Money We Have Vs. Time We Have

Money vs Time

A member of our extended family expired sometime back.

He was financially savvy and did everything right (as far as my understanding about managing money is there). Saved a lot… to an extent that it seemed a little too much.

But then, having accumulated almost all the money that he would ever need… he left. Suddenly and without any warning and at a fairly young age.

It was sad.

This highlights one thing:

We always know how much money we have.

But we never know how much time we have.

Read that again.

It’s important.

As an advisor, its my duty to help people save and invest well. But people should realize that money alone is not everything. If you keep strangulating yourself and save and build assets so that ‘one day’ you would do anything you want, then its possible that ‘that particular one day’ might never come for you.

So find the balance.

And remember: Many may not have that much time left that they think they have.

Do what is necessary. Letting life slip away is not what should be allowed.

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Are Mutual Fund Star Ratings any Useful?

Mutual fund star ratings

Thousands of people rely on mutual fund star ratings for picking good or best mutual funds to invest in. It’s a popular metric amongst investors and advisors alike.

These stars (ratings) are provided by agencies like Morningstar, Value Research, Money Control, CRISIL, etc. Most of them rate funds on several parameters and come up with a star rating – which ranges from 1-star to 5-stars. Top funds get 5-stars and ones at the bottom get 1-star.

It’s a simple method of comparison for investors and advisors. Naturally for fund houses, it is also a free method of advertisement for their well-rated products. 😉

Most people believe that a 5-star rated fund will perform better than all others. But truth is that… this is not necessary.

So…

Are Mutual Fund Star Ratings really useful?

Before we move on to discuss this important question, let’s understand why these ratings are so popular first.

The number of funds available is overwhelming and unnecessarily large and most people don’t know how to pick the right mutual fund schemes. So they take the easy way out and end up relying on star ratings.

In words of the founder of Morningstar, the star rating system ‘is a way to whittle down a big universe into something more manageable.’

I agree here.

Mutual Fund (star) ratings are designed to help investors quickly identify funds to consider for their investments. For starters, they give investors a quick-and-dirty opinion on the chosen fund within minutes. And this is perfect for our era of time-poverty.

But the problem arises when investors rely solely on these ratings to pick funds.

They treat these stars as a guide to future performance and high star rating to be a definite buy signal.

This is not the right approach. It is plain stupid.

Mutual fund ratings by themselves do not guarantee high returns in the future.

It is not at all necessary that a 4- or 5-star rated fund will always perform better than a 3-star one. But it is generally expected that over a period of time, better rated mutual funds do perform better than lower rated ones. But there are numerous instances where lower rated funds have outperformed higher rated ones.

In this post, I don’t intend to talk negatively about rating agencies. There is nothing wrong with the concept of star ratings. These are based on actual data and solid maths.

The idea instead is to remind investors that they need to look beyond star ratings. Many investors rely blindly on star ratings and have questions like:

  • Should I choose only 5 star rated mutual funds?
  • Should I choose only mutual funds that are either 4 or 5 star rated?
  • Should I switch out of my mutual fund investments every time my fund’s rating is downgraded?

These investors need to wake up and understand that the star ratings are not enough.

But investors alone should not be blamed. Many financial advisors love star rating systems too.

They take this easy route and use star ratings to justify their advice. 🙂 I have seen this being done by many advisors! Even many of you would have experienced it. It’s a cover-your-@$$ type of service… An advisor can say, ‘I’m going to put you in this fund, it’s a 5-star fund,’ …and if something goes wrong the advisor can shunt blame to the rating agency.

🙂

But keeping aside advisors and rating agencies for a while now…

Why you should not blindly depend on ‘Mutual Fund Ratings’?

Ratings do a decent job of accurately analyzing a fund based on its past performance (and few other criteria). But the downside is that this isn’t a good guide to future performance.

You cannot use these ratings to correctly predict future performance. And that is what most people forget.

Remember the standard disclaimer that has become too common for its own good?

“Past performance is no guarantee of future results.”

It is not just a disclaimer. It’s a reality!

Most fund rating agencies do suggest that their star ratings are backwards-looking assessments. And since past performance is no guarantee of good future performance, one should consider the limitations of these ratings when making investment decisions based on them.

At best, these ratings should be considered as a sort of filtering mechanism when selecting mutual fund(s) to invest in. Both for lumpsum and SIP investments.

If necessary, then investors should only use this rating data as a starting point, combine it with other important factors (consistency, suitability, fund objective, portfolio, expenses, fund manager’s track record and experience, investment process followed, the integrity of the fund house, etc.) for shortlisting funds.

My view is that these ratings may not be even a good starting point for research. I prefer taking the data and analyzing it myself.

And think of it, it would be really great if picking funds were as simple as looking at how many stars it has earned. If rating agencies believed in their ratings, they would be running big portfolio funds which would be investing in these high-rated funds. 😉 That is something to ponder about.

And it’s not just me who is being sceptical here. Even Morningstar’s CEO voices similar thoughts here:

  • We recognize and have often acknowledged the limitations of a measure like the star rating that’s based on past performance, but we also believe it can usefully tilt the odds in investors’ favor, when combined with other research and tools.
  • We’ve long described the star rating as a worthwhile starting point for research that can help investors make good decisions when combined with other research and tools.

I say this again – mutual fund ratings as a concept is fine. But as an investor, you need to focus on more important things.

Instead of looking to invest in all the top rated mutual funds, you first need to ensure whether you got the category of the mutual funds right or not. And that is after you have decided which financial goals you are investing for.

Choosing the highest rated fund in the wrong category can kill your investments and you risk not achieving your financial goals. Being in the ‘Right’ fund in the right category is much better than being in the ‘best’ fund of the wrong category.

The ‘best’ mutual funds suited for your real goal-based investing needs may not necessarily be 5-star rated. They may not be category toppers too. Also, a high ranking for a particular fund does not mean that it will be necessarily suitable for each and every investor.

Another issue is that different strategies (fund’s investment strategy) or styles go out of favor and then come back after a few years. So if you exit a fund that has dropped in rating due to their particular reasons, chances are that you will miss out when the strategy returns with all guns blazing.

This is something that most people don’t realize when going via ‘I-only-bother-about-fund-rating’ route.

Is it a Mirage?

Recently, a Wall Street Journal (WSJ) article titled The Morningstar Mirage created a lot of drama in the investment fraternity. And the subtitle of the article got straight to the point:

Investors everywhere think a 5-star rating from Morningstar means a mutual fund will be a top performer – it doesn’t. 😉

In the article, WSJ concluded that the top-rated funds attracted a majority of investors’ money (in the US) but most didn’t continue performing at that level. Unsurprisingly, the rating agency in question hit back (link) with its counter-views protecting itself; and in essence, claiming that their ratings were not supposed to be predictive and they should be a starting point for investors selecting funds. Their CEO also pitched in with his views (link).

If you go through all the articles related to this particular episode, you will understand that the rating companies also know about the shortcomings of star ratings but they have a business to run. 😉

Let’s talk about the possibility of a conflict of interest here.

I am sure most mutual fund rating entities are professionally run. And since most information is in the public domain, chances of wrongdoing seem limited.

But who knows… 😉 😉

A fund that is rated well (lots of stars) will attract more investments if fund houses pitch it strategically to advisors and investors. Its easily possible that investors would continue to pour fresh money into top-rated funds even if their performance declines – just because the rating is still high.

So whether they agree or not, the fact is that the rating companies are a big beneficiary of their own ratings. Think about it. I know a few things. Others might know as well. But I am not saying anything more here… 😉 If you know what I am pointing to, you will understand. Else, ignorance is bliss.

And with a sustained rally in Indian equities for last many years, equity is no doubt turning out to be an attractive asset class. At such times, its all the more necessary that the role of mutual fund rating agencies is critically and subjectively assessed.

Maybe, the Fault is not in ‘Stars’ but in Us

Here I quote from an article by Barry Ritholtz that has some apt words:

Retail and professional investor alike seem to ignore the fact that every single document ever generated by any investment-related firm has a warning on it to the effect that “Past performance is not an indicator of future returns.” Every chart ever drawn, each investing idea back-tested and every single historical comparison is testament to how little mind humans pay to that disclaimer.

To borrow from and paraphrase the Bard, the fault lies not in the stars, but in ourselves.

Thus, it should come as no surprise that misunderstanding what fund ratings mean is a very typical error made by, well, just about everyone. It isn’t a forecast of future returns, nor could it be.

If it could successfully do that, [Mutual Fund Rating companies] would have long ago set up a hedge fund to profit from its newly discovered abilities to identify winning investments.

Sounds logical. Isn’t it?

Bottom Line

I reiterate that mutual fund ratings are fine as a concept and provide useful insight into a fund, how it has performed in the past and how it invests. But they are not meant to be used in isolation or as a predictive measure.

When it comes to things like ratings, you cannot build a perfect system. Never. But it’s your hard earned money. You should atleast know the limitations of factors on which you are basing your investment decisions.

The best way to invest in mutual funds in India is not by just looking at the mutual fund star ratings. Ideally, investors need to use data, do some homework and estimate how a fund might perform in future. And that is very important. The rating system alone does not have complete information for making such a subjective judgment.

So should you ignore mutual fund star ratings altogether? Or are mutual fund ratings useful? Or are mutual fund ratings of no use? And will 5 star rated funds perform better than all others? Are star ratings the best way to choose a mutual fund?

I have already shared my thoughts. It’s best if you decide about the final answers to these questions yourself.

Being Really Wealthy!

Being wealthy

Making money is one thing and being wealthy is another thing. And that reminds me of a quote by Coco Chanel:

There are people who have money and people who are rich.”

🙂

I don’t know how to properly define what being wealthy is.

But when I look at the people who earn well and can easily be called rich… still struggling and unhappy, it seems that they are not really wealthy.

High income doesn’t mean being wealthy. And being really wealthy is something else.

Ofcourse you need money to become wealthy. Without money, life is practically impossible. And there is no doubt that lack (or abundance) of money changes all the iron rules into rubber bands [Ryszard Kapuscinski].

But maybe… being wealthy is a state of mind. I am not sure but it seems that way.

Or maybe…Wealth is the abundance of something in such surplus, that no condition can destroy it. It’s abundant – you can’t get rid of all of it. There’s so much that no matter what happens around the world, it can’t go away. [source]

But think of it.

In reality, money is not the end goal. At least it shouldn’t be. Every person is different. And every person’s idea of a good life that they want to live is different. So the cost of creating such a life would be different too.

This obviously means that everyone doesn’t need to be a millionaire to lead a wealthy life. You can be earning less than your friend but still feel wealthier as unlike your extravagant friend, you don’t need much to lead a good life that you want.

I came across this beautiful article by Morgan Housel titled Iron Rule of Money (link). He says:

The first iron rule of money is that wealth is the stuff you don’t see. It’s the cars not purchased, the clothes not bought, the jewelry forgone. Money buys things, but wealth — assets such as cash, stocks, bonds, in the bank, unspent — buys freedom and security. Pick which one you want wisely.

Then there is another concept of 2 types of Wealth that I came across in this article.

The first is Vertical Wealth:

People who are vertically wealthy think, “I am rich. So I had better do what rich people do.” 

The vertically wealthy people rush to outshine others with better this and better that and what not….

Then, there is Horizontal Wealth:

Horizontal wealth means not letting your increased income dictate your tastes. So what happens when a horizontally wealthy person goes from Rs 30 lac a year to Rs 3 crore a year?

Nothing much… really. They don’t care about what others think of them. They don’t care about living like other rich people. They continue to live as they wish to live.

So while the horizontally wealthy own their riches, the vertically wealthy are owned by them. And as Morgan says in the Iron Rule article:

The only way to build wealth is to have a gap between your ego and your income. Getting rich has little to do with your income and everything to do with your savings rate. And your savings rate is just the difference between your ego and your income. Keep the former in check and you should be fine over time.

Personally, I liked this idea of two types of wealth. That’s because I have seen people react differently to increase in income / networth.

I would any day prefer being Horizontally Wealthy.

But in reality, I know I will be somewhere in between being Vertically and Horizontally Wealthy. But that’s fine… we all are different and it’s acceptable to not fit in perfectly in any definition. 🙂

Being an investment advisor, I deal with numbers. And also, I like maths. It’s solid and it makes sense. But I don’t think one should keep chasing numbers their whole lives. It’s best to figure out how much you need for few of your important goals and invest accordingly and then… just be as you are. Live life.

Don’t chase new cars every time like the highway dogs. 😉

[No Gyan] – Buying the new iPhone X vs Investing

Buy iphone vs invest money

I don’t want to take any moral high ground here by telling whether it makes sense to buy the new iPhone vs invest the money instead.

But just thought that I would share some bits of a conversation that I had with a friend yesterday.

This friend of mine is a gadget freak. And as of now, he has decided that he ‘should’ buy the recently announced iPhone X whenever it becomes available in India.

Unfortunately, he doesn’t have the financial solidity or high income to make the cash purchase. So he is thinking of taking the EMI route.

As far as I know, this new model is expected to cost around Rs 80,000 to Rs 1 lac. To be honest, till just a few years back I would not have thought that mobile phones would cost that much. 😉 But that’s how inflation and more particularly, lifestyle inflation is.

Coming back… I did try to reason out with my friend about the purchase.

I already know that he invests just Rs 5000 per month in mutual fund SIPs. And that is not because of lack of intent to invest more but because more often than not, his expenses end up being more than his income… almost every month. 🙂 Had it not been for me, he wouldn’t have begun even that smallish SIP.

I may sound odd but at the face of it, this purchase of a mobile phone for Rs 1 lac doesn’t make sense to me. Atleast not in my friend’s case. He might have his reasons to purchase it (remember he is a gadget lover)… but still, I didn’t feel it right.

So I told him so and he blasted back telling that he knew I would say so as I was always looking to for opportunities to give some financial advice. 🙂

I understood that his defenses were too strong for me to break down and he will do what he wants.

Nevertheless, I still tried. I compared his expected EMI of Rs 9000-10,000 with a SIP of Rs 10,000 every month in mutual funds.

Now the EMI payment for the iPhone would only last for 12-15 months. But just to sort of arm-twist him into believing in the power of investing, I showed him what a SIP of Rs 10,000 (which he could do if he didn’t buy the phone) could deliver in 5, 10, 15 and 20 years.

I have already done such calculations in this detailed post on mutual fund SIP sometime back. So using that, here is what I told him:

  • 5 year SIP of Rs 10000 monthly = Rs 8.5 lakh
  • 10 year SIP of Rs 10000 monthly = Rs 23 lakh
  • 15 year SIP of Rs 10000 monthly = Rs 50 lakh
  • 20 year SIP of Rs 10000 monthly = Rs 96 lakh

Note – Assuming 12% average returns with annual compounding.

He did see the merit in this “what if I invest” logic.

But then his heart took over again and he brought in the we-live-just-once logic. 🙂 He asked me what will he do with all the money when he becomes old. He also questioned me that I should not be telling him anything about spending when I myself spend money on travelling.

At that moment, I knew I had lost the debate. 🙂 🙂

I am pretty sure that he will proceed with the purchase. And I don’t blame him here. It’s simply about priorities. I cannot be the judge about how people spend money. I can only tell what I think is a better approach. I cannot force anyone. I guess many aspects of personal finance cannot be explained to people when their desires and incentives are strong enough. 😉

I don’t know what else to say to him or here…

Ideally, aspirations (desires and wants) should match our abilities to bear the costs comfortably and sensibly.

But then, it’s easier to say so.

If your wife asks you for a diamond ring which you cannot afford easily, I am sure you will do everything in your ability to make that purchase possible (irrespective of whether it’s sensible or not). 🙂

But just because you cannot afford something doesn’t mean you shouldn’t aspire for it. That’s like giving up. Work towards increasing your income if that is what must be done. And then just use your money sensibly. Don’t become a saving machine. Spend too. But don’t throw away your money. If you save money now, money will save you…if not immediately, then eventually.

Happy buying!

Invest 5000 per month SIP

Invest Rs 5000 per month SIP Mutual Funds

 

Many people are of the view that they should only begin investing when they have a large sum to invest. The underlying belief is that small regular investments cannot create wealth.

But this is not true!

Did you know that by investing just Rs 5000 every month in equity mutual funds through a monthly Systematic Investment Plan (SIP) can create a corpus of Rs 1 crore in 15-20 years?

This might seem surprising. But you can easily accumulate Rs 1 Crore by investing just Rs 5000 Monthly.

So if you wish to know the best way to invest Rs 5000 per month or how to invest Rs 5000 per month and get Rs 1 crore, then you are at the right place.

Investing in mutual funds is one of the best ways to begin your wealth creation journey. And if you have already decided to invest 5000 per month in mutual fund SIP, then it’s all the more better.

Why do I say so?

Because it’s well proven; I have benefited from it greatly myself and also because I can share a real-life proof of how one person used SIP investing to create a portfolio of multiple crores.

SIP or Systematic Investment Plans are simple – invest a fixed sum in mutual funds at a regular frequency (generally monthly). Since most common investors are incapable of making big lump sum investments, SIP makes it easy for such people to make small regular investments every month using their monthly salaries without feeling burdened.

Once you have decided to invest a sum of Rs 5000 every month regularly, I am sure that you would be curious to know how much money you will have when you invest Rs 5000 a month in mutual funds for several years?

Right?

So let’s do some basic calculations:

Value of Rs 5000 per month SIP (Systematic Investment Plan)

Historical SIP returns of good mutual funds have been between 12-18%. The actual returns might differ for different investors. But for this discussion, let’s be conservative and assume the average SIP returns in 10, 15 or 20 years to be 12% per annum.

Here is what a Rs 5000 per month SIP in mutual funds can do over the years:

  • 5 year SIP of Rs 5000 monthly = Rs 4.2 lakh
  • 10 year SIP of Rs 5000 monthly = Rs 11.7 lakh
  • 15 year SIP of Rs 5000 monthly = Rs 25.0 lakh
  • 20 year SIP of Rs 5000 monthly = Rs 48.4 lakh
  • 25 year SIP of Rs 5000 monthly = Rs 89.6 lakh
  • 30 year SIP of Rs 5000 monthly = Rs 1.62 crore

Wow!

Those are some big numbers…atleast towards the end. And the picture becomes clearer when you compare these figures with the actual investments made:

  • 5 year = Rs 5000 x 12 x 5 = Rs 3.0 lakh
  • 10 year = Rs 5000 x 12 x 10 = Rs 6 lakh
  • 15 year = Rs 5000 x 12 x 15 = Rs 9 lakh
  • 20 year = Rs 5000 x 12 x 20 = Rs 12 lakh
  • 25 year = Rs 5000 x 12 x 25 = Rs 15.0 lakh
  • 30 year = Rs 5000 x 12 x 30 = Rs 18 lakh

The route of SIP investing can create a lot of wealth for you.

And just notice this – If you invest Rs. 5000 per month via SIP for 10 years, you are actually just investing about Rs 6 lakh. But return you are getting is around Rs 12 lakh. It is double of what you originally invested over the 10-year period. And the longer you keep investing, the better the returns get!

So just imagine the kind of wealth you can create if you start investing early on in your career (let’s say at age 25-30) and continue till 60.

Your monthly investments of Rs 5000 in equity funds can grow into Rs 1.62 crore in 30 years! This is the magic of compounding at play. Many who think that becoming a crorepati on regular salary is impossible – need to see these examples. They will realize that seemingly unachievable wealth targets can be achieved by investing as small as Rs 5000 per month.

Compared with other options like fixed deposits, PF, etc. (where you won’t get more than 7-8% returns), equity funds are great for real inflation-beating wealth creation.

And at the cost of sounding repetitive, I would say that starting early is unimaginably important. Here is something (very detailed) I wrote about the huge cost of delay in investing. It’s about two friends who start investing at different ages of 25 and 35. You will be shocked to see the difference in the final corpus they create. Do read it!

 

Real Example – SIP of Rs 5000 in Good Mutual Funds

The calculations shared above were done using simple SIP calculator (using fixed average returns of 12%). But in reality, the returns fluctuate and neither stock markets nor mutual fund NAVs move in straight lines.

So let’s use some real life SIP examples instead.

Let’s see what would have happened if you would have started investing Rs 5000 every month via SIP in some good mutual funds years back:

Note – The choice of fund(s) or fund house is just for sharing the concept. It should not be construed as an investment recommendation.

Starting January 2000, if you had invested Rs 5000 per month in HDFC Top 200, HDFC Equity and HDFC Prudence, your actual total investment in each would have been about Rs 10.55 lac (up to July 2017).

And the value of your investments would be…

….hold your breath….

  • Rs 87.1 lakh in HDFC Top 200 Fund
  • Rs 93.1 lakh in HDFC Equity Fund
  • Rs 81.4 lakh in HDFC Prudence Fund

Read those figures again. 🙂

We often think it’s difficult to get rich. The above examples prove otherwise. Rs. 5000 Per Month For 15 to 20 Years and you will become a Crorepati.

Investing in mutual fund SIPs can make you a SIP crorepati even with a normal income! No need for a rich father. 😉

So how to get Rs 1 crore in 20 years? The answer is to invest 10000 every month. How to get Rs 1 crore in 15 years? The answer is to invest Rs 20000 every month.

So now you have answers to your questions like how to become a crorepati by SIP.

But…

Don’t you feel something is odd in this discussion till now?

There is. And let me highlight it for you –

There is absolutely no need to keep investing just the originally decided amount of Rs 5000 per month for 20-30 years. Your income would increase every year. So your investments too should increase accordingly. Isn’t it?

Just imagine what would happen if you decide to go for a Step Up SIP? An SIP that increases every year in line with your income. So for example, it can be Rs 5000 in the first year, followed by 6000 per month in next year, 7000 per month in 3rd year and so on…. (i.e., increasing SIP by Rs 1000 every year).

If you want to start a SIP, always keep in mind that you can create ‘more’ wealth if you are able to increase the SIP every year.

Now ofcourse I have chosen funds that help me prove my point. And there have been several other bad funds too where a systematic investment strategy would have resulted in much lower SIP returns. But I am trying to highlight the potential of serious wealth creation here. And if you believe in the power of equity, then for most common people, the best way to invest regularly in equity is to do it via mutual fund SIPs.

Model SIP Mutual Fund Portfolio

If you wish to create a portfolio of mutual funds by investing in a SIP of 5000 per month, it’s suggested to have 1-3 funds. Going for more is not necessary.

Depending on one’s risk profile, some possible options are:

  • Rs 5000 in Large Cap fund
  • Rs 2500 Balanced fund + Rs 2500 Large Cap fund
  • Rs 2500 Large cap fund + Rs 2500 Small & Mid Cap fund
  • Rs 3000 Large cap fund + Rs 2000 Small & Mid Cap fund
  • Rs 3500 in Multi Cap Fund + Rs 1500 Mid & Small Cap fund

There can be any number of combinations. Suitability of SIP portfolio will differ from one investor to other.

If you are not sure about where to invest or are looking for the best SIP for Rs 5000 per month or start to invest 5000 per month and get 1 crore, it’s better to take help of an investment advisor.

Note – It’s assumed that if investing Rs 5000 in equity funds, you have already taken care of debt investments (via PF, PPF, etc.) in accordance with your asset allocation based investment plan. It is also assumed that you wish to invest for atleast 5 years. Anything lower (like 2-3 years) and you should go for debt options or have a very small percentage in equity.

SIPs are really helpful when it comes to investing in equity without much effort or stress.

But SIPs in equity funds can be helpful when it comes to goal based investing too. You already know that equity has the potential to offer much better returns than other asset classes. This in turn helps you beat inflation which is essential to achieve long-term goals.

I have already written at length as to how setting goals can help better manage investments.

It is always advisable to attach a goal to your investments. It helps keep you motivated and stick with the investment plan for long enough. And this is exactly how the remarkably powerful goal based financial planning works.

You can easily use SIPs to plan for all your goals (Download FREE Financial Goal Excel Worksheet here) and then invest regularly to achieve them. Goals like saving for children’s education, children’s marriage, saving for your house purchase, foreign trips, etc. can be done easily and efficiently through systematic investment plans of mutual funds.

And why leave the biggest financial goal of them all?

You can even do retirement planning or early retirement planning using mutual funds. In addition to the mandatory savings you do for your retirement (via EPF or PPF), you can use SIPs to create a good retirement mutual fund portfolio. Investing in mutual funds for retirement is a no-brainer if you don’t want to run out of money before you die.

As a professional investment advisor, I do help investors create goal-based financial plans to achieve their real financial goals. If you wish to get yourself a solid financial plan that tells you how much to invest, where to invest and for how long to invest for your financial goals, you can contact me for professional advice.

Here is how to contact me:

  • Go through the Services Page to see how I create your financial plan and use the form (at the end of the page) to contact me
  • Contact me directly using this form

As you must have realized, just knowing where to invest Rs 5000 every month is not enough. You need to know how much to invest in SIP to achieve your financial goals and then, invest in a more structured goal-based manner to live a financially fulfilling life that takes care of all your financial goals.

I will end this post now.

But before I do, let me tell you something important – SIP is no magic that will solve all your financial worries. Also, it does not guarantee high positive returns. But if you understand and believe in equity and the real power of compounding, I can assure you that taking the SIP route is your best bet to earn high returns offered by equity and that too in a limited monthly income that most people have. You have a real chance of getting very rich over time. And you don’t want to miss that. 🙂

Also please, don’t be under the impression that SIP is only for small investors. You can invest much more than just doing a SIP of 5000 per month.

You can go for (click links below for details):

By investing regularly via SIP in best mutual funds for long-term SIP investment, you can create a solid portfolio that earns inflation-beating returns without any hassles.

So…

Are you still thinking whether or not to start a SIP in equity mutual funds?

I would suggest you stop thinking and start acting now.

SIP is a wonderful tool available for investors who wish to create wealth in the long-run.

And more importantly, after reading this post, you have all the answers now. So you don’t need to wonder what would happen if I invest 5000 a month in mutual funds.

You know exactly how much wealth your small regular systematic investments can create. So start investing if you still haven’t, or increase your SIP investments if you are already investing Rs 5000 per month in mutual fund SIP. Over the long term, you will do incredibly well.

It’s Your (& nobody else’s) Moral Duty to Achieve Higher Returns

This is a guest post by Amit Jain. A businessman and a valuation+quality conscious investor focusing on generating reasonably high returns from long term investing.

In this post, he discusses about our moral duty to earn higher returns (when available).

So over to Amit…

– – –

Achieve Higher Portfolio Returns

When it comes to jobs and professions, most people work sincerely.

Not because they like their jobs but because they want to provide for their families. The well being of their families is at the forefront.

And if they had a choice, very few would want to remain in this rat race.

Well then, I ask…

Aren’t people who are responsible for earning money (to bring food on the table), equally responsible for safely growing their savings at the rate of doubling the capital every 6 odd years?

Shouldn’t they take full responsibility of ensuring that their invested/saved money grows properly, as opposed to only doing it half-heartedly?

If there is an asset that can give handsome returns without weighing down on the quality of their lives, then isn’t it their responsibility to pay similar (serious) attention to such opportunities like they give to their everyday jobs?

Let’s look at it a little differently.

If there was a job opportunity to double your salary every 6 years without having to get some out-of-reach kind of graduate degree or overseas work experience, wouldn’t you grab it with both hands?

A responsible person would do everything in his power to get that job. It’s a no-brainer!

But if a similar opportunity came in the form of the option to make an investment properly, how many would take that step?

Very few!

Maybe just 1-in-50.

So why is this?

Is it because of a lack of understanding or because of lack of investment capital?

I think it’s neither.

What stops people is the sense of risk that comes with the process of making any investment.

In most people’s mind, equity markets are nothing short of a Raging Bull! And they themselves are like matadors; where an ill trained one, is a dead one.

Therefore, understanding this Risk element is of prime importance; know the common pitfalls, and they are only a handful.

It’d take much less IQ and effort to get your head around the process of investment, than you need to get your Graduation Degree.

Once this concept of RISK is understood correctly, taking actionable steps to invest sensibly and profitably will only be natural.

So, let me try and put a foot forward in that direction.

We work very hard for money, so it’d be a psychological contradiction if we played around taking risks with it. Over the years, we develop an aversion towards risk taking, because we’ve had bad experiences, where MOST risks looked like very stupid decisions in hindsight. In fact, in this time and age, nine out of ten risks are likely to go bust. Every agency out there (be it individuals, businesses or even the government) are looking to make money, by hook or by crook (In fact, some are abashedly out and out of a fraudulent category.)

Therefore, it is very sensible and responsible of people to not want to part with their hard earned monies, unless they are getting maybe a brick of gold for it.

So far so good, it is very wise to be cautious.

However, let us loosen the noose slightly. Not too much… just slightly…

What if you were told, that there are companies out there that are Gold Standard? Getting shares of these companies is as good as buying gold, probably even better. In fact, the most successful investor in the world deliberately chooses to invest his billions of dollars in some such companies, and, categorically, not in gold, and makes a point about it every time he gets onto a podium.

Hold onto this thought, while I assert the importance of doing so.

If money is lost in the process of doing a business, making a real estate investment, giving a personal loan etc., the person gets depressed and often beyond consolation.

Rightly so, because hard earned money is lost.

On the other hand, if the same person just carelessly let’s go the chance of doubling his capital in 6 years (while investing in companies of the gold standard) then does it not qualify as a BIG mistake, a risk gone bust?

Should he not feel really (REALLY!) stupid in hindsight?

Why should he be excused, serious money has been lost, all due to negligence? He did lose money and a lot of it.

He chose to take the risk of ‘not taking a risk’, and lost 100% equivalent of his capital!

In conclusion, what I mean is that one must learn to loosen the noose a bit and learn to segregate investments into categories ranging from stupid to smart.

Don’t go by hearsay or go with the herd. Get educated.

There are ways to get good returns on your investments without taking too much ‘actual’ risks.

To get a feel of what actual risk means, consider the following comparisons.

The former seems low risk, because the herd is doing it, but can turn into a nightmare when the music goes off. However, the latter is a winner hands down as it is a Low risk in the truest sense with potential for giving perpetual returns.

  • Compare your chances of success in getting possession of a flat you booked with a reputed builder, against your chances of success in investment in top 30 listed companies of India? Which is a more sensible risk? Forget the capital appreciation. Where is your money safer?

It is nothing new to hear a builder who has stopped construction because the local government body has repealed a license or simply because his funds have dried out.

  • Compare your chances of success when investing in small companies (which many self-proclaimed successful investors suggest) vs investment in top-30 listed companies of India? The latter wins, hands down. Why would I even think of giving my money to a source with little or no credibility?

Lastly, the most controversial dilemma

  • Should one purchase the first flat of residence (in ready possession; cash against delivery)? Given the current scenario, one cannot hope for must price appreciation for the next decade as they are already so heated up

Or

  • Rent a home, which costs a meager 1.8% (annually) of the value of the property, and invest this capital in the top companies of the nation, and perpetually earn 12 to 15% CAGR? Only the people, who have learned to identify low-risk ways in the equity market, will go for the latter.

Point being, we ought to loosen the noose a little and learn the ropes of making proper investments.

We must strive to introduce the magic of compounding in our family finances and let the generations reap the benefits.

We owe it to ourselves, and our families to resolve this Twisted Morality in our finances; Work hard and invest harder as it is your moral duty to earn better returns and provide the best for your family.

Is Higher Cost of Active Management Justified in Indian Context?

Active Fund Management India

You know about index funds. Right?

Passively managed, these funds replicate the index at a portfolio level. So if the index has 50 stocks with different weightages, the index fund will have the same stocks in same weightages.

Since this type of portfolio maintenance doesn’t require any superior intellect or stock picking abilities (after all, it’s simple replication of an existing index), the costs associated with index funds are much lower than actively managed funds. Obviously, the returns of these funds mimic those of the index. So where most investors want to beat the indices like Nifty and Sensex, index funds don’t want to do that. They live by the motto – If you can’t beat them, then join them.

But we need to give credit where it’s due.

Index funds don’t beat a good fund manager. But surely beat the bad ones. 🙂

Now Mr. Buffett is a staunch supporter of Index Funds. And so are many other great investors and money managers.

In fact, when Google was preparing for its IPO in 2004, the company realised that a number of its employees were about to become millionaires.

Therefore, the company brought in a series of financial experts to teach them to make smart investment choices. Stanford University’s Bill Sharpe, winner of the 1990 Nobel Prize in economics said, “Don’t try to beat the market.”

Even he advised Google employees to park their money in index funds. And rightly so.

In developed markets like the US, 70-80% of actively managed funds fail to beat the indices. So, it’s really tough to find good fund managers ‘there’ who will beat the index on regular basis. Even if there were a handful of such managers, new money flowing into their fund coffers will ensure that their returns suffer when the fund swells up. Then again, it would be tough to find index-beating returns.

This is the reason that greats like Buffett advocate index investing.

Active managers can’t beat the index. And they also charge higher. So what’s the point of having active management? Isn’t it?

Investors should get a better deal.

In his latest letter to shareholders, Mr Buffett even talks about his bet that no person (whosoever) could select at least five hedge funds (high-fee investment vehicles) that would over an extended period match the performance of an unmanaged S&P-500 index fund charging only token fees!

Many investors tend to disregard investment fees. But when active management is not helping get higher returns, why pay higher fees for underperformance? Better stick with low-cost index funds. And in this age of robo-advisory, it’s possible to invest passively with minimal human interaction. And one look at any automatic investment fee calculator would highlight the amount of money that can be saved by going the robo-way. Low cost, potentially better performance. What else do the investors in developed economies need?

But here in India, the landscape is very different.

Many years back, I was of the view that I should be investing primarily in index funds.

But then I realized that index fund investing is not the best option for me. And for all those who are ready to take some additional (but not illogical) risk in need of higher returns.

There is enough proof available that active funds managed by good, skilled and capable fund managers in emerging markets (with not very mature equity markets) like India will outperform the indices.

In any case, if you tell someone in India that a fund will give you returns that match that of the index, they will be disappointed. Even if the index is giving 20% 🙂 Investors just want to beat the shit out of index returns.

But jokes apart, for most common investors it’s better to avoid index funds for time being.

A reasonably good proportion of mutual funds have been known to outperform the benchmark indices on a consistent basis over various time periods. In all likelihood, the index funds in India will be unable to beat some of the good actively managed mutual funds for some years to come. Here is an interesting analysis on active management (index vs actively managed funds) in India.

Some feel ‘Invest in the index for better returns and lower fees’ is Buffett’s Single-Best Piece Of Advice for common investors (who have no business picking stocks or fund managers).

It’s of course essential to control (if not eliminate) your investment fees. Uncontrolled investment fees can significantly reduce returns over time.

But given the Indian context, where the probability of finding index-beating funds is higher, the higher fund management costs seem justified. At least to some extent.

Finally, when it comes to index vs active discussion, I think we Indians have won the ovarian lottery (in words of Buffett).

We have quite a few options beyond index funds.

Index investing isn’t meaningful for most investors. At least not for me. At the current levels of market efficiency and size, I expect good actively managed funds to generate alpha atleast for next decade or so. Possibly after that, the over-performance (above index) might reduce as domestic equity markets become more efficient.

So as long as the party is on for some more time, keep dancing. 🙂

5 People. 1 Story. Reality of the Indian Real Estate

This is a guest post by Shyam Shenoy. A software engineer who is passionate about value investing. He believes that one of the major reasons for the real estate prices reaching unrealistic levels is the Indian IT economy.

You may or may not agree to that, but he has an interesting story to tell you.

So over to Shyam…

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Reality Indian Real Estate

There is absolutely no doubt that Housing is one of the 3 basic needs of life. You need a house. I need a house. And for all practical purposes, we all need a house.

Thousands of articles have already been written about why owning a house makes sense. And even if you don’t read such articles, people around you will try to ‘somehow’ convince you that it does make a lot of sense.

Now housing is a need. And every need… costs.

And for regular people like us, every cost… counts.

Having said that, the cost of a house is probably the single biggest expenditure that a person incurs in his lifetime.

So there needs to be a solid thought process behind the decision to purchase a house.

Now Stable Investor is a site about investments. So here, I am talking from the perspective of prudent money utilization and not from house-is-a-basic-need-so-we-should-buy-it perspective.

In this post, I want to share a story with you. The standard disclaimers apply. 🙂

Disclaimer: Any Resemblance to Actual Persons, Living or Dead, is Purely Coincidental

 

The Story of 5 People

There were 5 people in a small town:

  • Ajay an IT engineer
  • Bob the builder
  • Charan a corrupt Government Employee
  • Daniel a banker
  • Edward who was engaged in small businesses

All of them had close to zero money to start with.

Now a businessman named Peter (who owns a big IT business) comes by and offers Ajay (the IT engineer), a job for Rs 15 Lac per annum.

Immediately, Ajay has levelled up and is going to be rich. And the other four people take notice.

Bob (the builder) now sees an opportunity here.

He approaches Ajay and lets him know that he could build a house for him for a price which he would let him know later. Ajay agrees to it in principle, as he is still not committing anything.

Bob gets down to work. As per his calculations, it would cost him about Rs 30 Lac to construct the house. If he adds his profit of Rs 10 Lac, he can sell this house to Ajay at Rs 40 Lac.

Charan (the corrupt government babu) has years of experience in dealing with approvals and permits. For lack of a better phrase, he can smell money in this transaction too. Being aware of Ajay’s new found income source and about Bob’s construction plans, he tells Bob that he will give approval for his construction project only if he gets his cut. A cut of Rs 20 lac in a suitcase so that he can ‘legalize’ and ‘approve’ this construction.

To sweeten the deal, he assures that he will also bring in Daniel (the banker) and influence him to grant loan for construction.

As you might have guessed, Bob is forced to add Rs 20 Lac more to the selling price. The house will now cost Rs 60 Lac. Adding more for registration costs, stamp duties and other miscellaneous items, the final price for Ajay comes to around Rs 70 Lac.

Bob lets Ajay know that the price of the house would be Rs 70 Lac – ofcourse in a combination of black and white 😉

Daniel (the banker) is ready to offer Home Loan to Ajay at 10% per annum.

Ajay feels that luck is favoring him again with these good deals. After all, it was him who found a job that pays an annual salary of Rs 15 lac whereas other four people still don’t get much.

He accepts Bob’s offer and takes a home loan from Daniel.

If you are aware of the home loan mathematics, then you would agree that for a long-term home loan of Rs 56 lac (assuming 20% downpayment by Ajay from some other source – maybe from his father’s retirement corpus), what Ajay is probably tying himself to is a loan repayment schedule where principal + interest would be around Rs 112 lacs or Rs 1.12 crore (approx.).

But that is Ajay’s headache. 🙂 Let’s move on.

Edward (the 5th person) sees all this and does his own biddings…. starts a school, hospital, shopping Mall and what not…

So what is the current situation?

Bob certainly makes a profit of Rs 10 Lac. Charan gets his ‘black’ Rs 20 lac. And banker Daniel gets his Rs 56 lac interest on home loan. There is no real estimate as to what Edward is making. No one except Charan is doing anything illegal (maybe Edward too is doing something as he got huge investments to build those hospitals and schools etc.)

However, Bob, Charan, Daniel and Edward have cleverly exploited the situation.

The money ‘traveled’ from Ajay’s hands to others and Ajay is at maximum risk.

Bob and Charan have already made the money and left. Edward obviously is stinking rich and can afford to sit and wait for things to work out.

Now comes the interesting part…

Try imagining thousands of Ajay(s) and other fours. This becomes the case of an exponentially growing city. Now imagine lacs of such people and it becomes the situation of the entire economy.

Now suppose that Ajay has four friends (colleagues) – Amit, Ashok, Ali and Antony.

They come to know that Ajay has bought a beautiful house. Now, these friends get into the herd mentality. They feel that since Ajay has bought it, it must be good. They too want to buy a house (obviously loan funded).

The opportunities for Bob’s construction business are plenty. So other builders, bankers and establishments also join the party. All are happy. Since people like Charan (the corrupt government official) have very few competitors, more and more people like Ajay and his friends make him richer and richer.

If you see the bigger picture, it’s a clear case of a mad rush to make money at the expense of people like Ajay and his friends.

As more builders enter the fray, Bob is facing stiff competition. He starts making houses out of substandard/inferior raw materials. He also engages real-estate agents and brokers to whom he pays a small cut – to bring more and more unsuspecting buyers to him. Some of the builders like Bob have already started absconding without even completing their projects.

Charan starts approving all the projects blindly. Lands near city dumps, toxic lakes, far away places, agricultural lands, lake beds, flood plains, encroached spaces and lands with no clear titles. Charan is busy signing approval papers and has no interest whatsoever in construction standards, roads or infrastructure.

Daniel is giving out loans like never before. All which can and might turn into NPAs. But he is too busy to see all that. He has undercover and shady links to loan recovery agents.

As for Edward, he starts raising prices of the services he is providing through his schools, hospitals and malls. Prices everywhere are going skywards.

Obviously, this cannot continue forever. The flip side starts showing up slowly but certainly.

Depleting land leads to land mafias. Depleting sand leads to sand mafias. Depleting ground water leads to water mafias. There are no proper waste management systems and nearby rivers are being filled with lakhs of litres of polluted water daily. There are laborers pouring in from all around the city and living in slums with a desire to get employed in this fast growing town.

Can the situation be reversed back?

Almost impossible.

Even if Charan suddenly decides to turn into a good man and stops accepting illegal money. Why would Bob reduce his price from Rs 70 lac to Rs 50 lac all of a sudden? His competitors will not be doing so. No one will quit as long as the party goes on. The houses already constructed cannot be demolished, given the scale of constructions that have taken place.

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So that was the story.

But in spite of me claiming it to be an imaginary one, even you know that it’s not completely fictitious. 😉

Now I am not arguing in favor or against the idea of purchasing of real estate. It all depends and differs from one person to another.

Buying a first house (your primary residence) is sensible. But investing more money into real estate is another question (read this). And remember, you need to consider many other things:

  • Are you really getting your money’s worth when you are investing in property?
  • Is the quality of the house reasonably good? Do you know it or you are just assuming it?
  • Most of you will take a home loan to buy it. Are you fine being chained to the loan repayment cycle for life (ok not life but a decade or two) and thereby compromising other financial goals to a larger extent?
  • Have you considered how you would pay EMIs in situations like job loss, health deterioration, etc.?
  • If it’s an investment, do you feel you will really find a buyer at the price that you wish to dispose of your flat in case of an eventuality?
  • Now, this is not an easy one to digest. Aren’t you enriching other people with your money by buying houses at exorbitant prices? If so, don’t you think it makes sense to stay in a rental house?

Think about it.