market for the financial year 2018-19.

We would start sending your reports from next week and we hope to finish the task for every single client by end of April.

2017 was a great year and you all saw phenomenal returns. 2018 turned out to be a horrible year. But for the sharp recovery in the month of March, this financial year had a very bad time.

For long term investors, the portfolio returns look good. For those of you who started in the recent years, it is average to below average performance.

It’s election time and this is in the top of the mind for every investor. In the long run, markets are not influenced by politics. In the short run, sentiment and liquidity rules the roost. In the immediate future, election results would have impact on the markets. In the long run, what matters is return on equity and growth in earnings.

In the last 40 years of Sensex journey, it has seen all kind of governments; NDA, UPA and third front. The long term results you see are after going through multiple governments. I’ve no permanent affiliation to any one party or leader. Each election, be it parliament or assembly or local body; I’ve voted based on what I felt appropriate at that point of time.

Any government would have pluses and minuses. All I see is which one is more. This time I would prefer NDA government. I believe it is good for both the country and corporate India. None of us can be sure of who would form the next government till the last vote is counted. If NDA loses, it may impact market negatively for short term. In the long run, markets are politically agnostic.

Don’t worry about electoral outcomes. Your only focus should be on developing right behaviour and temperament. In your investing journey, you’re going to see multiple governments and prime ministers. They are not going to determine your investment results. The only deciding factor is going to be your behaviour.

Those of you who have invested during the recent years may be concerned by the lacklustre results. This too shall pass. Long term results would always be good. For time being, trust my words. In the long run, portfolio return itself would automatically convince you.

It’s all finally boils down to staying the course through ups and downs. The long term results are always rewarding.

All the very best for sticking to the course.

Posted in General, Muthu's Musings | 1 Comment »

The future roadmap

Posted by Muthu on February 24, 2019

There have been lot of good developments over the last few years for the investors of mutual funds. The costs have been coming down, funds have been meaningfully classified and appropriate benchmarking has been done.

The costs would further come down from April of this year. Henceforth we see costs going only one way, down. Due to increased allocation to financial instruments by households, the size of the funds has been going only one way, up.

Globally, majority of the funds struggle to beat the benchmark. I would give you an example. If Nifty returns 12% in a year, your large cap fund should provide you more than 12% to justify the cost. The excess return over benchmark is called alpha. If the fund provides you lesser than benchmark, the cost you’ve incurred is simply waste of money.

To the credit of Indian fund industry, over last two decades, funds have created significant alpha over the benchmarks to justify the cost incurred. This is likely to change. World over, index funds have been gaining strength as fund managers find it extremely difficult to beat the index. In my view, this may be the case in future for India as well. Though Indian fund managers are confident of beating the index in future, I doubt whether that would be the case.

Based on the industry’s past track record, I want to wait for next three years to see how things take shape. We need to then decide whether we would move fully to index funds or combination of index funds as core portfolio and some active funds as satellite portfolio. We also need to choose whether the investments would be through funds or ETFs.

The advantage of index funds is the costs would be very low. At the same time, investors have to settle down for index returns and not something over and above. As much as the costs would come down, the returns also would go down.

I want to touch upon here real and nominal returns. Equities in India have been providing around 8% over and above inflation. When inflation was 8%, the returns were as high as 18%. Here the nominal rate of returns is 18% and the real rate of returns is 10% (over and above inflation). You can see that the inflation has been coming down over years. If inflation settles around 5% in the long run, then equities would provide nominal returns of only 12% or 13%.

Though the real returns remain the same, the nominal returns would come down. To give you an example, during times of high inflation, you may get 12% as salary increment. When the inflation comes down, the increment may be only say 6%. Though ‘really’ you’re not getting less, ‘nominally’ you’re getting less.

If indexing, alpha, real or nominal returns sounds very confusing, I would clarify all these in our personal meetings. In your own interest, it would be better to start learning.

As you’re aware, we’ve never recommended you any NFOs (New fund offers), sectoral or thematic funds, closed ended funds, PMS (Portfolio management services) and AIF (Alternative investment funds). We’ve consciously avoided all exotic and expensive stuff. Recommending these would have made you poorer and us richer.

Our biggest contribution is to avoid all nonsense and choose few sensible stuff. Also we’ve been continuously focusing on your behaviour to ensure you stay the course and earn the returns the funds are able to offer in the long run.

For now, you need to do nothing. But in next three years, we may have to relook the way you invest.

As I’ve said earlier, your costs are going down. This means the income of fund houses and advisors have also been going down. Ultimately what is good for you only should prevail.

Once indexing becomes the main stream, the cost would be bare-bones and so is our income. We also expect the regulator to nudge advisors to fee based model rather than commission based one. The intermediaries like us would then have to become RIAs (Registered investment advisor), who would only charge fee. Also there may be migration towards flat fee rather than asset based fee.

I’m writing this to keep you informed of likely changes in next three years. We need to see how things evolve before firmly recommending you a course. Stay with us. We’ve guided you so far with utmost integrity which would continue in future as well.

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

Extreme patience

Posted by Muthu on February 12, 2019

To make money from equities, not just patience, but extreme patience is required.

Even last piece I wrote on patience. I’m continuing with the same. Why?

Patience is the most difficult virtue to develop. As I’ve said before, the origin of the word patience means suffering. To be patient is to suffer.

By nature, we try to avoid pain. But nothing worthwhile is ever achieved without going through pain.

Markets may not give any returns for three years and give three year returns in the fourth year.

Gains are never linear but always lumpy.

Markets can test our patience to the extreme. Only those who are able to bear the same are rewarded well.

Investors who are impatient seldom make money from markets.

Those who are with us for long are still seeing good returns.

Those who have become clients in the last few years are staring at bad returns.

Things will definitely change. Over a ten year period, the results would be good.

I cannot predict when markets would start going up. All I know is, in a decade, you would have more good years than bad years and the overall results would meet your expectations.

I can motivate and handhold you. But it is you who need to develop the required virtues.

Stay the course with faith. You would be amply rewarded.

Posted in General, Muthu's Musings, Stock Market | 1 Comment »

Need of the hour is patience

Posted by Muthu on February 4, 2019

“The biggest thing about making money is time. You don’t have to be particularly smart; you just have to be patient.”- Warren Buffett

Though broader indices may not say so, for all practical purposes, for majority of stocks we’ve been in a bear market.I saw a fund manager presentation. Only 21% of BSE 500 stocks ended positively in 2018. The rest 79% have given negative returns.

Debt market has also not been doing well for more than a year.

So be it equity funds or hybrid one like balanced and MIP, returns have been abysmal.

We know that 70% of the years, it is bull markets and only the balance 30% is bear markets. Still time moves very slowly in bear markets. Our patience and discipline are severely tested.

It is normal to be impulsive and impatient. That’s why it’s very difficult to make money in the markets. Only the few who are disciplined and patient ultimately makes it big from the markets.

All you need to do now is to simply the stay the course. Looking at portfolios can be painful. So I would suggest not to look at them till market recovers. Rain or shine, good or bad, I send yearly reports with my comments in April every year. It is generally a good thing to look at your portfolio once a year. More so in the negative market conditions like this.

There are many people who predict what would happen before or after elections. It is simply their opinions. May or may not happen. You know that I don’t make short term predictions.

The government is aiming India to be a $10 trillion economy in 2030. We’ve lot of foundations already in place. India is definitely a structural long term growth story. When we move from $2000 per capita to say $8000 per capita over next twelve years or so, lot of companies would do very well. As an equity holder, you would be reaping those benefits.

Keeping bigger picture in mind is the only way to withstand the short term pain. You’ve invested in equities with belief in a better tomorrow for the country and corporate India. Stay with that belief. I don’t know what would market do based on pre-poll opinion polls and election results. It is both difficult to predict events and market reaction to those events. All I can tell you is, whenever you’re in a bear markets, a bull market is always around the corner.

Maintain discipline. Stay patient. All would be well.

Posted in Economy, General, Muthu's Musings, Stock Market | Leave a Comment »

13th Year

Posted by Muthu on January 1, 2019

Wishing you and your family a wonderful 2019.

I’ve made it a practice to write on the first day of every year.

After quitting employment in December 2006, I formally got into this profession on 1’st January 2007.

This is our 13th year into the profession. I’ve been evolving a lot both as an investor and an advisor. You’ve been part of this journey and I am proud to note that there are very few emotionally matured investors like you. Only a small percentage of investors can manage their behaviour and emotions well. Those who do that are the one who create wealth from markets. I’m glad that you’re all part of this tiny minority.

For the last two years, we’ve stopped taking new clients except if it comes as a strong referral from anyone of you. We’re fine with where we are now. We want quality time to be made available to you as and when required and I also enjoy the free time the current bandwidth offers.

I’m financially independent and contented with our present state. I don’t want to increase the quantity, there by affecting quality. Time is finite and there is no point in spending it by chasing more and more growth.

I want to be always of assistance to you in managing your financial affairs. I want all of you to build good wealth and also preserve the same. Getting rich is difficult and remaining rich is most difficult. We’re there to guide you both in creation and preservation of wealth.

2017 was a great year in terms of return and 2018 was bad on the same. There is no way to avoid bad years. I’ve no clue how 2019 would be. All I know is there are more good years than bad and staying invested for a decade or more creates good wealth.

It would have been a great pleasure to see the portfolio in 2017 and painful to see the same in 2018. Pain, even though temporary, is the price we have to pay for long term wealth creation.

Nothing worthwhile in life can be achieved without some amount of pain. It holds good for wealth creation from markets as well.

Focus on your life going through the pleasure and pain it offers. Leave the investment part to us. Avoid looking at portfolio frequently. The emotional roller coaster you would go through by constantly looking at markets is not worth it. There are better things to do in the finite time available on earth. We would continue to do yearly review for you, which is more than enough. Investors for whom market is not the profession, yearly portfolio review is good enough.

I wish that 2019 be good to you and your family. Once again best wishes for a wonderful year ahead.

Posted in General, Muthu's Musings | 2 Comments »