Invest fearlessly and grow wealth through Equity MF

Invest fearlessly and grow wealth through Equity MF

Each one of us should understand why we invest and for whom we invest. We invest for ourselves and our family. If we are investing for ourselves it has to be the best. The Best is something which can be converted quickly and easily into cash (liquidity), must be safe i.e. it should be giving me a return beating inflation and since my money is going to be used in an economic system, I should be adequately compensated in terms of return.

We invest because there are many needs and requirements which will come in different stages of life and we require adequate amount of money for it. How much we will be requiring in future is very difficult to say but one thing is sure it will be much more than today’s cost.  Since apart from normal inflation there is bigger impact of lifestyle inflation due to increasing aspirations, needs and wants, I will require much more money than originally thought . We can look back into our own lives 5, 10, 15, 20…years back and would have never thought of new types of expenses we incur today.

The asset which is closely related with lifestyle products and takes care of lifestyle inflation is Equity. Equity is most closely related with economy vis a vis other asset.  if I am investing for myself and my family my definition for best investment should be one that gives me desired amount when I want and that I will get from equity investment. E.g. in 70s and 80s having scooter or motorcycle was a normal Indian dream. Today all dream to have car and that also premium one. If one had visualised that 20 years ahead his need will be car and if in line with change in lifestyle he had invested in Maruti or in stock of big car then by the time he wanted to buy a big car his investment would have also grown much more than the cost of that car. But this one can say in hindsight. For a normal person not easy to visualise his need or new product years ahead nor can he analyse the trend but he does not need to worry as there are professional to take care of this.

If leading a prosperous life means having luxury products at one end then he has to have enough money to purchase those things when desired and that can happen without much of stress by investment in right asset (equity) and right product (Equity Mutual Fund).

Rather than investing directly on own in equity, investment through a proven fund is always better because stock selection is research based, diversification is based on risk-return optimisation, decision on logics rather than emotions.    

Fear of losing in Equity looms on the mind of many investors but if he has this conviction that it is aspiration / need of the individuals / household that leads to creation of products by different companies then there is nothing to fear. The pattern, trend is analysed by research and money is invested by fund manager in those companies where there is sustainable positive growth.

The risk which has to be managed by investor in Equity Mutual fund is selection and time. Selection risk is managed by investing through a proven fund having a sound and methodical investment process, consistent good performer across all market cycles. Time risk is managed by having a long-term horizon (above 5 years) and not timing the market and investing regularly. Yes, in short term there will be volatility in stock market and fund NAV can go up or down but investor should understand volatility is an opportunity for fund manager. Volatility is an interplay of movement of money in stock market among stocks on account of mismatch of prices vis a vis performance. This is due to changing investment behaviour moderating variable expectation of different investors. It is also due to sentiment due to changing economic conditions. In first case money will find its way to better performing companies as investors want profit and they will recognise and reward performance in long term. Regarding economic situation there could be temporary factors which are to be ignored as it is short lived or it could be slowdown or recession which can extend from few months to some years (like in 2008-09) but if as an investor my conviction on economy is strong i.e. growth is all what all human being wants then ultimately the long-term trend is positive only. There is no loss in long term as neither individual nor economy wants to remain in bad or negative situation. There is always a natural trend of normalising and move towards betterment i.e. growth.

Invest in Equity Mutual Funds fearlessly but taking care of selection and time risk . Grow rich . be wealthy .  

Learnings from Johari Window

Learnings from Johari Window:

In our management books we have all learnt about Johari window. It is about how much I or others know / don’t know about me.  It is basically 4 parts

1         -- Open Area -- Everyone including me know about myself

2         – Blind Area -- others know about me but I am ignorant about it

3         – Hidden Area -- no one knows about me but only I know about it

4         – Unknown Area – Neither I nor others know about me

If we look at the above picture we find the biggest area is UNKNOWN to all living beings on earth ( approx. 60%) , followed by next biggest area HIDDEN , the area which is known to me only and unknown to others which may be approx. 24% ) , followed by OPEN and BLIND area which could be 8 % each .

So how much I do not know about myself ? Its 68 % ( 60+8 ) .

So how much I know about myself ? Its 32 % ( 24+8 ) .

So how much others do not know about myself ? Its 84 % ( 60+24 ) .

So how much others know about myself ? Its 16 % ( 8+8 ) .

Without getting into any argument about the percentage part stated above we can easily say we do not know ourselves fully. Do we not try to find what we are? , who we are? , what strengths we have? etc. The fact we know is mostly bodily and worldly related but what about soul part?  Do we know what we have done in our past lives if we at all believe in next birth? We know much lesser about ourselves than what we don’t know about ourselves still we feel as if we know everything. Meditation is a process that has helped many to know the UNKNOWN and BLIND aspects of our life. That has helped people to know what actually they are, what they are supposed to do, what good virtues they carry which has been overshadowed by this worldly temptations. There is a great need of exploring oneself.

Again if we look how much others know about me, it is more baffling.  It is much lesser than what they do not know about me. We take pride if someone appreciates, give compliment but if I don’t know anyone fully does not this appreciation a bit shallow? Are we not appreciating again on bodily, physical, worldly aspects of that individual? Have we ever tried to find how good a soul is that person? Should we not know the real person and value accordingly rather than just valuing the person of external visible aspects? Today trust, love, affection etc. is decreasing and broad reason is neither we know our self fully nor the other person.  Everything is superficial.  

If the world has to change for good, the age old Johari window has to be proven wrong by all of us. Meditation is one way where we get in touch with our real self. If all of us start knowing our -self more than what we actually know today , if all of us start connecting with super soul through meditation, the ignorance , hatred etc. existing between humans , religion will get wiped off from this planet . Even from the career perspective meditation will not only make one understand his strength but also give him better wisdom to understand rights and wrongs of the world in much better manner .

I look forward for a day when OPEN area of Johari window expand like anything and UNKNOWN gets reduced to the minimal. That will be the day when we can say this is true world and true life . 

Why and When people lose money in Stock Market

Why and When people lose money in Stock Market

If you ask 100 people their perception about stock market from gain or loss most of the people ( 80% to 90 % ) are of this opinion that most people lose in stock market than gain and hence very very risky . If you look at the penetration of equity investment in India it is less than 5 % .One obvious question comes to my mind that if only 5% people have invested how come 80-90% people can make a judgment that it is a loss making venture ? Are they right or wrong?  The person who have negative opinion have they really invested in equities through stock market route and had any experience or are they giving opinion just out of ignorance or sharing someone else opinion .

Yes investment in stock market is risky. You can end up making losses more than gains. Reason for this is your investment decision is influenced more by temptations – greed (earn more) or fear (not ready to digest any loss). If you go by this you will end up taking irrational decisions at times. Whenever you buy anything you pay a price. Two things you always evaluate. First the benefit or value you get from that product and second is even if you get the benefit and value the price which you are paying to acquire that is it worth paying that price ? We are a nation where many people are more price conscious than value conscious. This psychology gets carried in when making stock market investment as well.

What is the value for which we are buying a particular stock or share of a company? It is the net profit or earning per share ( EPS ). Are we aware what earnings we are going to get for the price which we are paying? Suppose there is a stock which was bought at a price of Rs.125 and gave a EPS of say 20. Now the moments participants in the market realises that the share has given a good profit and expected to continue that trend they are willing to pay a higher price now.. So may be now the price rises to 170. With more and better experience from earning front, more and more people start going for that stock and more and more money start chasing the price of that stock. So a situation comes when the price at which an investor buys that stock may be much higher than the price that the stocks actually deserve. Most of the investors enter buying when the stock price is already overvalued ( i.e. more than what it actually should be ) as they are just looking what has been the return based on price last different time duration forgetting it is ultimately the value for which you are paying the price and even if the company is good not necessarily the price at which you are buying is worth going for .Since such investors have been chasing price and not value it is obvious they are not looking for long term gain but short terms gain.

You should know that there are two type of market – cash and derivative market . In cash market transaction is settled within 2 days whereas derivative is something a bit longer and also at times the participants might not be having the stock to sell. Derivative market is dominated by speculators mostly . The volume of trade in derivative market is more than cash market .So if I consider all participants in stock market I see there is a dominance of those who are speculators ( trading on price differentials ) and also willing to take and bear the risk . If that is the case how can a naive investor compete with such participants?

Also just look from other perspective if everyone wants to gain and that too in short term is it practically possible? Yes it can happen for some time but when there are better informed investors also who know what is over-priced stock and  will they buy or sell ? If they sell then will there be fall in price or will there be correction in price or not ? Also volume wise they hold and trade more than what a normal retail investor can do . In other word they dictate and direct the movement of stock price and stock indices .

In the BSE there are more than 7000 stocks trading. How many of those companies you know? When I am saying knowing it does not mean you have just heard the name. It means you know the valid reasons why it is worth investing and at what price. We all have heard the name and also have a perception that large cap companies ( 50 to 100 ) are good ones . Can you say same about mid cap companies ( 500 to 1000 ) and small cap companies  ( 2500 - 3000) ? When you hardly know or heard about any companies in mid and small cap segment you can definitely not comment its good or bad company or whether worth investing or not? But what mistake many people do?

First they do not invest out of fear of losing. Then when they see and hear positive news about economy, stock indices showing appreciation, some people making gain out of equity investment they start investing. Now even if most want to buy large company and famous company stocks they will be able to buy only when someone is willing to sell . As most people are positive why someone will sell Infosys, HDFC Bank, Hindustan Lever etc stock unless he requires money or want to book profits . Those who have purchased it earlier because they know these are large good stable profit generating company , will rarely sell it and for go lesser known , less profitable company stock . Most knowledgeable and wise investors will buy and hold good company stock with long term horizon.

So now as one is positive , wants to invest his next attention gets drawn toward readily available and tradable stock ( mid and small cap ) . Also since more interest moves toward stocks the price start reaching newer heights with every successive day and so does translates into profit for investors and thereby invoking more interest and more participation and the cycle continues . If you see the reason for this upside is more to do with sentiment and less to do with earning ( EPS ) gain . Also for many investors a stock worth Rs 1000 is more costly than a stock worth Rs 50 as they feel for the same Rs 10000 he will get more share in 2^nd case and lesser shares in 1^st case . Its not the price level but scope of further appreciation due to future earning which can make the stock cheap or costly .  

Since the psychology of many investor for making quick buck there will be lateral movement of money moving from one stock to another even on the small news and views basis ( positive or negative ) . This euphoria continues with the economic cycle in general way but within that also there are more informed investors who know what is overvalued and they will book profit before you can act and may be you see a correction in pricing happening . So even in positive scenario also the timely action and inaction can lead to gain or loss to investors . Now it is for the investor to honestly evaluate that are they really better informed on right valuation level at any point of time ?

So ultimately you have to realise that there are price risk, information risk and knowledge risk apart from temptation risk ( greed ) when you are investing on your own . The clever, the wise , the more knowledgeable , the more informed will win most of the times and those lacking on these qualities will lose most of times rather than gain. After all stock market investment is a zero sum game – one person’s loss is another person’s gain . Solution to invest and gain  is invest in business ( quality product leading to better sales leading to more profit and earning ) and not merely of price movement . Can you do the research to know all these ? You might think so but its not possible always . You can just search in internet , read research report etc ( if you have ample time but again of how many companies ) but please remember market is very dynamic and news and views get incorporated in prices on real time basis . So by the time you decide to buy/sell a stock market has already corrected itself . So as an individual not possible for you to time the market on regular basis . Yes few times you might succeed but not always and regularly.

So why to do something which will lead you to failure more than success . Yes if research is the key to investment why not invest through a professional research based institution which is Mutual Fund . Mutual fund manages all types of risk in best possible manner as they are more informed than any of the retail investors .

Are Companies managing their human resources well ?

Are Companies managing their human resources well ?

Most companies run after all sorts of resources – capital , infrastructure , technology, products etc but are they giving importance to the scarcest of resources i.e employees ?    Now a days most businesses have outsourced their thinking to client . Simply put look the needs and demands of clients . Ideas of new product or service now mostly taken from inputs from clients . It is now a days believed by most of the companies that to be competitive the companies have to move from product centric to customer centric . Yes true till its working fine . What if the customer suddenly losses interest in the particular product or company ? Also since now everyone is looking at the same customer to provide some new idea then where is the difference creation .

Companies apart from taking inputs from customer should also create and nurture difference creator amongst employees . More than the stake of customer it is the stake of employees associated with the growth of the company . The more percentage of employee are there as difference creator the more competitive advantage the company has . How many companies in India really support ,nurture and reward difference creator . Every one consider a productive employee who meets the target , adds revenue to the balance sheet or works in synergy with his senior as best employees .

One has to understand that products have life cycle and also customers loyalty can not be taken as everlasting things . One parameter where the growth of employees in their career should also be how much difference creator they are . Difference creator means being innovative , thoughtful, creating impact , bringing change for good etc. Do companies have an effective mechanism of checking human skill , talents and competence or it is just the based on the feedback from seniors ? Training is one of the most less emphasised by many companies . Yes some have their calendar or training units but again its focussed more on product knowledge , soft skills , sales oriented etc . Have we seen any training of emphasising on creation and nurturing of  difference creators amongst employees .

The organisation should develop a culture , system , atmosphere where employees are motivated to be difference creator . There has been so many countries which are much smaller in population than India but we find them technogicaly advanced , producing better products and we just try to ape them or bring them to India.  Are Indians less intelligent than any other nationality in the world ? Why a nation of 130 crore can be a pioneer in industries , product etc . Reason is very simple there is hardly any culture , atmosphere or incentive for being a difference creator . The more as a company , as a Industry , as a nation we start recognising such individuals who want to create difference i.e rather than banking on the thought and demand process of client they are putting their brain ,mind, soul , heart ,knowledge , skills and thinking of bringing something new India will be also producing lots of new products and goods .

If we are the most populous nation then we should also think of leading the world w.r.t innovation in product , process etc . The Indian Engineers , Doctors , Scientist have prospered in USA but why not in India ? Time has now come that every company now look to groom and motivate such difference creator and who knows next coming decades can be all of India .  

Emotional Intelligence in Investment Advisory

Emotional Intelligence in Investment Advisory

Emotional Intelligence is to know your own emotions as well as those of others, self motivate and know how to monitor the emotions of others.

In India emotion plays a very important role in the life of most of the people and in their decision making. Investment products or financial products are not tangible where look, feel and touch can impact ones decision making. It is the belief, experience, faith and trust which influences the decision more. Ideally it should be the knowledge and logic that should be the core of investment decision making but that is not the case.

Do we treat our client as a revenue generator for our company or someone whose existence itself is must for my own better career and life? If we think client as a revenue generator then our approach is totally product centric, our own company centric and we try our best to convince him and get the business. But in this process have we for once really tried to understand what client really needs or wants? Every investment product is good but not suitable for all. Most investment product sellers are so much impressed with the feature of the product that they anyhow make it suitable for anyone.

If any investment advisor thinks that this client is useful for my own career, he will not do hard selling but soft selling. I will think him not as a mere revenue generator but a very much part of my team. He is no more an outsider for me but a very much part of my own success and growth. Here emotional intelligence plays a very active role.

We need to understand the components of emotional intelligence

Personal Competence – self awareness and self management

Social Competence – Social Awareness and Relationship Management.

Self Awareness is the ability to understand your own mood, emotions, drives and their impact on others.

Self Management – to control disruptive or impulsive moods and to think before acting

Social Awareness –ability to understand emotional characteristics of others and having skills to treat people according to their emotional reactions- empathy)

Relationship Management – proficiency in managing relationship and building network. The ability to find common ground and building rapport.

In investment advisory when we are interacting with client we should be cheerful, cool, calm and composed first. Pressure of meeting sales targets or revenue playing on your mind, your emotion may not be in your control and wrong communication can come out ending up in no business or miss-selling. Even if I am not in total control of my own emotions still I should not hasten with my recommendation and force decision on my client if it has some element of biasness. I am expected to be fair to my client. I should know what makes my client happy. Is it excess return or it is safe consistent return? Is he comfortable taking risk i.e. able to bear short term volatility or that short term volatility affects him psychologically?  If short term volatility affects him then have I explained him why it happens and how it benefits also if there is patience and long term investment horizon. Have you ever once explained him all possible risks in detail and how you can help to manage the risk or you have just marketed on the basis of return. In India the fear of losing looms so much in the mind of investors that they lose opportunity of good gain also. As an investment advisor also many refrain to explain risk for the fear of losing the client as it creates negative emotion. A right advice with total benefit for client develops a very solid everlasting lifelong relationship and also a network of such long trusted relationships which will eventually lead to client faith in advice and ultimately help an investment advisor meet his business targets, earn profitability for client (first) then company and finally earn reward for him. We all know client acquisition is very difficult but if client is retained following emotional intelligence way then business growth is always exponential.

Panch Tatva of Human life and Relationship

Panch Tatva of Human life and Relationship

We are made of pancha tatva – prithvi, aakash , vayu , agni and jal (earth , sky , air, fire and water ).  Apart from what God has created (nature, sun, moon, stars, river, mountains etc) whatever human beings have created for which they feel very proud of is all from this panch tatva . You can not imagine a single thing made by mankind which is not from this panch tatva. So one can easily say even the inventions and creation by human beings have happened because nature / God wanted so. Nothing exists on this earth without the approval of Almighty .

I have tried to visualise the panch tatva even in our personal life, in our relationship. For any human being 5 relationships are most important. We get the birth from the womb of mother. We lay in her laps when small kid. Mother is equivalent to earth. Earth only gives you but takes nothing in return. Agriculture products helps us survive , tall buildings where we live and work have their base on earth only , cars , roads on which we move from one place to another in on earth only . Role of our mother is same in our life: makes food for us, gives us with full love and affection.  When we are in any discomfort or pain we put our head in her lap.

Second tatva is aakash ( sky ) . Aakash covers us, how long and how high it exists cannot be  measured . We feel protected in the lap of earth under sky. Aakash in our life is our father. In our life father is one to whom we seek protection if we feel insecure from outside. He is always there to protect from any external risk. In the same sky we find hot sun in day and also cool moon at night. our father corrects us by being tough  when we are wrong but will show mildness when seek forgiveness. Father always represents two extreme  behaviour but both beneficial for us , same as sun and moon in sky .

Third important tatva is Vayu . From the time we are born till death we breath. Vayu is must for our health. A partner throughout our life . Who is our partner throughout life in all situation. It is wife  . She is called ardhangini or better half . She is a constant companion in every stage and situation of life same as vayu . You change a place, do anything but vayu is always your silent companion always to make you alive . Similar is wife . If there is breathlessness or air pollution how uneasy we feel. Similarly a right wife like right vayu makes you feel healthy. Vayu is not polluted on its own, our mistake has made it polluted . Similarly we should not find fault in wife but find whether  we have taken her care properly for a proper relationship to exist .

Fourth important tatva is Agni. Agni is energy in our life. It is in the form of heat which helps in digestion , maintain right body temperature . Any imbalance in our health gets reflected by fever. Excess of agni (sun in summer ) creates discomfort and shortage of it in winter also creates discomfort . So agni is must for us but has to be in balance else problem.   In our life Son represent Agni . We see ourself protected in an able son . His good deeds bring happiness and pride in our life but his misadventure , wrong deeds can even bring pain in our life .

Fifth important tatva is Jal . Jal like earth and moon brings coolness , must for us like vayu .Can we live without water? Water in our body is must to control excess of agni. Shortage of water in our body makes us weak and can be life threatening as well. In our life Daughter plays the role of jal . Her coolness , calmness brings peace and joy . She also plays a very active role in soothing ,guiding her brother and bring balance in life just as water does to agni inside our body . Both agni and jal equally important in our life to maintain balance. similarly both son and daughter are equally important . Both have been designated by nature to play a specific role. I don’t know why people do not give equal importance to both son and daughter and crave only for son when nature has clearly displayed both as equally beneficial .

Lets live the way nature has made the universe, our body, our life and also relationship in our life . Now we should know why family is important? If we understand fully well that we are made of panch tatva , our life is also governed by panch tatva and God also created them in human form in our life as – mother ,father ,wife, daughter   and son . we as individual should respect each of the 5 relationship we have in our life . Yes each of the panch tatva has its own importance but it’s not that we can say one is more important than others and so take care of that only. If that happens, imbalance will happen to our body and then we will have diseases, agony, health problem etc. Similarly in life also each relationship is important. Can’t ignore or should not disregard one relationship for other, else there will be  imbalance and unhappiness in life.

Understanding Riskometer

Understanding Riskometer

Last few years it has been made mandatory by SEBI to display riskometer for every Mutual Fund scheme . The reason behind having riskometer is to make investors aware about the risk associated with that product from the return perspective. The idea no doubt is very good but the way riskometer is displayed needs more clarity so that investors gain confidence and conviction and not get apprehensive or confused .

The riskometer as displayed in the various literatures of Mutual Fund schemes looks as below with ( sample riskometer ) . Interpretation is given on left side ( level of risk ) .

Anyone who invests in any mutual fund scheme has some expectation of return which is either in form of Dividend income and/or capital gain (i.e. profit on invested amount when sold back). It is risk or uncertainty of not getting as per your expectation is what that is displayed .

We find debt funds are usually in low to moderately low category. Very very few might fall in moderate range whereas in equity funds most are in moderate and high and hardly very few in moderate . Equity funds always shown more risky than debt funds so someone who is not so well conversant with equity might fear and not invest in equity fund.

Investors need to understand why and how your principal i.e. amount invested is at risk? But before that lets understand risk.

For most of the new investors risk it means loss or chances of loss. Some think risk means uncertainty in return but that also in downside loss not on upside gain. Risk in investment means uncertainty in return i.e. getting a different return than what expecting.   It could be both upside or downside i.e. in either direction or level from what expected. Here one has to understand expectation has to be realistic and is generally based on past historical average. If someone expecting 15 % based on realistic historical average and gets 7% then there is a risk and if he gets 28% then that is also a risk. So any deviation from realistic expectation is risk whether it is positive or negative.

In investment there are many types of risk and each one of them can affect the assets (debt /equity) and various types of securities within those assets, the performance of the companies and eventually return on investment. The effects can be positive or negative. There are business risk, market risk, economy risk , country risk, currency risk  , credit risk, interest rate risk , inflation risk etc.  The overall impact gets affected in return or performance of the fund.

Riskometer describes Principal at risk . So by above fact it mean principal is more at risk in equity vis avis Debt ? Yes it is true but only in short term. As the time horizon of investment increases and becomes long term (> 5 years) then in fact surety of getting a higher return in equity is more than debt. So one can say Risk in equity is less to zero in long term. In fact if we see performance of equity fund vis avis debt fund on different time horizon say 1 year , 3 year , 5 year , 7year , 10 year ...... one will find that beyond 5 years equity giving better return than debt fund. For a period between 3 to 5 years again most of times equity giving better return than debt. For a period 1 to 3 years it is mix result sometimes equity and sometimes debt has given better return than the other . Yes less than 1 year debt has found be give safe positive return vis a vis equity fund.

In a mutual fund whether it is a debt fund or hybrid fund or equity after doing detailed research money is invested in those companies which are profitable or going to earn good profit soon. Ensuring profitability aspect is the key in fund management. Also while investing whether the security is overvalued or undervalued is also considered and fund manager takes proper care not to go for bargain where there could be identifiable loss. Money is invested in a lot range of companies with a clear objective that the overall portfolio return does not go down. So from where the principal is at risk?

On Asset front return from debt fund is from interest income earned and capital appreciation of debt securities held in portfolio. Similarly in equity fund return is from dividend income earned and capital appreciation of equity securities held in portfolio. Of all these only interest income is fixed and assured. So in a debt fund there is surety of some income definitely coming in fund. The capital appreciation part is affected by interest rate movement so that also is correctly expected by fund managers maximum of time and its likely impact on portfolio is well countered by being in securities with right term to maturity .Equity on other hand is more subject to volatile expectations of investors which reflects in market volatility . The securities held are more subject to steep valuation gain or valuation loss of the security held in the scheme portfolio. The factors causing risk and affecting return are many. Many of them are sudden and bring changes in prices of securities which is difficult to judge in short time. The psychological impact on investors in stock market at times stays for longer period as it takes some times again for confidence building amongst investors . Sometimes the impact is of very short duration. The duration of this psychological impact is also variable  So when principal is at risk here in riskometer means possibility of valuation loss of equity securities are much more than the valuation loss of debt securities in short term. The valuation of securities affect the return and so debt fall under less risky category and equity more but more in short term .

As an investor one should be clear that money is invested in best available companies after thorough research and if the stay is for longer period then investment is equity is less risky i.e. you get return better than debt and as per realistic expectations.

Higher the risk higher the return

Higher the risk higher the return

The above statement is what is very common when one evaluates for investment . It is said that when you want higher return you should take higher risk but it is also said that it is not necessary that when you take higher risk you are sure to get higher return . Many investor get confused with this . Some even start thinking if there is not surety of higher return when I take higher risk then why I should take higher risk.  

First we need to understand what do we mean by risk. For a common man it mean loss or chances of negative return . But risk in investment means uncertainty in expected return  . In other words if there is more probability of getting expected return it is less risky and if there is lesser probability of getting expected return it is more risky .

So Probability factor becomes a very important measure for risk. What are the factors that affect the probability – nature of asset , nature of security , time , economic factors, market dynamics, people expectations  etc

Most Indians refrain from investing in Equities as their understanding about risk from equities is not correct . They think it as stock price , indices only . These price and indices are symbolic representation at any point of time whereas equities are in larger terms linked with people growth aspiration ,better living aspiration . These leads to demand for creation of more and quality product and services by some or the other companies or industries . This will lead to valuation , revaluation and new price discovery of stocks and rise of indices . The constant valuation, revaluation and price discovery leads of volatility in short term but in long term quality always dictates its term and any investment in such equities lead to  much higher return. So when we say higher the risk it implies the tolerance level and patience level in short term when there is volatility . If selection of investment in good company is done then good return will come soon and later .

Some can argue what is there is economic slump ( like recession in 2009 ) . Yes there might be negative impact on return may be of some months or up to few years . But again if you believe in law of nature then again not to worry . We have seen even after the worst of cyclone , tsunami when the whole village or town is destroyed first nature cools down and people again work hard to restore lives and infrastructure back to normalcy or even better . So always remember there is one truth of this whole world – everyone strives for growth and betterment . All nations, all economies , all corporate , all individuals all want growth and so the economic slump will not last forever and growth will come sooner or later as growth again is linked with our aspirations and better life which is through some products or services and investment in the equities of those companies will ALWAYS give you a higher return .

So we can say higher the risk tolerance ( showing patience by staying invested and not getting affected by volatility ) in short term but invested in good quality equity ( i.e stock of those companies which are producing good product in demand ) there is ALWAYS a higher return and no risk of losing in long term.

Debt Mutual Fund vs Bank Fixed Deposit – An analysis

·         Why an investor prefers Bank Fixed Deposit over Debt Mutual Fund – it is assurance of fixed return which can not be guaranteed in Debt Mutual Fund . Its also the safety of capital which again in not guaranteed as Debt Mutual Fund is market linked .

·         So what adds confidence to investors – Assurance ( clearly stated ) or Fixed return or safety of capital or all ?

·         Assurance from a credible issuer has value (i.e bank Fixed Deposit and good rated Company ) . Assurance from lesser rated debt Fixed Deposit is hardly preferred so assurance is linked with quality of issuer .

·         Safety of capital is again linked with the credibility of the entity whose Fixed Deposit purchased i.e good rating ones . Banks are considered to be most credible .

·         Fixed return is a percentage return in numbers ( e.g 8% )conveyed while investing but when redeemed does the investor gets  in hand the same return what he was expecting ? In notional terms yes but in real terms , no. He gets a net return which is lesser than gross return ( what has been communicated ) due to inflation and taxation . so if inflation is 5% the net return reduces to 3% . Further you have to pay tax as per your tax bracket on gross and not on net after adjustment of inflation . So net final return will be further less and can be even negative .   what is important – what is told or what you get in actual ? 

·         If one get in actual ( in hand ) lesser than what assured can this be called assured in real sense .

·         So now we need to evaluate Debt Mutual Fund on these 3 perspective – Clearly stated ( assured ) , safety of capital i.e will get back principal and fixed return what has been clearly stated .

·         In Fixed Deposit you are a lender . Its the borrower ( Bank OR Cos ) which decide what return you will get and you have to choose from whatever offered .

·         In Debt market the return is decided by borrower . Govt of India being the biggest borrower sets the lending and borrowing rate pattern in the economy through RBI through RBI by repo and reverse repo rate. No entities in the organised market can lend the money at a lesser rate than repo rate .   

·         Lending rate of Bank  > Deposit rate in bank Fixed Deposit ( of same maturity ). Obvious reason is banks should have some margin for operation and profitability . Also if it is the other way round there it will create an arbitrage opportunity for investor i.e borrow at cheap rate from bank and invest in the same bank at higher rate and gain  . Yes there are arbitrage opportunity but one has to risk his capital in lower rated company or exposure in interest rate derivatives . 

·         in Debt MF you are a not a lender but a proportionate owner in the fund as per your investment which is denoted by nos of units you hold .

·         Its obvious that as an owner you will always like the best possible return along with safety of capital as well .

·         Lets analyse safety of Capital first . As communicated earlier it has to do with creditability of borrower . In Debt Mutual Fund after doing a thorough research the best of companies in terms of profitability , safety are filtered and then money is invested in some of those good companies / issuers debt instruments .  So research ensures you quality ( safety ) and diversification ensures not exposing your money to one or few companies but more ( additional safety )

·         Fixed Return – If bank has lent money to Corporates etc it will get interest on regular basis . If money invested by Debt Mutual Fund in good debt securities will the fund also not get interest? It will also earn interest . Further here money is not invested in one particular yield i.e money is invested in Debt securities of different rating ( AAA, AA+, AA, AA- ...)  and also debt securities of different term to maturities ( few month to few year ) . Combining these two aspects the fund strives for a higher but safe return  .

·         If in a Debt Mutual Fund there is no assurance on return but that does not mean an investor should doubt on safety . Safety is assured from the quality of company and its profitability which is well taken care . Non assurance of return in any mutual fund product is because investment is done in marketable securities ( i.e those securities which are bought and sold ) where prices can change on daily basis and as securities are valued daily based on market prices assurance can not be given .

·         In a Debt Mutual Fund credit or default risk is well taken care by ensuring money invested in good quality company . Yes there can be interest rate risk ( Price of the debt securities can go up or down with the decrease or increase in interest rate ) but investor worry is  downside risk ( market value of security going down  ) only when interest rate rises .

·         If interest rate rises and you are in Fixed Deposit non cumulative option you don’t gain as your interest rate was fixed . When interest rate fall there also you don’t lose for same reason . If bank has assured of 7% per annum return on 3 year deposit then if next year interest rate changes to 6% or 8% you get the same 7% in a fixed interest Fixed Deposit But in Debt Mutual Fund if interest rate rises the market value of debt securities go down but at the same time the coupon interest earned can be reinvested at a higher rate  . In case in Debt Mutual Fund if interest rate falls the market value of debt securities goes up but at the same time the coupon interest earned can be reinvested at a lower  rate . So we see that some portion of rise and fall gets nullified by fund manager in Debt Mutual Fund.

·         What could be interest rate movement in short term is not a big puzzle so in a Debt Mutual Fund the Fund Manager is well aware of possible move and protects the portfolio market value in case of uprise in interest rate by either going for floating rate debt securities or more allocations in short term debt securities as there the fall is lesser compared to long term debt securities . In case he expects lowering of interest rate then he will have more allocations in long term debt securities as there the rise in market price is higher than  compared to short term debt securities .

·         A contra judgement on interest rate movement can only lead to large loss which is a very very rare possibility . In probability terms it can be 1% whereas 99% times judgement is right which can be validated by historical  data last 5 decades of MF .

·         One fear in the mind of investor could be safety of capital. What if a company which was good ( profitable ) when invested became bad ( non profitable ) later on . One major difference between bank or any Fixed Deposit is that the money given to company as loan get struck up till maturity whereas in Debt Mutual Fund the money invested in tradeable security . The research wing keeps monitoring the financials , operation and management of the company where invested and if they get any negative feeling the fund manager sells those debt securities  much before the market realises , thereby avoiding creating of any NPA in the fund portfolio . Again historical data are there for cross checking .

·         In Fixed Deposit you get a fixed return but Debt Mutual Fund you get fixed return plus there is scope of capital appreciation .

·         Regular / periodic income earned in Fixed Deposit is called Interest whereas the same in Debt Mutual Fund is called Dividend . Dividend is tax free in the hand of investor whereas interest income are taxable .  Fixed Deposit has TDS but there is no TDS in Debt Mutual Fund.

·         Interest in Fixed Deposit is fully taxable . Bank deduct TDS @ 10% initially but the whole interest income to be taxed as per income slab whereas dividend is tax free in the hand of investor . Its only the Dividend Distribution Tax  which on the gross dividend is much less ( approx 28.33 % of gross dividend in case of individual ) .

·         There is no capital gain in case of Fixed Deposit so no tax . In case of Debt Mutual Fund if redeemed before 3 years the gain is taxed as per marginal tax bracket where investor lies . For a period more than 3 year Debt Mutual Fund gives better return net of tax as there is indexation benefit which is not in Fixed Deposit. Here the gain is taxed @ 20% with indexation benefit . In Fixed Deposit you get he same principal back in notional term but in fact it is less as inflation has reduced the real value . In Debt Mutual Fund you are compensated for loss due to inflation due to indexation benefit .

·         In a Debt Mutual Fund you have a flexibility of managing your cash flow need either through dividend option or partial withdrawal as and when you want or through Systematic Withdrawal Plan if the requirement is periodic and fixed . You can stop SWP any time, change the amount any time.  In Fixed Deposit withdrawal allowed but again not with so flexibility or ease .

·         You have easy flexibility to move from  debt to equity and vice versa through Systematic Transfer Plan in case you want to take advantage of equity market or protect your investment value if equity not doing well whereas not possible frequently and with ease in Fixed Deposit. 

Attractiveness of Indian Equities

Attractiveness of Indian Equities  

Analysing strength of Rupee first

·         The level of our currency depends on many factors but the two most critical factors are fiscal deficit and current account deficit

·         Fiscal deficit is the difference between what your government earns and what it spends .

·         India being a growing economy and also due to lots of social benefit schemes spending has always been on rise  .

·         Earning is taken care by Taxes + Borrowings in case of shortfall

·         If Spending > Earning and taxes are not able to compensate then more borrowing by Government

·         More borrowing means more pressure on payment and when you borrow a lot, your credit profile in the outside world goes down thereby rupee at times become weaker .

·         Current account deficit is the difference between what India exports and what India imports.

·         Our imports have always been higher than exports, resulting in high demand for US$

·         The twin impact of high fiscal deficit and high current account deficit resulted in high demand for US$ and kept the Indian Rupee under pressure .

Will Rupee expected to get Stronger from its present level next 5 years ?

·         Over the past three years, India seems to have solved both the above mentioned problems

·         India’s fiscal deficit has reduced by ~Rs. 1,50,000 crores over last two years because the current government is spending less and earning more . The current government has made the previous government populist policies more efficient by bringing transparency and accountability in operation ..

·         On the revenue front, India’s tax collections grew at 18% in FY17, the highest in last seven years. Most of the gains due to declining oil prices .        This government’s relentless focus on tax compliance has also helped (demonetization was one of the many steps in this direction).

·         The current account deficit  problem has been solved through structured control over gold import , incentivising domestic physical gold savers  by offering various financial products like gold bonds and ETFs.  India’s import bill has reduced by more than Rs. 400,000 crores or US$61bn.  Thus, India needs far lesser US$ now than two years back. It’s only natural that Indian Rupee should

become stronger.

·         This indicates strength of Indian economy .

How can you benefit from this trend of strong rupee?

India seems to be more stable economically in a relatively unstable world economy.

·         FIIs inflows in Indian equities has been phenomenal ( US 40 billion last FY ) . They hold approx 25% on Indian equities vis a vis 15% held by domestic mutual funds . It seems they have confidence in Indian equities .

·         Domestic investors savings moving to equities and not in real estate and Gold . Declining FD rates also motivating investors to go for equities .

History  --  Past 10, 15 years Indian equities have given one of the best return

Present  -- A stable Government trying to control corruption ( subsidy directly to bank account , demonetisation ), increase in taxation ( , proper allocation of resources , economic reforms ( GST )

Future – Strong consumption pattern, focus on self reliant economy etc will boost growth and economy thereby more return through Indian equities . Risk from equities can be minimised by investing in good equity mutual fund products .