Wise Wealth Advisors

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

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Archive for the ‘Mutual Funds’ Category

Rise and fall

Posted by Muthu on July 7, 2018

Broader markets have been going through deep correction in 2018. This has impacted the equity funds return. Rising bond yields have impacted the debt funds return. Both combined have impacted hybrid (balanced, MIP) funds return.

For those of you who have been investing for long time, portfolio still shows decent returns.

For those of you who started last year, the returns are either marginally positive and in many cases negative.

Markets are always cyclical. It never keeps going in one direction. During good periods, we think bad periods would never come and vice versa.

Rise is always followed by fall and fall is always followed by rise. The long term returns we earn are after going through these repeated cycles.

There is no way to time these cycles. Understanding cycles does not lead to timing the same.

If we expect 15% annualised returns from equity funds over next 10 years; 80% of the returns would happen in 20% of time. Need to stay for entire 10 years to ensure that we don’t miss this 20%.

Long term returns are obtained after years of high returns, low returns, no returns and negative returns.  We cannot focus on one and avoid others. If we need to participate in years of high returns, need to stay invested in years of negative returns as well.

We always ask you to take a minimum 10 year outlook for equity funds, not less than 6 years for hybrid equity (balanced) funds and at least 3 years for hybrid debt (MIP) funds.  Only liquid funds can be held for short term without any prescribed minimum period.

By our regular interactions, you are aware of all these points. Still it is my duty to keep reinforcing the same periodically.

Bull markets would be followed by bear markets would again be followed by bull markets ad infinitum. The cycle continues to keep happening. Need to go through both bull and bear markets for good long term returns. One positive aspect is there are more good years than bad years. Markets are up generally 70% of the time and down 30% of time (in years).

If looking at portfolio pains you, stop looking at the same.

Investors who review portfolio only once a year has better chance of staying the course. If you panic and redeem in bear markets, you would not be able to enjoy the returns of bull markets.

Only those who own investments in bear markets are those who are rewarded in bull markets.

Investing legend Andre Kostolany said beautifully “Who does not own shares, when their prices drop, will not own shares when prices soar.”

Be intelligent and stay the course.

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

New example but same old lesson

Posted by Muthu on March 10, 2018

Mutual fund investors are prone to two common mistakes:

The first mistake is investing after few good years and redeeming after few bad years resulting in behaviour gap, the difference between the return earned by investors vis-a-vis the return provided by the funds.

The second mistake is constantly churning the portfolio chasing recent performance.

We’ve given you many examples in the past for both the mistakes.

As our clients, we ensure that you don’t make these mistakes.

In fact, our key value addition is to ensure you avoid these mistakes, stay the course and reach your goals.

Today I want to give an example of second mistake. This is based on an article published in the March’17 issue of ‘Mutual Fund Insight.’

They have taken the 10 year period from January 2007 to December 2016.

Let us assume you believed in chasing performance and investing every year in the previous year leader (the best fund in small cap category). You would have invested in Rs.1 lakh in Janaury 2007 in SBI Magnum Midcap. In 2008, you would have moved to JM Emerging Leaders. Like that you would have invested in ten funds over the above 10 years.

Chasing performance in the above manner would have increased your wealth from Rs.1 lakh to just Rs.1.4 lakhs. An annualised return of only 3.42%

Instead had you simply stayed invested in SBI Magnum Midcap, your Rs.1 lakh would have become Rs.3.32 lakhs, annualised return of 12.77%

Staying invested got you 12.77% while chasing performance got you only 3.42%

Chasing performance really hurts your return.

Timing the market is the first mistake and chasing performance is the second mistake.

Avoiding these two mistakes would make you a successful investor.

That is the reason why we never let you time the market and suggest changes in portfolio only when it is really required.

Posted in Behaviour, Mutual Funds | 2 Comments »

Peter Lynch on market timing

Posted by Muthu on November 19, 2017

Peter Lynch was one of the best fund managers. He managed a fund called Fidelity Magellan Fund for 13 years, between 1977 and 1990. $1000 invested in 1977 in his fund has become $28,000 in 1990. Money multiplied by 28 times in 13 years, annualised return of 29.21%

I was reading one of his interviews today. Thanks to @stocknladdr  for sharing the link. As you know, we are always against market timing. In our opinion, you should invest when you have money and redeem when you need money, ensuring at least there is a 10 year time period in between.

Peter Lynch has provided a study on market timing. Let us listen to him in his own words.

“People spend all this time trying to figure out “What time of the year should I make an investment? When should I invest?” And it’s such a waste of time. It’s so futile. I did a great study, it’s an amazing exercise.

In the 30 years, 1965 to 1995, if you had invested a thousand dollars, you had incredible good luck, you invested at the low of the year, you picked the low day of the year, you put your thousand dollars in, your return would have been 11.7% compounded.

Now some poor unlucky soul, the Jackie Gleason of the world, put in the high of the year. He or she picked the high of the year; put their thousand dollars in at the peak every single time, miserable record, 30 years in a row, picked the high of the year. Their return was 10.6%. That’s the only difference between the high of the year and the low of the year.

Some other person put in the first day of the year, their return was 11%. I mean the odds of that are very little, but people spend an unbelievable amount of mental energy trying to pick what the market’s going to do, what time of the year to buy it. It’s just not worth it.

Excellent timing returned 11.7%. Lousy timing gave 10.6% and disciplined investing provided 11%. Always keep this in mind and stay the course.

Wishing you a wonderful week ahead.

Posted in Mutual Funds, Stock Market, Wealth | 5 Comments »

Simple yet effective

Posted by Muthu on October 28, 2017

Walking thirty minutes a day is good for health. Eating simple vegetarian diet is also considered good for health. But not all of us walk or eat simple food. There is nothing great in the suggestion to walk or have good diet. These are very simple suggestions but are extremely effective if followed upon.

SIP is also a very simple idea of investing a fixed sum every month for many years. There are few million SIP investors in the country. I would not be surprised if it becomes tens of millions over next one decade. As we’ve seen above being simple or common does not mean it is inferior. All of you have been SIP investors for long with a minimum commitment period of one decade. You’re already seeing the result of this simple method.

I was reading Mutual Fund Insight magazine of this month. One example attracted my attention and thought of sharing the same. If you’ve started investing 20 years ago, Rs.10,000 a month in HDFC Tax Saver and increased the contribution by 10% every year, you would have invested Rs.68.7 lakhs over  last 20 years. The value of the same now is Rs.7.06 crores, an annualised return of 24.78%.

Who would have got this return? Someone who invested for 20 years, while increasing SIP contribution regularly, completely ignoring plenty of bad news which he kept hearing frequently and staying the course without wavering.  This sounds very simple but extremely difficult to follow.

All of you, our clients, are sticking to this simple but effective discipline. You’ve achieved what is behaviourally difficult for many investors to achieve. We would continue to offer simple and effective solutions while ensuring you stay the course.

We may not get in future the kind of returns an investor would have got in the example cited above. But equity is the best asset class to own in India for long term. The returns would be superior to what we can get elsewhere.

In personal finance and investing, simplicity triumphs complexity by a wide margin. What is simple is also mostly effective.

Keep up the behaviour and continue to stay the course.

Posted in Mutual Funds, SIP, Wealth | 2 Comments »

Some changes expected in next 5 years

Posted by Muthu on October 21, 2017

I anticipate some changes to take place in next 5 years or so. Though I cannot precisely time, I strongly feel this is the way forward.

As a first step, expense ratios of mutual funds would come down. This would lead to reduction in income for mutual fund companies and advisors. As an investor, it is good for you because the return goes up to the extent of cost reduction.

As a next stop, expense ratio would further come down leading to zero commission income for us. We would be asked to become RIA (Registered Investment Advisor) and charge you a fee. Those who pay fee would continue to get advice and service. Those who cannot or do not want to pay need to take care of their affairs on their own.

Actively managed funds are broadly doing well now because mutual funds are still not a very significant percentage of total market size. At some point, due to growth in their size, they will become THE market. Once they become the market, they cannot outperform markets. As an investor, you may then want to own passive funds. Passive funds simply invest in broader indices like Nifty 50 or Nifty 500 for a very low cost. ETFs (Exchange Traded Funds) listed in stock exchanges would also come into being which also can be owned at very low cost.

The expense ratio paid is worth now because of the alpha (excess returns over benchmarks). When alpha is no longer there, cost cannot be justified.

Not only costs would come down, the returns also would be down. When there is no alpha you get only market returns. This would have huge impact on the entire eco system of investors, asset management companies, advisors and distributors.

It is our responsibility to advice you on the above as and when we feel the time is ripe. As I said, I see it happening within 5 years or so.

We would then tell you whether to only own passive funds or some combination of active, passive and ETFs.

These changes would not be limited only to equity but for hybrid products like MIPs and balanced funds as well.

For those of you who would continue to be with us when our revenue model changes from commission to fee, our advice and services would continue as usual.

This is the way forward.

There is nothing you need to do now on this communication. It is just to keep you updated on the changing landscape in coming years.

When the time for change come, we would handhold you.

Despite any changes, we would continue to assist you in reaching your financial goals, financial independence, building and managing wealth.

Whether it is active or passive, funds or ETFs, commission or fee our focus would be on you and your behaviour. In any form, we would continue to focus on right behaviour of discipline, patience and staying the course.

Have a nice weekend.

Posted in General, Mutual Funds | 2 Comments »