Risk in equity investment comes from short term or long term?

Risk in equity investment comes from short term or long term?

Equity is risky. Only in short term or mid term or in long term? Many expert say risk in equity is only in short term but my view is risk in equity is every time. Before disagreeing with me I request please read the whole article.

First what does risk means to me. Its uncertainty or unpredictability of the outcome from the expectation. Long term is made of many short term and some medium term.

Risk can come from global factors, geo political factors, economic factors, industry factors, market factors, natural factors, different investors behavior factor etc. when so many factors affect billions of participants in market who react differently no one can predict the direction in short term. Market reflects changing sentiment, mood of the market and so can any one predict first what will happen and how the moods of billions will change?

Why I said long term because long term is eternal and for respective individual it is till he is alive. A corporate in whose share one invest is also said to be perpetual but does everything remain the same always? Management changes, competitors strength changes, industry landscape changes, company financial changes. Things goes from bad to worse or bad to good or good to bad and even worse also. The same thing can be said about equity mutual fund also.

Whenever I read many saying this investment is for long term so I don’t need to bother whats happening in short term is wrong. Long term has to be quantified in terms of years. Many times short term extreme underperformance affects so much that there is no revival in long term. Today many of the top companies of 80s and 90s are seen nowhere in competition.

There is only one truth about long term which is in long term your money should grow and be safe also. Stop loving the company or fund or even fund manager but be concerned only about your money in investment.

Why investors waste time in analysing too much on short term events

 

Why investors waste time in analysing too much on short term events

I have been reading, hearing, watching last some days everyone talking, discussing short term events particularly arising due to tariff war. Most expert have given either negative view or created more confusion in the mind of investors. Everyone on a daily basis thinking and talking of what’s next? This is not an isolated incident but has happened many times in past but may be for different reasons.

When we all know that short term is risky i.e. uncertain, equity investment gets impacted most and we do not invest our money in equity if required in short term, then why waste too much time on short term analysis.

Only 2 issues to consider (1) how long can this short-term uncertainty be (2) what will be the fate of my money in long-term.

These two words, short-term and long-term themselves give a clarity. Short term can be said up till X (months or year) whereas long term can be said as beyond X (months or years). Sometimes one can have a guess about this and sometimes may be not. But one thing is for sure, this X will come some day and it is not an eternity.

Coming back to this USA tariff case I always held a view (1) Trump government is for maximum 4 years. As per USA law there is no 3^rd term for same person (2) If negative atmosphere or confusion is deliberately maintained by that government either there will be resistance both from domestic quarter and/or from external economies (People do not want to remain in and situation for long) and that will have some impact (3) People/Economies will find an alternative way to counter the negative impact and force turnaround. So, this X has a duration and there is every reason to believe the impact is not forever.

Answering to 2^nd issue irrespective of any situation everyone desires growth. Growth is the essence of our lives. If we go by generations by generations or past decades by decades it is evident that in long term growth has happened and in future also will certainly happen (just compare our aspiration for better lifestyle with our next generation, we will get the answer).

My advice to investor is, don’t read too much of analysis. Experts will talk something different else how they will be called expert. Just think and act like a common man, using your common sense and invest. Investment in equity is all about taking advantage of long-term positive opportunity and when required protecting from short term negative impacts. So, if long term looks excellent whey to worry present short term. Yes, do take corrective action when your investment horizon is coming to its end i.e. protect short term risk when redeeming.

 

 

Why people waste time to know view on market?

 

Why people waste time to know view on market?

Most people (investors or distributors) want to know views about market, what will be market level in future? When will Sensex touch 1 lakh etc? In my training these questions are often asked. My answer is I am neither God nor a financial astrologer. Only God knows about future and even the most knowledgeable expert does not know it. I say this because of undermentioned reason which is based on fact and logic.

Market movement is decided by billions of people and hundreds of factors. Which factor will affect which person in what way who can correctly say? How long that factor will stay and how again people will react who can say?

When people ask me my view on market, I simply ask that person can you please tell me what you will be thinking 24 hours from now or what will be your mood 3 days from now? We don’t know. So, if I do not have a 100% correct answer about myself, which I know the best and have lots of control (not full) then how can we say about billions of people who are involved in market?

Sometimes my trainees ask me that then how come Mr X is saying such thing on a TV channel. My simple reply is whatever he says is on some presumption, assumption based on today’s fact. But when we all know our mind has changing thoughts then how some human being can say what billions of people will be thinking 1 day, 1 month, 1 year, 10 years from now w.r.t market? Assessment or analysis on present may or may not turn true later on. I also say, go back and check yourself what he had said few or some years back and judge how accurate he had been.

Why people are interested to know about view on market, its future level? It has to do with human psychology. Anything which is glamourized, expressed in story, give some visualization, do catch attention and interest. An urge to know something of future which I don’t know also creates curiosity. Many people think if they talk such things before others they are accepted as more knowledgeable and get respect.

The experts can give somewhat correct answer about quality and not quantity (return or price or level). That too as per assessment of facts as on date. Someone asked me about investment in one of the top IT companies. I said yes as of now seems it looks as one of the best investment opportunities. But can I say the same 10 years from now. Answer is “I don’t know”. Reason is, the future prospect of growth banks upon the quality of people who are managing the business. Their decision affects the quality of product/service, their financing decision, their investment decision, their service quality etc. Who can say who will be handling these decision 10 years from now or the status quo will remain in future also. People, process, competition etc changes with time.

Most investors think risk comes from economy, market, company, product, business etc but if we go deeper the root cause of all the risk is the human being itself. They are the consumer, they are in the management, they are investors, they are policy makers etc. Human being thinks, and behave irrationally most of times (i.e. emotion). No one can predict who is thinking what. The only thing one can predict is everyone wants betterment in their lifestyle i.e. growth. So, any investment decision should be based on “growth” only. Safety which many people think is different from growth is in fact a part of growth only. (Watch my coming article: Is growth and safety same or different?)

My advice to each and every investor is please don’t ask about view on market but do investment based on your own margin of safety (Watch my coming article: What is an investor margin of safety). Don’t even ask is it right time to invest or not. All time are right to invest. The better question should be how to invest (lumpsum or SIP or lumpsum then STP). Ask in which asset and security there is possibility of making loss and why or making gain and why. Don’t ask how much you will gain or how much you can lose.

 

Managing Investment Risk by Yourself

Managing Investment Risk by Yourself

Three things you need to do/have: (1)Strong belief ; (2)Learning from past experience and (3) Understanding and interpreting present information correctly

Strong belief : “Is there any possibility of losing money also”? or “I am going to gain from investment only as I know to tackle downside risk”? What is your belief when you invest in any investment instrument or investment product. If its of loss then there is no point of investing in that product. Reason is you will be always fearful and a slight negative can affect you emotionally and you end up taking wrong decision i.e. withdraw when not required.  When you invest, your mindset, your belief system, your conviction should be positive. No doubt, no fear, strong faith.

Learning from past experience: If there is lack of positive belief, conviction why it is so? Is it because of past experience or is it because of what others are saying? Please remember what others are saying could be their own experience which might or might not be relevant in your case. You have to analyse your experience only from your perspective, your action/inaction that led to this experience. Let’s say you had a bad experience of illiquidity or loss. Why it happened? Was it because of wrong choice of product or was it because of wrong economic /market condition when you withdrew or was it because you withdrew out of fear as everyone was doing due to some negative factors at that time? You need to go back and examine yourself. See how much money you got that time from that investment and what is the value today . Think what if you had not withdrawn at that time? Would you have lost or gained? On most occasion one has seen it has been error of judgement. So, by now you should know what when you took right decision and why and when you took wrong decision and why. I always tell people that whenever you invest and whenever you withdraw, you should document in few words why you invested and also why he withdrew. The biggest learning for each one of us is from reviewing our own actions. This will help you to know what caution and precaution you need to taken moving forward . One or few bad experience should never be generalised. One need to understand the cause of it .

Understanding and interpreting present information correctly : Now you don’t need to repeat past mistake . Understand and interpret present information from only credible reputed sources in terms of risk (losing) and return(gaining). Today in a social media age there are many experts who in order to be relevant keeps posting different views. Just don’t follow anyone blindly. Who knows many of them have their own vested business interest. Many times, we have seen in past many future predictions of great experts have gone wrong as no one is God here. Your loss is your loss , your mental distress is your distress and so only you have to safeguard against it There are some entities who provide only research , have decades old credential, have big clientele base for their research report. Read their reports. Even if there is some cost for subscription go for it. Please remember there is no free lunch and free lunch if is there it is of some vested interest.

You know both psychological and information gap you had which led to losses in past. Once you know present information, you need to take a call what will be your reactions. We never remain in same mindset always. It changes with changing scenario. So better you note down somewhere if X ( Worst happen in next 3 month , 6 month ,1 years what will be my reaction) . How long do I have the tolerance to bear that.This has to be written with fully honesty in all fairness based on what you actually believe you will do. Go through it few times on different day when in different mood to ascertain there is consistency in your belief system.  If you feel you might repeat same mistake as past better avoid such product and invest in safer ones. Understand the notional risk part and its impact on you emotionally , psychologically and even physically ( health wise). If you know now with learning you can withstand notional loss, volatility for short term and not panic then no issues you are on right track .   

Remember the famous proverb at Railways Stations “Passengers please take care of your own luggage”. Same way in investment  “ Investors please take care of your own money “ . So safeguard your investment interest.

 

Positioning of Debt Fund

 

Positioning of Debt Fund 

Debt fund is for any short term need and not for long term need. This short term can be if required anytime within next 3 years and may be for retirees if required anytime within next 5 years. 

Why Debt in short term: Safety of capital, regularity in income is important in short term. This can come only from debt and not from equity. Any debt instrument and debt fund have clarity on cash inflows because coupon income is pre-decided, frequency of coupon income is pre-decided, receipt of maturity amount by or at maturity is pre-decided. Nothing is pre-decided in case of equity or equity fund, and all depends on fortune of the business. Further when you look at the risk also which can impact the cash flows there also in case of debt it is clear to judge from credit quality, cause and trend of inflation, level of interest rate and probable action of RBI MPC. In Equity again since sentiment dominates over logic in short term, measuring the changing sentiment and mood of market where billions of participants are involved is not easy. Even the best of blue-chip stock prices goes down in short term. 

Why Debt not in long term: Inflation is the biggest risk of money. Longer the period the impact of inflation is also more. The purchasing power of money gets reduced more in long term than in short term. Further if you look the long trend of the safest of debt products (PPF, NSC, PO schemes Bank FDs) the rate of interest has gone down decade by decade. See the trend from 1980s till now. What will be the trend going forward in long term? 

My assessment is it will keep declining further. My assessment is backed by a sound logic. No borrower wants to pay higher interest rate (Do any one of us want to pay more interest rate or less in case of home loan, car loan, education loan etc? Government is the biggest borrower in any economy. Borrowing is always done either when left with no choice or giving me ROI from my investment (e.g: I am paying 8% on home loan and getting 9% as return from investment). But government does not invest like you and me.

We all know Government borrows either to reduce the revenue deficits (Expenditure is more than income) or for some spending (capital expenditure, social benefit expenditure etc). So, in expenditure, interest payment on Government securities is also a component. . More the borrowing more will be the interest payment outgo. The other way to reduce the borrowing is increase the income (tax revenue, dividend from PSUs etc). 

Now look at the trend of GDP growth and tax income at government end. The trend is increasing only (exception Covid period). So, it’s natural that if income increases borrowing is not a compulsion. RBI borrows for Government and RBI also decides the policy rates which are an indicator for interest rate level within economy. 

Growth of economy is a natural desire and taming of inflation is a compulsion. That is the reason in short term interest rates move in any direction within a range (mainly to counter inflation) but in long term interest rates are reducing as lower cost of capital i.e. interest rate augments growth which everyone likes as borrower (Government, Companies, you and me). 

So, is there any incentive for investing in long term in debt when notional interest rate is declining, impact of inflation will be more and maybe I end with low or negative real interest rate. 

Which type of fund to choose: Within debt fund apart from credit quality also we know risk varies as per maturity. Longer the maturity more is the risk. SEBI has defined debt many funds on Macaulay Duration basis. Macaulay duration can be understood simply as average payback period. For e.g for Low duration fund the Macaulay duration is between 6 months to 12 months. It can be interpreted that though the fund manager has the flexibility to invest money in debt instruments of varying coupon, frequency of coupon payment, maturity, ratings etc but on the weighted average method all the cash inflow in the fund must come within 6 months to 12 months. Each cash flow is calculated on not what will be received but what will the present value of that cash flow considering that money has a time value risk and it is done after discounting it with present yield. 

One should ask himself when he wants his money back and match it with the Macaulay duration of the fund. Let’s say someone wants after 7 months. Now he has 2 funds to choose from: Ultra short duration fund (Macaulay duration 3 to 6 months) or low duration fund (Macaulay duration from 6 to 12 months). Both seems fine but as an investor I will prefer Ultra short duration or may be mix of both. Reason for preferring Ultra short duration is my horizon is near to it as compared to low duration (What generally we do like in Fixed Maturity Plan or FD). 

Should one try to time looking at interest rate trend: Debt fund should always be positioned as strategic asset allocation (matching horizon with Macaulay duration) and not tactical. Many experts I have seen suggest different fund for investment looking at interest rate level and trend. 

My view is very simple for what I am taking the risk? For some big return? When you look all past RBI policies rate changes it has been mostly within the range of 25bps (0.25%). Even it has gone for 50 bps how much change it will have on the NAV. Please remember if the fund size is big the risk or the change gets absorbed easily but if the fund size is small then the change can be seen more. 

Also, when I see same fund return for different time horizon (e.g: Low duration fund 1 month, 3 month, 6 month return…….) the change is not much and this small change is more in shorter period and as time period increases this reduces and become negligible (Remember normal yield curve which is upward slope). Also, when I see the change for same time period (say 1 or 3 months) for different debt funds (Liquid vs UST vs ST………) there the change is more in higher maturity fund as compared to shorter maturity fund. The risk here is if I choose to say, mid to long duration fund over ultra short duration fund because there is possibility of lowering in interest rate leading to more MTM gain in longer duration even if I require after 7 month then what might happen if my call goes wrong? 

Another angle is the impact of interest rate risk get nullified by reinvestment risk (e.g: if interest rate goes down from 8% to 7 % leading to MTM gain then the cash flows which will come from existing coupon income and also fresh inflow will get invested at 7% and not 8%). 

Lastly even if I get some small gain how much ultimately is left with me after paying short term capital gain tax? So, based on all these logics why to take unnecessary risk of being tactical. Let this job remain with the fund manager who will take advantage of such situation.

                                                                     

 

 

Is profit booking from equity mutual fund a crime?

I have never seen any AMC relationship manager telling any of their client to book profit from equity mutual fund. Distributors are also guided accordingly by AMC RMs and they also guide their client not to book profit as it is meant for long term i.e. till the goal.

First of all both investors and distributors should think why AMCs will like their AUM to go down. Not only the fund is earning good revenue but officials are also earning good bonus/incentive because of higher AUM.

May be distributors also thinking that if their AUM goes down then they might also earn less trail commission and so keeping that same “stay long term” mantra they also tell their investors not to book profit.

Its investors money on which both are enjoying the fruit. Investors should always look, evaluate and do what is beneficial for them. If someone does not book profit then still in long term that investor will get good return but booking profit does not necessarily mean its wrong. All depends on situation.

Lets look at 2 situations.

Situation 1: Assuming that if someone has invested 100 and in one case there is for 2 successive year there is 50% growth and 3^rd year 50% fall.

	Year beginning	Growth	Year end
Year 1	100	50%	150
Year 2	150	50%	225
Year 3	225	-50%	112.5

 

Situation 2: Assuming that if someone has invested 100 and in one case there is for 2 successive year there is 25% growth and 3^rd year 25% fall.

	Year beginning	Growth	Year end
Year 1	100	25%	125
Year 2	125	25%	156.25
Year 3	156.25	-25%	117.1875

 

From the above 2 examples in which situation after 3^rd year the net growth is more?. It's situation 2.

Let us look another example

Situation 3: Assuming that if someone has invested 100 and in one case there is for 2 successive year there is 75% growth and 3^rd year 75% fall.

	Year beginning	Growth	Year end
Year 1	100	75%	175
Year 2	175	75%	306.25
Year 3	306.25	-75%	76.5625

 

Situation 4: Assuming that if someone has invested 100 and in one case there is for 2 successive year there is 20% growth and 3^rd year 20% fall.

	Year beginning	Growth	Year end
Year 1	100	20%	120
Year 2	120	20%	144
Year 3	144	20%	115.2

 

Situation 5: Assuming that if someone has invested 100 and in one case there is for 2 successive year there is 15% growth and 3^rd year 15% fall.

	Year beginning	Growth	Year end
Year 1	100	15%	115
Year 2	115	15%	132.25
Year 3	132.25	15%	112.4125

 

When I again look at situation 3,4, and 5 then its very evident that if there is very high gain the recent 2 years and if there is reversal at same rate for next year part of gains are wiped off. In fact in situation 3 it has gone less than the capital invested and loss is there.

The higher the gain in recent past more is the risk if trend reverses. Investor should always see that volatility w.r.t long term average return and at some stage should book at least some profit.

Being long term in investment does not necessarily means to be in long term in same fund. The short term performance of that fund should be viewed. More the high return in short term vis a vis past long term average return then some profit needs to be booked and shifted towards another good fund within same peer group where reversal risk is less. Booking of profit and movement of money should happen within 3-5 funds of same peer group.

If one does this then that investor is still staying in long term in the funds. Yes, one might end up paying capital gain tax but if net of tax it is advantageous for investor then still can be considered.

My view is total investment (in a portfolio of 3-5 funds within same category) is for long term but fund wise evaluation should be of short term also (in every rolling 3 years/5 years) and lateral movement of money should happen if need arise so.

Investor should be in love with their money and not any particular fund. At present we are in situation where this 3/5 years evaluation and rebalancing required.

Investment in equity is must for everyone. (Nurture India Investors Jagr...