Interview With Mid-Cap Mogul Kenneth Andrade

Kenneth Andrade Interview Midcap
Image Source: Livemint


I recently had the privilege of talking to Kenneth Andrade, who is widely acknowledged as one of the best fund managers in the mid-cap space in India.

Most people already know this legend and many refer to him as the ‘Mid-Cap Mogul’. Hence, an introduction is not necessary in Kenneth’s case. But for those who don’t know, he was the fund manager of IDFC Premier Equity Fund – one of the most popular and best performing mid-cap funds ever.

Ability to think out-of-the-box to identify the big theme, build investment hypothesis around it and most importantly, convert it into winning investments. This was and is his expertise. Now he has moved on from IDFC MF and turned into a private investor.

In this interview, he answers my questions about investor psychology, investing in stocks for the long term and mutual fund investing.

So here it is…

Common Investor Psychology

Dev: One of the biggest problems of common investors is their inability to sit. So how does an investor stay put even if (say) markets have moved from 10,000 to 20,000 in just a couple of years and he/she wants to book profits?

Kenneth: Investors do stay put in investments; except in equities. This probably is associated with the volatility of the asset class and the lack of a fixed return or physical asset.

Also no one likes negative returns and the equity asset class can’t promise that every year.

The western world has found a way around this with their pension plans. India still needs to get there. As a discretionary investor they will always give into greed at the top of the markets and fear at the bottom of the cycle. Hence the only way out is to package products, which eliminate or smoothen out volatility. Manufacturers in India have been experimenting with hybrids. They tend to cushion the volatility of the markets. Maybe that’s one way to keep the investor interested. It may not be the most efficient way of equity investing but the yields across market cycles would still be higher than mere fixed income products.


Dev: It is said that in investing, it’s very important to avoid making big mistakes. Even someone like Charlie Munger believes, that not making big mistakes is a huge determinant of whether one will have financial success in life or not.

How does a common investor identify his limitations, create a simple mental framework and more importantly, implement this framework to avoid making big mistakes?

Kenneth: The way I would address this is to invest in what you know. I am very apprehensive in putting money to work either in a company or an investment, which I don’t understand. I guess the same would apply to any investor.

One way of avoiding mistakes is to understand what you do, that way you can identify and correct it when and if it does go wrong. If you don’t know the investment, you would never know if things are going wrong in the first place.


Dev: What according to you is the biggest reason most investors don’t succeed in stock markets?

Kenneth: I guess most serious investors do succeed in markets. The longer you stay invested, the better are the results. Investing needs to be passive and rather than focus on prices investors should concentrate on the underlying. This is a learning process. And being persistent is the key to long-term success. A lot of investors give up in the short term.


Dev: How important it is for investors to have reasonable expectations? Many investors start believing that markets will continue to perform well, just because they have done so in the past. How does one correct this perception?

Kenneth: In the beginning of 2013, 10-year index returns converged with liquid fund returns. There is no set rule that equity or any asset class will deliver an above average return in perpetuity. Sure if you play with statistics, we can prove otherwise.

In the long term, any manager or fund with a return over 5%-7% (post tax) over the risk free return is a job well done. If that is the benchmark, then it is fairly important to anchor investor expectation around this number. Of course at times this could be significantly higher if a couple of asset classes do extremely well.


Dev: Volatility is one of the most recognizable and hated aspects of equity markets. And because of volatility, most investors do the exact opposite of what needs to be done. They buy (on fear of missing out) when markets are high and sell (out of fear), when its low. This seems to be driven primarily by the perception of volatility and risk being same things.

But that is not correct as per my understanding. So how does one start believing and also, convince others about the fact that volatility is an aspect of risk and it is not 100% same as risk.

Kenneth: I guess the latter part of the question can only be experienced with time in the market. In one of my presentations lately I made a point that you need to use volatility to your advantage. Markets overshoot in both directions, and if you take advantage of this it could be extremely profitable. But one needs discipline to take advantage of these extremities.

Mutual Funds

Dev: The best time to invest was yesterday. Next best is today. Though its easier said than done for most people (who invest for long term goals), how does one go about convincing people to stick with to long term mindset when it comes to investing?

Kenneth: It’s the discipline that’s very important for that. And more than convincing, it’s the investor experience in the product category that matters. If any consumer has had a good experience of a product or a service, chances are he will stick to that regime. So it’s important that a habit is cultivated.

A lot of investors like to see markets trend up so that their money is multiplied everyday. Logically if I had a steady income – I rather want to invest in a market that is sideways to down for even maybe 5-7 years. (Read I Pray for Bear Markets) That keeps my average holding of my investments low. Then if markets doubles or trends upwards, which they normally do once in 5 years, it’s a very profitable trade.

If you do the math investing in a market, which is trending upwards is very inefficient. You have a very high weighted average cost of holding and a relatively lower return than the former.


Dev: It is said that apart from returns, one should also consider many other factors while selecting a mutual fund for investing. Which factors according to you should form the key criterias for fund selection?

Kenneth: Investing in any portfolio should be a long-term commitment. Likewise the long term is also associated with durability. So if one needs to buy a MF scheme for the long term, the portfolio also needs to be in sync. There are a lot of funds out there, which promise long-term returns with the top stock undergoing tumultuous changes. Portfolio churn is never good for the long-term investor. If this were so with the underlying fund, at most the best return would be index linked. One needs to watch for this.


Dev: Inspite of MFs being the best option for common investors*, people do get attracted by the glamor of investing directly in stocks. As per my understanding, this is human nature and people will continue to do so.

But when they do it, it also makes sense to invest only in companies, which dominate their industries with no-to-moderate debts and positive cash flows (atleast for non-professional investors, these criterias should be good starting filters).

How can an investor go about finding such companies? Another problem with finding such stocks are the perennially high valuations, which they are assigned. How does one go about investing in such companies?

* neither has the time nor expertise to analyse individual stocks.

Kenneth: MFs reduce volatility and at the same time offer participation in the growth of the capital markets. Their models are largely disciplined with managers allocating money across a number of companies. Individuals can replicate this off course by buying stocks directly. The error that most investors commit is the discipline of diversification. If this were managed well the outcomes would not be very different from diversified mutual funds.

The second part of your question resonates around investment styles. And no one style fits all. But by sticking to what you understand best will give you more upsides than downs. Don’t diversify your style.

As an investor I have always shied way from levered companies (excessive debt). And I consistently look for stocks and business that are out of favour. That way you know you are getting in at the ground floor.

An example of an ideal investment case would be a loss making company with a shrinking balance sheet in an industry that is under stress. So go one step backward on what creates capital efficiency – higher profits and capital employed (RoE = Net Profit/ Shareholder Capital). The former is the function of the environment; the latter is the function of the management. Look out for the latter, this should not be bloating. Chances are these stocks will come extremely cheap because of the cycle they are in.

As investors we all consistently focused on return. On the contrary we should be risk managers. A bull market gives you the return because all stocks participate; a manager has a very little role in that. It is the downside that counts.

You have to have a framework that works in a market offering you negative returns and measure your successes by buying companies that survive an economic slide.


Dev: In one of your interviews, you said that it is very important to go for companies, which are in a space that is scalable and significant. But as Graham said in Intelligent Investor, “obvious prospects for physical growth in a business, do not translate into obvious profits for investors.”

How does one think on those lines, so as to avoid the pitfalls of investing in the wrong company in the right space? Is it that the predictability of understanding the environment that a company operates in, and the ability of the company’s management to actually execute in that environment is the most critical aspect of decision making?

If yes, how does one be sure about the management here?

Kenneth: A company profit is limited by the size of its industry. Hence my fetish for scale sets in. Off course once this scale is established, the execution has to be profitable market share growth.

In my framework any company that loses market share raises a red flag, the cost of building back market share gains is ridiculously expensive. It is an easy parameter for most investors to track. (This framework may not strictly apply to commoditized business, but it works in most cases).

Getting back to the scale question, I love excesses. I always am on the look out for the next stock market bubble and the reasons that would cause it, but I would rather preempt them. Else like every one else I end up being the follower. If this is the context, I would necessary need to find scalability in the business and in the mid term markets extrapolate these numbers creating these excesses.


Dev: Most people say that India will continue to grow for years to come. As investors we need to be optimistic about future prospects. But as I read in one of your interviews, you said that it is very important not to go into an expanding economy with the wrong portfolio.

Most people are looking at the same set of sectors, which have done, well in recent past. But to outperform over the long term, one needs to know what can drive the next bull market. Though its tough for common investors to do it, what would you advise a person who is willing to put in place a mental-framework to think on those lines?

Kenneth: That’s an easy one. Demand creates profitability, which creates market caps which in-turn creates the need for fresh capacity. So in this framework, companies, which were growing 15%-20% per annum, set up capacities to grow between 30%-50% using near term historical numbers to justify the capital investment. This creates excessive capacities. Which is why the same sectors get very capital intensive and never return to historic levels of capital efficiency and then valuations.

If the above is true, we would need to let go of the past and look at industries where supply constraints or competitive intensity is low. Chances are they hold on to their profits and efficient capital allocation. One way of tracking this is leverage. Banks usually are arbitragers of high capital efficient business and low interest rates. They usually fund excessive creation of capacity based again of near term historical numbers, which they extrapolate into the future. So look for what these institutions fund, it may be the beginning of the next economic bubble; and excessive lending may end up being the end of one.


Dev: I know that you like buying companies, which are efficient with their use of capital. How can one analyse companies to find efficient use of capital. And more importantly, how does one create a list of such (prospective) companies in the first place?

Kenneth: Go one step behind. In one of the question above I alluded to two components of the capital efficiency ratio – the numerator and the denominator (ROE = PAT/ Shareholder Capital; ROCE = PBIT/ Capital Employed). The numerator is profitability, which largely is the function of the economy; I don’t believe I can predict a complex subject of growth.

The denominator however is the function of the management and efficient capital allocation. A lower denominator is all I look for and you don’t need a model to predict that. This is already in public domain. Just look for the latter. If you buy a portfolio of 20 companies that meet this criterion, the probability of going wrong is well zero!



Dev: Few books which you would ask everyone to read, to get their thoughts about investing and money ‘corrected’ and streamlined.

And what will you suggest for someone who is interested in doing deeper analysis of the actual businesses behind the stocks?

Kenneth: I have always identified with the Peter Lynch style of investing, which is what makes his two books my all time favourites. i.e. 1) One Up on Wall Street and 2) Beating the Street

And nothing beats company annual reports if you want to deep dive into an analysis of a company.


Dev: How do you avoid noise and information overload, which are so prevalent these days? How does an investor focus just on what is important?

I feel that noise is generally made up of opinions people have. And I may be wrong, but most people don’t know what they are talking about when discussing about future. How does one stop oneself from becoming influenced by such noises?

Kenneth: As an investor I am always looking at a right price to buy a good business at. So noise is welcome if it gets me to that objective. Else, file all the information you get in some remote corner of your grey cells. Chances are you will need this sometime in your investing journey.


Dev: That’s all from my side Kenneth Sir. I thank you for taking time out of your busy schedule to answer my questions. It was wonderful to have you share your insights.

Kenneth: Thanks Dev.


Building Wealth through Systematic Investing in Mutual Funds – A Case Study

(Updated 2019-20)

Note – This is a guest post by Ajay, a regular reader of Stable Investor. He has written many useful posts here on accumulating funds for recurring expenses, investing surplus money in mutual funds, his own super-detailed experience of accumulating Rs 3.7 crores in 10 years (this is one of the big SIP success stories). Alongwith with Ajay, I also did a super detailed comparative analysis on Real Estate Investments vs. Mutual Fund Investments in India.

So over to Ajay – who is once again highlighting the importance of systematic investing in creating long term wealth by SIP in mutual funds.

Wealth SIP Equity Funds
For years, mutual fund companies have been trying hard to convince retail investors about the benefits of SIP. Investment advisors, newspapers, personal finance magazines and even blogs have been doing it for years.
But sadly, despite the Indian mutual fund industry being more than 25 years old, only a small section of the retail investor community has benefited from investing in mutual funds in the real sense.
And this is not a general observation. It’s a fact which has also been highlighted by a well-respected fund manager from Franklin Templeton, based on the analysis of their mutual fund folios after completion of 20 years of Franklin Blue Chip Fund.
According to their study, despite the fund delivering consistently high and market-beating returns, there are hardly any investors who have profited fully from this fund.
The reason for this can be attributed to the fact that most of the times, retail investors are sold products that don’t meet their requirements. The distributors & agents only sell products which give the highest commissions. And this does not stop at that. These agents and distributors then convince investors, to churn their portfolios continuously to extract more commissions from them!
Now there is nothing new or radical that is being said in this post. And you might have already read similar articles about SIPs on other blogs and personal finance magazines. This post is a reiteration of our strong faith in the power of regular investments through Systematic Investing Plan (SIP). We will use fact and figures to further substantiate this faith.
So let us get into the details now:
For this multi-scenario case study, we have chosen the mutual fund scheme: Franklin India Prima Plus Fund – Growth (now called Franklin India Equity fund since 2018-19)
An amount of Rs 10,000 was invested monthly (via SIP) in this fund starting from July 2000 (for a 15-Year Period for this case study).
Now we did not attempt to time the markets or try any other complex techniques. We just focused on doing a plain and simple, monthly SIP of Rs 10,000 for a period of 15 years.
If you want, you can see the entire investment statement by clicking on the small image below:
Franklin India Fund SIP
To summarize, a regular monthly investment of Rs. 10,000/- from July 2000 to June 2015 (with the 1st trading day of the month taken as the SIP day) was done. This amounted to an actual investment of Rs 18 Lacs.
Now in June 2015, which is after 15 years of starting the SIP, the invested amount of Rs 18 lacs has grown into a corpus of Rs 1.28 crores!
Not a small amount considering that just Rs 10,000 was invested every month. And to put it on record, we did nothing spectacular. We just did SIP. That’s it:
Rs 10,000 x 180 Months = Rs 1,28,00,000 (!)
Looks crazy? But that is the power of long term investing.
As a retail investor, you don’t need to be super intelligent or a financial wizard to create a big corpus. As Buffett famously said,
“Investing is not a game where the guy with the 160 IQ beats the guy with 130 IQ.”
For retail investors, the rule of the game of wealth is simple:
Don’t do anything else apart from investing a small amount (as much as you can manage) every month for long periods (to know more, check the detailed SIP calculators).
In our case study, it’s about investing an amount of Rs 10,000 every month for a period of 15 Years.
Not a very difficult thing to do for quite a few of us. Isn’t it?
So if it is so easy to create wealth through a simple SIP, then why do people continuously talk about equities being risky and complain about losing money by investing in stocks and equity mutual funds?
Are the equity mutual funds really that risky? The answer is a big ‘No’.
It is not risky provided you play by the rules of the game. And to convince the sceptics, let us analyze the returns earned by the chosen mutual fund during different periods.
Since the investment is SIP-based, we calculated the XIRR returns over a different period. In our opinion, 7 years+ is a suitable time frame for investing in equity mutual funds.
However, we will calculate XIRR (or internal rate of return) for 3 years, 5 Years, 7 years, 10 years and 15 years.

Rolling 3-Year Returns

Please note that a period of 3 years is not a suitable time period for investing in equity funds.
An amount of Rs 10,000 was invested via SIP on 1st of every month for 3 years. So in 15 years, we get 13 data points on a rolling 3-year basis. The XIRR results are as follows:
Franklin India Prima 3 Year SIP
Out of the 13 available data points, not even once were the returns negative. The returns ranged from lows of 4.28% to highs of 48.45%.
9 of the 13 three-year periods gave returns in excess of 18% – which is not a small achievement.
4 of the 13 three-year periods gave single-digit returns ranging from 4.28% to 8.32%. No doubt, these figures are low. But there still hasn’t been a loss. Now let’s agree with one fact. In short time periods, bull and bear markets can significantly distort the returns. Both on the higher, as well as on the lower sides.
So let’s carry out a similar analysis for longer time-frames.

Rolling 5-Year Returns

Now 5 years is the bare minimum, which one should consider for investing in equity funds.
In this particular scenario, an investment of Rs 10,000 was made via SIP on 1st of each month in each of the 5-year periods. In a 15-year period, we get 10 data points on a rolling 5-year basis. The results are as follows:
Franklin India Prima 5 Year SIP
Once again, not even once did the returns turn negative. i.e. there were no loses. In fact, the returns ranged from lows of 8.71% to highs of 49.43%. It is worth noting that the minimum returns are quite close to risk-free (and most of the times taxable) returns provided by PPF and the ever-so-popular bank fixed deposits.
7 out of the 10 five-year periods gave returns in excess of 17%. There was just one single digit return period of 8.71%.
Let’s now move further.

Rolling 7-Year Returns

For a 7-year SIP, the return figures are as follows:
Franklin India Prima 7 Year SIP
The most important thing to observe here is that once again, there are no negative returns periods. And the returns range from lows of 9.54% to highs of 42.52%.
7 out of the 9 available periods gave returns in excess of 16%. The two lowest returns were 9.54% and 11.04%. And both these are well above the returns given by traditional bank deposits, PPFs, NSCs, etc.
Now, let’s move to 10-year period now.

Rolling 10-Year Returns

In this, we only get 6 rolling periods of 10 years each. The returns corresponding to each of these periods is given below:
Franklin India Prima 10 Year SIP
No losses. Lowest is 17.40%. Highest is 28.18%.
And all the six period have provided returns in excess of 15%.
It is worth understanding that these type of returns are the best among all available financial instruments like fixed deposits, PPFs, NSC, etc. And unless you were lucky in real estate, you could not have made such returns in any other asset class.
Now the interesting thing about these 10-year periods is that these started with a bear market in 2002 – 2003, which was then followed by mega bull-run of 2003-2007. Then came the crash of 2008-2009, which was then followed by the sideways move of 2009-2014. Since 2014, it’s been a practical bull market till June 2015. So most of the data points in 10-year periods have gone through a couple of bull and bear markets. Yet the returns have been positive and in fact, exceeded 15% in each of the periods.

Rolling 15-Year Returns

In a 15 year period, we just have one data point. And returns for this period of 2000-2015 are 23.25%.
Franklin India Prima 15 Year SIP
It can be safely said that over a 15-year period, none of the investments (excluding real estate in some specific areas) would have provided such returns. More importantly, such returns have been achieved by small monthly investments without straining your pocket or cash flows.
Now we know what you must be thinking.
Why was this particular fund chosen?
Or what would have happened had we taken any other fund?
Now as per Value Research, the scheme Franklin India Prima Plus Fund (Or Franklin India Equity Fund) is rated highly – as a 5 Star** Fund (at the time of writing this post originally). It ranks in top 3 in the Large & Midcap Equity Funds category* over a 5-year period. It is also among the top 3 funds over a 10 Year Period. To sum it up, it’s one of the best performing funds in its category over short, medium and long term.
* To know more about changes in mutual fund categories recently, read SEBI’s Mutual Fund Categorization and Rationalization changes in 2018.
So lets admit that we intentionally chose the best and the top rated fund in the Large & Mid Cap Category for the above study. Hence, all results were bound to be in our favor. Isn’t it?
No worries. Lets change the fund now. 🙂
What if we choose a fund that is one of the worst performing funds of its category?
That will be an interesting analysis.
So we take one of the worst performing funds – Sundaram Growth Fund and repeat our analysis.
As of June 2015, Sundaram Growth Fund has been rated as a 1-Star Fund, and ranked in bottom three of the Large & Midcap category over a 5-year period. It is also ranked last in all funds over a 10-year period.
So once again, lets analyse the power of SIP using the worst performing fund.
If you want, you can see the entire investment statement by clicking on the small image below:
Sundaram Growth Fund SIP
To summarize, a regular monthly investment of Rs. 10,000/- from July 2000 to June 2015 was done. This amounted to an actual investment of Rs 18 lacs.
Now in June 2015, which is after 15 years of starting the SIP, the invested amount of Rs 18 lacs had grown into a corpus of Rs 68.42 lacs!
So this has been achieved by a simple SIP in 15 years, when invested in one of the worst performing funds.
Comparatively, the best fund created a final corpus of Rs 1.28 crores. The total investment was the same in both the funds, i.e. Rs 18 lacs.
This divergence in returns highlights the importance of choosing the right fund and monitoring the same regularly for its performance.
Now lets proceed to our XIRR analysis for various time-periods.

Rolling 3-Year Returns

Below is the table giving the rolling 3 year returns in our chosen fund:
Sundaram Growth Fund 3 Year SIP
So while the best fund delivers returns between 4.28% and 48.45%, the not-so-great fund delivers returns between -0.44% to 47.10%.
Although, the best fund had no negative returns in any of the 3 year investment periods, this fund gives negative returns in 2 of the 13 data points.

Rolling 5-Year Returns

Sundaram Growth Fund 5 Year SIP
Out of the 10 data points, not even once the returns were negative. And we are talking about one of the worst funds here. 🙂
Lets move on to longer periods now.

Rolling 7-Year ReturnsSundaram Growth Fund 7 Year SIP

The returns in the 7-year period range from lows of 4.08% to highs of 37.72%. Compare this with the range of returns (9.54% to 42.52%) produced by the best performing fund.
7 out of the 9 data points for the best performing funds gave returns in excess of 16%. For the worst performing fund, only 4 out of the 9 data points provided returns in excess of 16%.
Now 2 out of 9 data points gave returns of 5.52 % and 4.08%. Though theoretically, it’s not a loss, it is still lower than what could have been earned through safer options like FDs, etc. In case of best performing fund, it did beat the fixed deposit returns even at its worst. So once again, it proves that fund selection is very important.

Rolling 10-Year ReturnsSundaram Growth Fund 10 Year SIP

No losses. Low of 9.21%. High of 24.03%.
Compare this with the returns given by the best fund – which had a low of 17.40% and a high of 28.18%. The best performing fund managed to give returns in excess of 15% in all 6 ten-year periods. The worst performing fund could manage it only twice.
Now comes the most important part.
Even though the returns of the worst performing funds were (obviously) lower than the best performing fund, the it were still higher than those given by other instrument like fixed deposit, NSCs, PPFs, etc.
Read the previous paragraph again to understand its importance.

Rolling 15-Year Returns

The story is similar for the 15-year period too. The chosen fund delivers return of 16.09%, which is way below 23.25% achieved by the best performing fund.
Sundaram Growth Fund 15 Year SIP
But even though the worst fund does poorly when compared to the best one, it is still not a bad performance, when compared to other safer options.


The above analysis shows that for the best fund in its category, there were no losses in any of the 3, 5, 7, 10 or 15-year periods. Even the worst performing fund managed to avoid losses in 5, 7, 10 and 15-year periods. Though there were minor losses in few of the 3-year periods.
But we need to remember that anything less than 5 years is not suitable for equity fund investing.
Now a very important point to understand here is that even though the difference in returns of two funds might not look large (23.5% – 16.09% = 7%), over a 15 year period, it can have a significant impact on the final corpus as shown in the table below:
Best Worst SIP Fund India
So which mutual funds you pick for portfolio does impact your final returns too.
Note about Sundaram Growth Fund: Between 2000 and 2005, this fund was an average performing fund and not counted among the good ones. Since 2006, this fund has not performed well and currently stands at the bottom of the large and mid-cap category.
Let’s now try to answer some questions (which readers might have) about SIP investing:

Frequently Asked Questions

Q – Why do most investors end up losing money or not getting decent returns from SIPs?

They do not follow the main rule of the game, i.e. keep investing an amount X every month for a period of 10 or more years. They try to time their entries and exits in markets instead of focusing on staying invested.
Once again, have a look at the complete investment tables for the 2 funds used in this analysis. Except for the initial years (up to 2 years), there was no time when the folio had come into a loss. Even during the 2008-2009 crisis, if one had been a regular investor, the high returns might have been lost, but the value of folio would still have been very decent in comparison to the money invested.
Q – What if I had entered the markets during the peak of 2008? I would have lost my money. Isn’t it?
On 1st January 2008, the NAV of Franklin India Prima Plus Fund (now Franklin India Equity Fund) was Rs 212. After the crash, the NAV was down to nearly Rs 98 by March 2009 (a fall of more than 50%). But it returned to Rs 220 by September 2010. So even though your folio was down in 2009, it must have been back to its original level by 2010. In addition, your regular SIP during 2009 would have allowed you to purchase units at cheaper NAVs, which would have given phenomenal returns by the end of 2010. Hence at a portfolio level, you would have done well.
You can check the rolling 3-year returns table in the post above (for Franklin India Prima Plus Fund). The returns are almost 19% to 21% for the periods between 2007-2010 and 2008-2011. So there would have been no loss even if you had entered at the 2008-peak and kept on investing as a regular dumb systematic investor.
I did not get the high returns from markets that people regularly talk about.
The market may or may not give high returns in the short term (spanning 1, 2 or 3 years). But there is data to prove that if one stays invested for periods of 5, 7 or 10 years in good mutual funds, returns easily beat those of traditional options like bank FDs.
What is that you want to say?
  • Equity mutual funds are the best available investment options to build wealth.
  • SIP is the best way to invest in equity mutual funds for common investors.
  • You don’t have to be a financial genius to build wealth.
  • You have to play as per the rule of the game i.e. keep investing an amount X every month for more than 10 years.
  • The markets will crash sharply, stay low, rise slowly, and run up fast. This is natural. But you can ride over it and make money only if you play according to the rule of the game.
Disclosure (Ajay): I am an individual investor sharing my personal experience. I have no interest in buying or selling any of the funds mentioned in the above analysis or otherwise. As an investor, readers need to do their own analysis or take help from investment advisors before making any investments. I am also a SIP and lumpsum investor in Franklin India Prima Plus Fund (now Franklin India Equity Fund) since 2006. I am not an investor in Sundaram Growth Fund.

Mutual Funds Vs Real Estate – Which is better for Investing in India?

Real Estate or Mutual Funds? This might be one of the most controversial debates I am starting on Stable Investor. But I had to write about it someday. And by the number of mails I receive from readers asking me to answer this question, it seems that there is much more than just financial logic behind this question. Peer pressure, family pressure and just getting done with this big decision in life are some, which I can think of right now.

Note – This post is a combined effort by Ajay (who has previously authored interesting posts like how to invest your surplus money and how he created a corpus of Rs 3.7 Crores in just 10 years) and myself.

But if you expect us to give you a clear answer at the end of this post, then please tone down your expectations. We do not intend to provide a thumb rule or even a judgment for that matter.

This question of whether you should invest in Real Estate (for investment) or Mutual Funds, can only be answered by you and you alone. This article should ideally be read in that spirit.

Property Vs Mutual Funds

So let’s go ahead…

In words of Ajay, a home is a place to live and it should not be linked to one’s investment strategy. There should not be any second thought given about buying your 1st property for self-occupancy whether with or without tax benefits.

My take on this question is not as strong as that of Ajay. But I do agree with him about the power of equities in the long run. As far as my real estate is concerned, I am still weighing my options and am yet to finalize my long-term real estate strategy. As of today, I don’t own any personal property but my family does have a house in our native city.

So why am I delaying this decision unlike many of my friends who are already paying hefty EMIs every month?

I know it might sound odd to those who believe that one should invest in property starting with the very first salary they get. But I am sorry… I don’t belong to that school of thought. I have full faith in the power of compounding and investing in equities. And I will only buy my first piece of real estate when I am comfortable enough to service my EMIs. I don’t want to have myself stuck in years of paying EMIs where I feel burdened at the end of every month. I don’t want to be slave of my EMIs.

But that was about me and my philosophy…. 🙂 So you can ignore it…

And for those who think that instead of paying rent, it’s better to pay EMIs – I have an answer. Paying rent might seem like an expense. But EMI also has a significant component of interest, which even in accounting term is nothing, but Expense. So this argument does not stand completely true.

Once again I repeat that the objective of this article is to highlight the differences in returns earned by investing in mutual funds and those earned by investing in a home funded through a loan, in the name of investment and tax-saving.

We have tried comparing two cases:

One where investment is made in real estate and the other where it is made in mutual funds.

So here it is…

Case 1: Real Estate Investment

Following is the data being used:

Value of Property = Rs 75 Lacs (1500 sq ft @ Rs 5000/sq ft)

Required Initial Down Payment (@20% of Property value) = Rs 15 Lacs

Loan Availed (for remaining 80%) = Rs 60 Lacs

Loan Tenure = 20 Years

Loan Interest Rate = 10.15%

Few more administrative costs are as follows:

Loan Processing Charges & Other Expenses (@2% of Property) = Rs 1.5 Lacs

Registration Fees (@10%) = Rs 7.5 Lacs


After doing some calculations which are depicted below, we arrived at quite interesting numbers.

India Real Estate Investing Analysis
Interest Paid over 20 Years = Rs 80.30 Lacs

And as you can see in the last column in the table above, this property has also been able to generate post-tax and expense adjusted rental income. We used a few assumptions for rental income and expense which are as follows:

  • Rentals increase by 5% every year
  • Rental income from the property is taxed at 20%
  • Maintenance expenses are recurring every 5 years: Rs 1 Lac (5th year), Rs 1.5 Lac (10th year), Rs 2 Lacs (15th year) and Rs 2 Lacs (20thyear)

All in all, these result in an amount of Rs 24.67 Lacs being generated from the property over a period of 20 years.

This means, that effectively the property costs about Rs 1.39 Crores as depicted in the table below:

India Real Estate Profit 2015

Now as per general perception (at somewhat backed by data too), the properties are known to appreciate in price. But here, we are not talking about property prices doubling every 2-3 years. We are talking about much sensible returns ranging from 9% to 12%.

Let’s see what this part of the calculation leads us to:

We will evaluate 3 scenarios where property appreciation is taken as 9%, 10% and 12% continuously for 20 years. And this evaluation is depicted in the table below:

India Real Estate Investing
To summarize the above calculations, this property initially cost Rs 75 Lacs. But since the loan was taken and it also generated rental income, the total landed cost was Rs 1.39 Crores.

Now when 3 different scenarios are considered where this property appreciates by 12%, 10% and 9%, the expected net gains are Rs 5.1 Cr, Rs 3.4 Cr and Rs 2.75 Cr respectively.

Agreed that these are some really big numbers.

But before you start putting your hands on your mouth after reading them, let’s check out the second case where we evaluate similar investments in mutual funds.

Case 2: Mutual Fund Investment

We are using the following data for this case:

Initial lumpsum investment in MF schemes of Rs 24 Lacs. This amount is equal to the sum of Initial Property Down Payment (Rs 15 Lacs), Registration Charges (Rs 7.5 Lacs) and Loan Processing fees (Rs 1.5 Lacs).

Now the EMI amount in the earlier case was Rs 58,459. This amount, in this case, can be used as a monthly SIP. But we also need to consider the tax benefit of Rs 1 Lac availed on house loan investment – which is to be equated monthly. That amounts to Rs 8333 and the resultant amount available for monthly SIP is Rs 50,126.

So here is the calculation sheet for two types of investment scenarios.

First one is where returns from MF move from the initial 12% to 7% in later years. These are conservative numbers when compared to returns given by really good MFs.

Conservative Mutual Fund Investor

The second one is a slightly aggressive returns assumption based analysis. Here the returns move from 15% initially to 7% in later years. But even then the returns of 15% are not that rare and have been achieved by quite a few funds in India for decades.

Aggressive Mutual Fund Investor

Now, what happens when these funds are sold after 20 years? There won’t be any tax as long term capital gains are not taxed in India for stock market returns (till March-2018).

So for an investment of Rs 1.44 Crores (lump sum + SIP of 20 years), a corpus of Rs 10.28 Crs and Rs 7.06 Crs has been achieved. And mind you, this return has been achieved despite having paid the additional tax @ 8333/- per month for 20 years. And these numbers are substantially higher than the real estate investment even after tax saving.

This means a net expected gain ranging from Rs 5.61 Crs to Rs 8.84 Crs.

Compare these numbers with those of Real Estate case and you will understand what this article is trying to point you towards.

Why do People Invest in Real Estate?

We have tried to list down a few reasons which we thought people have for investing in real estate. And here were are not talking about the 1st House but about the 2nd property, which is treated as an investment:

  1. There is mental comfort in buying a hard asset that you can see and feel (also applicable to gold).
  2. It is an asset that can be funded largely through long-term debt (75% Funded by banks). No other asset provides such a benefit.
  3. It is a big asset, which you can acquire and then comfortably pay back via monthly payments (EMIs) over a very long period of time. Once again, no other asset provides this benefit.
  4. The comfort we get by doing mental accounting about tax savings in real estate investments. One always feels happier when one is told that they don’t need to pay tax or no money would be deducted from salary, because of tax savings due to loan-funded real estate investment.
  5. Second income from spouse, which can be used to get additional tax benefits (by being a 1sthome loan for the spouse) by taking a home loan.
  6. The comfort of getting a stream of rental income. An income, which you get without working for – passive income. But most of the times, people forget about the linked expenses.
  7. The general opinion that it is a hedge against inflation.
  8. Mental fix that there is Zero Risk in real estate purchases (in reality, there are more risks than most other investments like gold and mutual funds).
  9. The justification that it is an investment for the next generation(s).
  10. High return expectations due to the recent past records (say last 15 Years).
  11. Black money at work!!
  12. Pride of owning multiple real estate investment and being known as the ‘Landlord’.
  13. As there is no daily ticker, the daily mental valuation of the asset does not take place.
  14. Mental satisfaction and happiness when disclosing to others that you own multiple properties.
  15. The perception that since everyone is investing in real estate and profiting from it, even I should do the same and make easy money.
  16. You always hear the story from neighbours that they bought a flat for Rs 900 / sq ft 15 years ago and now it is worth Rs 5000 / sq ft. Here mental maths comes into the picture. Mentally you might think that this 900 to 5000 appreciation is more than 5 times and a very profitable one. But neighbours comfortably forget to tell you about the expenses they incurred in these 15 years or in repaying loans. Actual returns are always calculated net of expenses. It’s neighbour’s envy and owner’s pride (copied from an old Onida TV advertisement). For those who want to turn Rs 900 to Rs 5000 in 15 years, it’s not that tough. You can do it at 12.1% per year.

Why Don’t People Invest in Mutual Funds?

Since you are reading Stable Investor, chances are high that you would be a mutual fund investor. But there are many who avoid mutual funds to invest in real estate. Let’s see what are the possible reasons for them to do so:

  1. Lack of knowledge about mutual funds and equity markets.
  2. Lack of understanding about the power of compounding, the power of equity as an asset class and clear knowledge of wealth building via SIP.
  3. Lack of knowledge about asset allocation.
  4. Risk and loss aversion.
  5. Unable to determine financial goals and estimate the amount required.
  6. They have already utilized all the tax benefits available to them because of home loan. Now they have no tax-incentive to invest in mutual funds. And hence they don’t do it!
  7. Bad past experiences. And these are primarily due to wrong fund selection or wrong time horizon or wrong advice (like combining insurance and investment or wrong thinking that saving and investing are the same).
  8. As daily price movement of MF through NAVs is available, the daily mental valuation of the asset forces one to take frequent buy and sell related decisions. This is driven by a general lack of patience in investors.
  9. Mutual Funds cannot be funded through Black Money.
  10. Unlike real estate, no long-term loans are available for investments in mutual funds.
  11. More people talk about losses made by investing in funds (for whatever reasons) and very few people talk about their success in meeting financial goals through funds.
  12. Mental fixation with recent huge loss events (like 2000, 2009, 2013 etc.)
  13. A major chunk of saved money has already gone into real estate, which leaves almost no money to invest in mutual funds.
  14. And as substantial money is not invested regularly in mutual funds, one does not feel that substantial money can be made through mutual funds.
  15. You don’t get to hear every day that a fund having a NAV of Rs 28 has grown after 15 years to Rs 805 – a return of 25% per year (Check Reliance Growth Fund). Such returns are very high ones and rare and cannot be matched by real estate investment or investments in other asset classes.

Now, let’s test your memory…

Do you remember how much did the petrol cost in the year 2000?

It was around Rs 25. As of today, it is about Rs 66. Now suppose you had invested that Rs 25 in real estate, which grew at 12.1% as mentioned few paragraphs earlier. This would have grown to Rs 139. Enough to buy 2 liters of petrol today. Now if this was invested in a mutual fund, which somehow could manage 25% return, it would have grown to Rs 711. Enough to buy at least 11 liters of petrol.

That is how equities work. That is how compounding works. That is how the value of your money is preserved and increased by investing in the right asset class for long periods of time.

Concluding Thoughts

And this is a repetition of the earlier statement. One should not give any second thought about buying your 1st property for self-occupancy, whether it is with or without tax benefits.

However, based on our comparative analysis above (and estimated returns), one should think twice (or even ten times…) before buying a second home for investment purpose. One should carefully weigh all the available data and then take a wise call. Just because your friend or family member is investing in real estate does not mean that you should also do it. You should evaluate your own financial goals and think about how you plan to achieve it, and then decide whether you want to ‘invest’ in real estate or not.

A hard and physical asset will always give a huge mental comfort and satisfaction over other financial assets like mutual funds. But it is also true that it may not always be the best available investment option. In fact, investing in house funded through a loan, is a huge long-term liability – which chokes the ability of the person to save and invest in other right instruments for the future.

In our opinion (and it is ours and you can ignore it), after the purchase of the 1st property for self-use, if there is any surplus cash left to invest, you should invest it as per your asset allocation (which includes debt, equity, gold & real estate). If the asset allocation permits you to invest in real estate, you may very well do it. But if it doesn’t, then you should refrain from investing in it. Investing in real estate for the sake of saving tax may not be the best thing to do.

As stated at the beginning of this article, this is one hell of a controversial debate. And there is not a straight-forward logical answer to it. There are no thumb rules or any other rules. The question of Real Estate Vs Mutual Funds can only be answered by you and you alone.

We have simply made an attempt to clear the myth that “Real estate investing is the only best Investment Option” available for everyone. We have done all the calculations by estimating the returns net of expenses. We cannot just ignore expenses like those who just tell you the number of times their property has appreciated in value.

Please note that this post may be biased towards Mutual Funds investments.

Do let us know about your thoughts on Real Estate vs. Mutual Fund debate.

Note (Update 2019-20): A new updated real-life case study on Mutual Funds vs Real Estate has been published. You can find it here – Mutual Funds vs Real Estate: Which is better for Investing in India (Follow Up Post 2019 Update)


Returns mentioned in this post are only assumptions and not guaranteed ones (for both Mutual Funds and Real Estate). While there is investment return record available for mutual funds, we could not get a credible investment return data for real state (we took NHB data as a guideline). Moreover, the real estate returns vary vastly from location to location.

Becoming a Value Investor using Nifty PE Ratio

First of all, I am overwhelmed with the responses I got for the financial concerns and issues survey conducted few days back. Thanks to you all, there are so many feedbacks that I am still reading through all of them.

And to be frank, I was surprised to see so many people being so honest and more importantly, aware of their financial issues. This awareness in itself is like a quarter (not half) battle won. I plan to regularly take up issues raised in the survey and do detailed posts around it. And here is the first one…

One of the readers had an interesting concern:

I am not a value investor. And nor can I become one as I don’t have the time to monitor or analyse stocks. But I still want to become a sensible investor who invests more when there is panic around. I have read that it’s wise to Buy Low and Sell High. I don’t want to think much about Selling-High right now, as I am pretty young. But I do want to invest more when everyone else is selling, i.e. I want to Buy-Low. But if I go for individual stocks, it can be risky. For someone like me, it makes sense to stick to mutual funds. But how can I know when to Buy More. Even if I invest regularly, shouldn’t I be buying more when markets are down and I have additional funds?

That’s a pretty reasonable concern of the reader. And I think that many among us do not really have the time to become real investors. We are better suited to piggyback on expertise of others.

So what I understand from this question is that he wants to become a Value Investor, without bothering too much about picking individual stocks.

Fair enough…I would say…

By the way, I don’t consider myself to be a value investor. At most, I am an opportunist who is interested in buying good companies, at relatively cheap prices and holding them for very long periods of time. And yes…every now and then, I do take up small short-term speculative positions as well. But these positions are small and generally not more than 5% of my overall portfolio size.

I know…the above paragraph is more like a disclaimer. So anything I say from here onwards should be considered as coming from the mouth of a self-confessed non-value investor and not an expert of any kind. 🙂

But jokes apart, it’s a fact that 95 out of 100 people who invest in stocks, would be much better off if they do not invest in stocks directly. They should rather stick with well-diversified mutual funds. And I am saying this not because I consider myself to be an expert or an authority in something (on the contrary, I am a pretty regular guy as detailed in 17 Unknown but Honest Facts about me). But because successful investing is more about our own personalities and discipline rather than just about picking the right stocks.


To explain this, lets take an example. Suppose your overall portfolio size is Rs 10 Lacs. Now you consider yourself to be a good investor and find a good stock selling cheaply. But you only invest Rs 5000 out of the Rs 10 lac in this stock. This stock goes on to become a multibagger (10X) – your Rs 5000 investment becomes Rs 50,000. But at an overall level, your portfolio of Rs 10 lacs only moves up by Rs 50,000 (or Rs 45,000 to be precise) ~ to Rs 10.5 lacs. Nothing much to boast of. Right?

So it is never just about picking the right stock. It’s also about position sizing and how convinced you are about the stock (and a thousand other factors).

Successful value investing is also about being prepared for the rare investment-worthy opportunities. This means that even if you have chosen the right stock, and are ready to allocate a significant part of your capital to this stock, you still need to have the cash to invest in the opportunity. Because if you don’t, you cannot become a value investor, of for that matter even a decently good investor.

So what should an individual who wants to do value investing, but not through specific stocks, do?

The answer is not very complicated. But there is a catch, which I will disclose after giving the solution.

Lets break down this problem statement into 2 parts:

  • Identify situations when it makes sense to invest additional money.
  • Identify investment options where one can invest

Here is the solution…

Part 1


It is not difficult to identify situations where it makes sense to invest more (and as much as possible) for an average investor. A real value investor can go and find undervalued stock in a bull market. But an average investor needs to be right first and then think about the return percentages. And chances of being right with individual stock picks are lower than that of being right about investing in a group of companies.

So here is an indicator (or rather 3), which give you helpful advise about when to invest more.

PE Ratio India Stocks
PBV Ratio India Stocks
Dividend Yields India Stocks

If you go through these above tables you will realize a clear correlation between these indicators (P/E, P/BV and Dividend Yields) and Returns you can ‘expect’ to earn when you invest on basis of these indicators. And here, by investing I mean – investing in a large group of stocks and not in individual stocks.


Lower the P/E Ratio when you invest, better your chances of getting higher returns. (Proof)

Lower the P/BV Ratio when you invest, better your chances of getting higher returns. (Proof)

Higher the Dividend Yield when you invest, better your chances of getting higher returns. (Proof)

It is as simple as that. And a few years back, I even found a range of P/E ratios, which seem to control Indian markets. You will be surprised to see how clear this PE Band is!! I was mightily surprised when I say it first. Here is another interesting analysis of how much time Indian markets spend at various PE levels.

Now you would want to know how to track these indicators regularly. The answer is that you can either track it using this link on NSE’s website. Or you can check out monthly updations, which I make to State of Indian Market page.

Part 2

Now comes the second part. Once you know that it’s a no-brainer to invest at a particular moment, and you have the cash power to do it, the question is where to invest.

I know you would love to invest in individual stocks, see them become out-of-the-world multibaggers and boast of being a great stock picker. But lets be honest. It’s not easy at all. Even expert investors are unable to find great stocks easily. So for all practical purposes, individual stock picking is best avoided by average investor. End of discussion.

So where does one invest?

The answer is… in a group of stocks. A well diversified selection of stocks belonging to various industries, which as a group help in mitigating the risk of getting it wrong by investing in individual stocks. Yes. I am talking about mutual funds.

When its time to invest more (identified in Part 1), you need to invest heavily in well diversified and proven mutual funds (Part 2). Done. Nothing else to do. You will be rich. 🙂

So the action plan for you is:

  1. Invest regularly in a few good mutual funds through SIP.
  2. If possible, increase SIP every year by 5% to 10%
  3. Keep a regular track of P/E, P/BV and Dividend Ratio (DY) of overall market.
  4. If markets go down and with it PE, PBV goes down and DY goes up, you would do well to invest additional money in these mutual funds.
  5. If the thought of investing more when your portfolio is going down does not make sense to you, then you need to rethink whether stock markets are a place for you or not.

The above approach is like giving booster shots to your portfolio when markets are going down. I have done a comprehensive 4-part analysis on investing more when markets are down. Results of the analysis were surprising as it proved that just by keeping it simple, i.e. investing a constant amount regularly still made a lot of sense for majority of investors. But if you have additional money, which you can invest and forget for few years, don’t hesitate to put it in mutual funds.

I hope that with this post, I have been able to clarify on how to become a value investor by using just plain, simple mutual funds. Let me know if you all have any questions or suggestions for this post. It will help me improve future posts addressing financial concerns.

Note – Whenever you think about investing in stocks or mutual funds, make sure that you are doing it for atleast more than 5 years. There have been 5-year periods when stock markets did absolutely nothing.