Wise Wealth Advisors

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

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Archive for the ‘SIP’ Category

Holding Period

Posted by Muthu on March 19, 2015

Recently I wrote about Dalbar studies and performance gap.

From 1984 to 2014, for a period of 30 years, the S&P 500 has given an annualised return of 11.11%. Whereas equity fund investors earned only average annual return of 3.69%. The performance gap is 7.42%.

Why performance gap? When a fund, after expenses, over a 10 year period, gives 18% returns, the investors also should have also made the same. But this rarely happens in a real life scenario. Investors invest more when the markets are high and redeem more when the markets are low. Added to that they keep chasing performance. A good fund is ditched because it had a bad year. A risky fund or not so good fund but which shows recent good performance gets lot of inflow. All these ensure that investors as a group earn less than what the funds provide. In many cases, people actually lose despite markets and funds doing well over a period.

Prashant Jain, one of the best fund managers in the country, in a recent interview has mentioned that only 2% of the AUM in HDFC Equity Fund is more than 10 years old.

I was going through an article in Business Standard today. AMFI (Association of Mutual Funds in India) has recently released some data. As per the same, 25% of the equity investors hold the fund for a period of 6 months or less. 50% of investors do not hold for more than 2 years. The median holding period of investors is barely 18 months to 24 months.

From what Prashant Jain has mentioned, hardly 2% of the investors may be holding funds for 10 years or above.

As Morgan Housel says, “The single most important variable for how you’ll do as an investor is how long you can stay invested… Time is massively powerful.

People who stay invested for 10 years or 20 years reap the benefit of time and compounding.

As I’ve emphasised many a times, you are rare ones. It’s rare for investors to have a long term vision of 20 years, ignoring ups and downs of the market, stay focused and stay the course.

We are lucky to have you as our clients. We have many clients who have been doing SIP without break for 8 years, 7 years and so on. Around 50% of our clients have been doing SIP for 5 years or more. People who became our clients from 2011 onwards would also be joining the above list in the years to come. They are also been regular in their SIPs for last 4 years, 3 years and so on.

At some point, we would have 90%+ our clients who have been doing SIP for 10 years or more against the industry average of 2%. The remaining 10% would have been new clients (i.e.) clients lesser than 10 years with us. We are focusing on creating a unique investor community of hundreds of families with real long term orientation and disciplined investing.

The steps to get rich are easy. But self mastery is extremely difficult. Discipline, patience and long term orientation are the key to self mastery in investments.

As an advisor, I’ve taken it on myself to ensure that you practice this self mastery. I would always stand by you and support you toward this.

In my professional life, I’ve a big ambition. I want hundreds of families to make huge wealth through equity investing by practicing this self mastery. By huge wealth I mean, tens of crores in many cases and 100+ crores in at least few cases.

Already many of you have been doing SIP for last many years. You’ve started seeing the results. You would be amazed to see how much you would be worth in next 10 to 20 years, if you continue in this path.

Stay the course.

Posted in Mutual Funds, SIP | Tagged: | 4 Comments »

Dalbar & Performance gap

Posted by Muthu on February 21, 2015

You may know Peter Lynch, one of the best mutual fund managers who managed Fidelity Magellan Fund and produced an outstanding performance. He once said that more than 50% of the investors in his fund lost money despite the fund being an outstanding performer. Reason? Inflows were more after few good quarters and outflows were more after few bad quarters.

Boston based Dalbar releases a QAIB (Quantitative Analysis of Investor Behavior) report every year. Dalbar compares how much the investment gave versus how much the investors made. The difference is called performance gap. From 1984 to 2014, for a period of 30 years, the S&P 500 has given an annualised return of 11.11%. Whereas equity fund investors earned only average annual return of 3.69%. The performance gap is 7.42%.

Why performance gap? When a fund, after expenses, over a 10 year period, gives 18% returns, the investors also should have also made the same. But this rarely happens in a real life scenario. Investors invest more when the markets are high and redeem more when the markets are low. Added to that they keep chasing performance. A good fund is ditched because it had a bad year. A risky fund or not so good fund but which shows recent good performance gets lot of inflow. All these ensure that investors as a group earn less than what the funds provide. In many cases, people actually lose despite markets and funds doing well over a period.

Prashant Jain, one of the best fund managers in the country, in a recent interview has mentioned that only 2% of the AUM in HDFC Equity Fund is more than 10 years old. Since we do not know what percentage (it can be say 0.2% or 20%) of investors hold this 2%, for ease of understanding let me assume that 2% of the investors hold this 2% AUM. So the benefit of long term compounding and superior performance of HDFC Equity Fund is experienced only by 2% of its investors!

I also take this 2% as a representative sample for all equity funds of HDFC mutual fund.

One of their funds, an ELSS scheme, HDFC Tax Saver has given an annualized return of around 28% over last 19 years.

This means that the invested amount has multiplied by 101 times over last 19 years period.

Rs.1 lakh invested in 1996 would have been worth Rs 1.01 crores at the end of 2014.

All sounds good. But if you look at who benefited by these returns; it is only 2% of the investors.

As Dalbar studies has repeatedly pointed out, investor returns is much lesser than the investment returns.

This is because investors are not disciplined. They fear volatility. They do not have patience. They lack long term orientation.

In my last piece, I mentioned that you are one of 4% of the population who have been blessed with the ability to invest. Also you are one of the 1% who has understood the opportunities available and is investing in equity. Most important is you’re one of the rare 0.2% of the country, who has understood the power of investing regularly through SIPs.

Now you would have understood why only few get rich from stock markets or equity investing despite so much of good performance made available by quality stocks, good equity funds and even index itself.

The steps to get rich are easy. But self mastery is extremely difficult. Discipline, patience and long term orientation are the key to self mastery in investments.

As an advisor, I’ve taken it on myself to ensure that you practice this self mastery. I would always stand by you and support you toward this.

In my professional life, I’ve a big ambition. I want hundreds of families to make huge wealth through equity investing by practicing this self mastery. By huge wealth I mean, tens of crores in many cases and 100+ crores in at least few cases.

Already many of you have been doing SIP for last many years. You’ve started seeing the results. You would be amazed to see how much you would be worth in next 10 to 20 years, if you continue in this path.

Stay the course.

Posted in Basics, Mutual Funds, SIP, Stock Market, Wealth | Tagged: , | 10 Comments »

A question and my answer

Posted by Muthu on February 6, 2015

As you are aware, I’ve been contributing to ‘Nanyam Vikatan’ Q&A section for the last 8 years.

In the latest issue, one gentleman asked me the below question.

“I’m 48 years old. I want to start saving for my retirement which is another 10 years away. I can save Rs.10,000 a month for next 10 years and I need a corpus of Rs.75 lakhs at the time of retirement. Please guide me as to how I can reach this goal of Rs.75 lakhs.”

My answer to him was as follows:

“To build wealth, you need to invest in equity. The best way to do is through SIPs in diversified equity funds. If you do a SIP of 10K per month for next 120 months (10 years), at 18% annualised return, you would be able to accumulate a corpus of only Rs.33 lakhsIf you want Rs.75 lakhs in 10 years, you need to save Rs.22,300 every month.

If you can only save 10K per month, then you need to invest for 14 years to get a corpus of Rs.75 lakhs.

So you need to either increase the SIP amount or the investment tenure to achieve the retirement goal of Rs.75 lakhs.”

If you notice, by extending the investment tenure by 4 years, he is able to get 2.3 times more than what he would have accumulated in 10 years and achieve his goal. Whereas if he is particular that the corpus has to be achieved in 10 years, he needs to save 120% more than what he is capable of saving now.

In this case, he should find a way to work for 4 years after his retirement from the current job. Otherwise, even by his own calculations, it would be difficult to lead his post retirement life.

If he had started early, say even at the age of 38, the same 10K invested per month would give him Rs.2.34 crores at the retirement age. He can lead a post retirement life beyond his expectation.

People want substitute for time in investment. Compounding needs time to work and it is always back loaded (i.e.) major portion of wealth gets build up only in the later part of investing tenure.

Searching for higher returns in order to reduce the time required to build wealth may lead to taking unnecessary risks.

If someone is 30 years now and wants to retire at 60 with Rs.100 crores, at 18% annualised return, all he has to do is to save 70K per month.

If you think, Rs.100 crore would be small in 30 years, you are wrong. At 6% inflation, it is worth Rs.17 crores today. In other words, what Rs.17 crores can buy today, Rs.100 crores can buy the same thing 30 years down the line.

Time can compound even small amounts into big sum over a long period of time. If you are saving big amount, then imagine how much it would be worth if only you can give not less than 10 to 20 years for investment to work.

Posted in Basics, General, Media, SIP, Wealth | 18 Comments »

A tweet from a Fund Manager

Posted by Muthu on January 23, 2015

Samir Arora (@Iamsamirarora ) is a fund manager based out of Singapore. Once, he was a mutual fund manager in India managing the schemes of Alliance mutual fund. Alliance was subsequently take over by Birla Sunlife. He has tweeted the following today:

“Birla Sun Life Tax Relief 96 (previously Alliance Capital Tax Relief 96) Mutual Fund (yes Mutual Fund) up 101 times since launch on 3/31/96.”

As per Valueresearch, this fund was launched on 29th March 1996 and has given a return of 27.85% since inception. His facts are right. If you’ve invested Rs.1 lakh, 18.8 years ago, on 31.03.96, it’s worth Rs.1.02 crores today.

Since you all do SIP, I want to share the SIP data as well. From April 1996 to January 2015, for 18.8 years, that is 225 months, if you’ve invested Rs.10,000 per month in SIP, you would have totally invested Rs.22.5 lakhs till date. The market value of the same as on date is Rs.3.75 crores. This works out to an annualised return of 23%.

As you are aware, we always take the long term market average of 18% while assuming future returns. We’ve many times explained the logic behind assuming this number. I don’t want to repeat the same now. But as per CRISIL data published last year, actively managed funds as a category has given 22.6% annualised return over last 17.5 years; more than what we assume!

I’ve got many responses for ‘Think Big’ piece. You’ve written that you want to aim for anywhere between Rs.30 crore to Rs.100 crore over next 20 years. We are in a right place in right time. The next 20 years would be better than the last 20 years. All you’ve to do is the stay the course and invest regularly.

We are in a bull market. We do not know yet if it is a secular bull market. Bull markets can last an average of 5 years and secular bull markets can even last 2 decades. Whatever it is corrections and falls would be natural. Markets never go only in one direction. Sharp corrections and bursts are very normal and that is what helps you to get more units as a SIP investor. Don’t forget that. May be I’ll write a piece soon about corrections in bull markets.

Also don’t forget that this 27.85% (102 times multiplier of money) returns given by the Birla Sun Life Tax Relief 96 is also after going through many ups and downs, bull and bear markets, euphoria and despair. Even though your portfolios are doing very well now and you’re bound to make a huge wealth in the long run; never forget the cyclical nature of the markets.

Stay the course.

All the best.

Posted in Mutual Funds, SIP, Stock Market | 3 Comments »

Think Big

Posted by Muthu on January 21, 2015

Those of you who are investing for 5 years or more, regularly through SIPs, have already started experiencing the power of compounding and equity.

This is only a beginning. You would make huge wealth through equities in the years and decades to come.

I’ve written about this couple of months ago. But I want to reemphasise this again. If you can internalise this one piece, you will build a great fortune.

Aim for really big money over next 20 years. Once you accumulate wealth, you can then think about distribution in terms of how much to give to heirs, what to give back to society etc.

How would you feel if you can have Rs.60 crores after 20 years?

Those of you who have accumulated Rs.1 crore so far and doing a SIP of Rs.1 lakh per month (through equity funds), can expect to be worth around Rs.60 crores in next 20 years. That is USD 10 million in 20 years. You would be in top 1% of not only India’s population but the world population itself.

If you’ve Rs.50 lakhs invested in equity MF so far and is doing a SIP of Rs.50,000 per month, the value after 20 years would be Rs. 30 crores. With USD 5 million, you would also be in the cream of world population, top 1%.

For the above illustration, I’ve assumed good diversified equity funds delivering an annualized return of 18% over next 2 decades.

Someone who has Rs.2 crores in equity funds asked me how much he needs to save every month to achieve Rs.100 crore in 20 years; assuming 18% annualised returns. Roughly the amount works out to Rs.1.23 lakhs per month.

He asked how much that Rs.100 crore is worth today? Assuming a long term inflation rate of 6%, it is worth Rs.31 crores today. This means what you can buy with Rs.31 crores today; you can buy the same with Rs.100 crores 20 years down the line.

He was stunned by the power of equity, power of time and power of compounding.

As India moves from a low income per capita to a medium income per capita country, as we move from a $2 trillion to $20 trillion economy, over next 2 decades, with nominal GDP (real GDP + inflation) growth rate of around 15%, 18% annualized returns from stock market (equity funds) look very much possible.

As you are aware, stock market growth happens in spurts with a high degree of volatility. In bear markets, even a diversified equity fund falling by 40% or so is not uncommon.

You’re reaping rewards now for sitting tight in one bear market. Even in a secular growth country like India, we’ll go through couple of bull and bear cycles in next 2 decades. If you can sustain the temperament and the patience you’ve developed in last few years for next 2 decades, huge fortune is all yours.

I’ll continue to do my best to assist in developing the right temperament and behaviour to stay the course. The rest is in your hands.

Think big.

Patiently stay the course.

Posted in SIP, Stock Market, Wealth | Tagged: | 1 Comment »