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We all want a financially secure future.. Yet we expect someone else to shape that future for us. SmarTomorrows is about taking responsibility for our financial future, by acting responsibly. It’s about thinking long term and longer term. It’s a good investment, made today.

SmarTomorrows is about investing a little money today with the aim to make it count for a lot more tomorrow. Imagine how wonderful it would be to be thirty five, with a lot of savings. To be able to splurge, when your son or daughter gets married. Or to be able to comfortably retire early.

This website will provide you with an insight on various investment concepts, to help you achieve your smart tomorrows. But it can only do so much.

Finally, it’s up to you. To dream a future that’s financially secure, by taking advantage of a financial scenario that’s full of promise.

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Why investors must look at large-cap funds. A large-cap fund is what we call the core portion of an equity investor's portfolio. These funds have a lower risk as compared to a small or mid-cap fund and a sector fund.

So any investor who needs to be investing in the equity space should allocate a large portion into a large-cap fund. For a first-time equity investor, this would probably be the easiest fashion to dabble in-through a large-cap fund where he would see low volatility as compared to any of the equity funds.

However, we are talking about specific funds. Morning Star does a lot of intensive research in understanding the processes that go behind building these portfolios.

Coming to mid and small-cap funds.. If you look at the way the industries themselves have moved versus the large-cap category, you have had anywhere between 20% and 22% in the mid and the small-cap index on the BSE.

However, what is crucial to understand is the fund because the dispersion of returns on the mid and the small-cap side is so huge, the good active fund managers can deliver significant alpha over the benchmark. That is where lot of these good fund managers have outperformed the index by 10-15% on a consistent basis over the last three-five years and that is where investor should be looking at. These funds are more volatile than your large caps but if you are looking at long-term wealth creation, this should certainly be a part of your portfolio.

The way I would see it is that large caps are a crucial holding of any investor's portfolio. Mid caps are what you would call the real growth engine to an investor's portfolio. Depending on the risk profile, you should look at what allocations you should make to the mid-cap space. Yes, they have delivered significant returns over the last three-five years compared to large-cap funds but you have to be wary that they are more volatile. So you clearly need to have a long-term horizon in terms of investing in some of these funds.

So, I will say even 5-7 years might be a short time because you can have cycles in the market where mid caps might underperform and since they have run up so much, you have to be a little cautious when entering this segment.

Source & Courtesy: Kaustubh Belapurkar, Director of Fund Research, MorningStar

You have never lost money in stocks over any 20-year period, but you have wiped out half your portfolio in bonds, after inflation. So which is the riskier asset?

This thought provoking statement is the premise of Jeremy Siegel’s ground breaking book Stocks for the Long Run. The book, now in its fifth edition, makes a compelling argument that stocks are less risky than bonds over time. The assertion is that in any given year, stocks could show tremendous volatility. But over long periods, they trounce cash and high quality bonds in terms of returns.

Professor Siegel has taught at the University of Pennsylvania’s Wharton School for over four decades. Barton Biggs refers to him as a wise man and an astute observer of the ever changing investment universe. Here are some insights gleaned from his book.

It’s not just investing, but re-investing that leads to wealth accumulation.

Bear markets, which so frighten investors, pale in the context of the upward thrust of total stock returns. One dollar invested and reinvested in stocks since 1802 would have accumulated to nearly $7,500,000 by the end of 1997. Hypothetically, this means that $1 million, invested and reinvested during these 195 years, would have grown to the incredible sum of nearly $7.5 trillion in 1997.

But total wealth in the stock market, or in the economy for that matter, does not accumulate as fast as the total return index. This is because investors consume most of their dividends and capital gains, enjoying the fruits of their past saving. It is rare for anyone to accumulate wealth for long periods of time without consuming part of his or her return. The longest period of time investors typically plan to hold assets without touching principal and income is when they are accumulating wealth in pension plans for their retirement or in insurance policies that are passed on to their heirs. The stock market has the power to turn a single dollar into millions by the forbearance of generations-but few will have the patience or desire to let this happen.

Short-term fluctuations in the market, which loom so large to investors, have little to do with the long-term accumulation of wealth.

The reasons for the persistence and long-term stability of stock returns are not well understood. Certainly the returns on stocks are dependent on economic growth, productivity, and the return to risk taking. But the ability to create value also springs from skillful management, a stable political system that respects property rights, and the need to provide value to consumers in a competitive environment.

Political or economic crises can throw stocks off their long-term path, but the resilience of the market system enables them to regain their long-term trend. Perhaps that is why stock returns transcend the radical political, economic, and social changes that have impacted the world over the past two centuries.

Long horizons – 10 or 20 years – are far more relevant than most investors recognize. The trick is to stay through market cycles and not time them.

One of the greatest mistakes that investors make is to under estimate their holding period. This is because many investors think about the holding periods of particular stocks or bonds. But the holding period that is relevant for portfolio allocation is the length of time the investors hold any stocks or bonds, no matter how many changes are made among the individual issues in their portfolio.

The upward movement of stock values over time overwhelms the short-term fluctuations in the market. There is no compelling reason for long-term investors to significantly reduce their stockholdings, no matter how high the market seems. Of course, if investors can identify peaks and troughs in the market, they can outperform the ''buy-and-hold" investor. But, needless to say, few investors can do this. And even if an investor sells stocks at the peak, this does not guarantee superior returns. As difficult as it is to sell when stock prices are high and everyone is optimistic, it is more difficult to buy at market bottoms, when pessimism is widespread and few have the confidence to venture back into stocks.

A number of "market timers" boasted how they yanked all their money out of stocks before the 1987 stock crash. But many did not get back into the market until it had already passed its previous highs. Despite the satisfaction of having sold before the crash, many of these "market seers" realized returns inferior to those investors who never tried to time the market cycles.

Lessons from the Nifty-Fifty.

The Nifty-Fifty were a group of premier growth stocks, such as Xerox, IBM, Polaroid and Coca-Cola, that soared in the early 1970s. All had proven growth records, continual increases in dividends and high market capitalization. The Nifty Fifty were often called one-decision stocks: buy and never sell. Because their prospects were so bright, many analysts claimed that the only direction they could go was up.

The average PE ratio of these stocks was 41.9 in 1972, more than double that of the S&P 500’s 18.9, while their 1.1% dividend yield was less than half that of other large stocks. Over one-fifth of these firms sported PE ratios in excess of 50, and Polaroid was selling at over 90 times earnings.

After the vicious 1973–74 bear market, which slashed the value of most of the “Nifty Fifty,” many investors vowed never again to pay over 30 times earnings for a stock. But is the conventional wisdom justified that the bull market of the early 1970s markedly overvalued these stocks? Or is it possible that investors were right to predict that the growth of these firms would eventually justify their lofty prices? To put it in more general terms: What premium should an investor pay for large, well-established growth stocks?

On a detailed analysis of the data over 25 years, Siegel found that many of these stocks were worth far more than even the lofty heights that investors bid them. For instance, Coca-Cola Corporation carried a very pricey 46.4 multiple in 1972, which many analysts claimed was far too high. But on the basis of its future returns, Coke was worth over 90x earnings.

In contrast to brand-name consumer stocks, the technology stocks such as IBM, Polaroid and Xerox failed. His study revealed that an equally weighted portfolio of Nifty Fifty stocks (mix of winners and losers) was worth 40.5x its 1972 earnings, marginally less than the 41.9 ratio that investors paid for them.

In Revisiting the Nifty-Fifty, he says investors can learn three lessons: 1) You must pay for growth. Growth stocks often sport very high price-earnings multiples, but stocks that are able to consistently maintain earnings growth year-after-year are often worth far more than the multiple that Wall Street considers “reasonable.” According to his study, stocks with steady growth records are worth 30, 40, and sometimes more times earnings. Good growth stocks, like good wines, are often worth the price you have to pay. 2) Don’t “pay any price”. Among these good growth stocks, those with the lower price-earnings ratios tended to outperform those with higher price-earnings ratios. When examining growth stocks, don’t be scared off by high absolute price earnings ratios, but try to cull out those growth stocks with lower price-earnings ratios. 3) Be diversified among various growth stocks and groups. Despite their dazzling performance, buying just a few of these growth stocks was quite dangerous. Among the many gems were bad apples. Even whole industries, like technology, that had enriched so many investors in the 1960s, vastly underperformed the market in the next 26 years. Diversification is a key to cutting risks and maintaining returns. No one stock or single industry is guaranteed to succeed.

Indexing with a twist.

Though not in the book, but worth a mention, is when asked about the best investment advice he ever received, he cites Paul Samuelson’s mention about low-cost indexed investments. In fact, Siegel was one of the very first investors in the Vanguard S&P 500 Index Fund. In the first edition of his book, he strongly advocated indexed investments.

Along came the tech bubble at the turn of the century. Even though tech stocks shot up phenomenally, way above fundamental values, the indexed investor had to hold on to them in proportion to their market value, which was very substantial. That is when he began to look at fundamental indexing.

Rather than assembling an index by its market capitalization, fundamental indexing uses other metrics such as earnings, dividend yield or book value. The result is a passively managed fund that avoids getting overweighted in specific stocks and industries. Siegel has two principle strategies: High-dividend stocks and low P/E stocks.

In fact, he told a reporter that the bulk of his equity holdings are in funds that are fundamentally indexed, covering different regions of the world. He certainly puts his money where his mouth is.

Source & Courtesy: MorningStar

India's retirees are standing before a difficult choice. They can switch to equity funds, or they can head for old-age poverty. Am I being too dramatic when I say this? Perhaps. I know that some people do not like phrases like 'old-age poverty' because it's a prospect that is too frightening to contemplate. However, that's part of the reason I use it; it's something that Indian retirees need to think about urgently, even if they have to be shocked into doing so.

I've said this earlier too but the situation is now getting worse because of dropping interest rates. Because the NDA government is managing its fiscal deficit well, it is more than likely that the returns from deposits will keep heading downwards. The economy may be better off, but that is not much comfort for the retiree who is past his or her earning life. If you are depend on a deposit for income, then you are heading for large cuts in your income. A cut from 8.5 per cent to 7.5 per cent in a deposit rate means that you lose almost 12 per cent of your income. If interest rates keep dropping, it could get much uglier.

Clearly, the general advice about sticking to fixed-income deposits of various kinds because they are the only safe option for retirees, since equity is too risky, is wrong. It's not just wrong, but it's utterly misguided and any senior citizen following it will head for financial disaster.

Unless you have an inherently inflation-adjusted source of income like rent, at some point you are going to face this problem. Interest on deposits will not keep up with inflation and the money you'll withdraw for your expenses will relentlessly eat into the real value of your savings.

So what's the solution? Clearly, retirees must invest in equity mutual funds. Looking backwards, let's take a real example of equity investments. Suppose you had retired in early 1980 with a kitty of `5 lakh that you had invested in a hypothetical investment that tracked the Sensex. Let's say that your monthly expenses were `3,000 a month and grew at 10 per cent a year.

After 32 years, your monthly expenses would be `63,000. Not only would you have no trouble funding these expenses, your principal would have grown to `2.7 crore! What about the risk? During these years, the investment would have faced up to steep declines in 1987, 1992, 2001 and 2008 and taken them in its stride comfortably. The lesson is clear: if retirees want to spend their twilight years prosperously, then equity is their only hope.

However, I understand that the real barrier is psychological. The fact that equity is risky and fixed income is safe is deeply embedded in our minds, especially in the generation that is now retired or is retiring. So what can be done about this? My firmly held belief is that this problem is not financial, and there are no financial solutions. It's a problem of mindset and must be cured by changing mindsets. Over short periods of time, equity is volatile. At the same time, over long periods of time, it is not risky. On the other hand, if you take the real value into account (after considering rising prices), then deposits are not just risky, they are certain to be disastrous. This is not easy to accept, but it's the only way.

Source & Courtesy: Dhirendra Kumar, Value Research -Mutual Fund Insight

The RBI’s rate cut, liquidity boosting measure in April are likely to make government bonds more valuable to hold which in turn will benefit the Debt MFs

With the government reducing interest rates of small savings schemes from April 1 and banks cutting fixed deposit rates, retail investors have limited options left for higher returns. Investment in debt mutual funds is a feasible option keeping in mind easy liquidity.

After the revision of rates for small saving schemes, the one-year post office fixed deposit rate has dropped to 7.1 per cent. For past one year, bank fixed deposit rates have fallen from 7.50 per cent to 7.25 per cent. Compared to them, as of May 5, the one-year return for income schemes of debt mutual funds has averaged 8.02 per cent, while the fixed maturity plan (FMP) schemes have averaged 8.08 per cent, as per Value Research data.

The outlook for debt mutual funds compared to bank fixed deposits is at present looking better as most analysts see one more rate cut by the Reserve Bank of India in its monetary policy review in August.

Lakshmi Iyer, chief investment officer (debt) & head products, Kotak Mutual Fund, believes that If inflation conditions remain well within the RBI's tolerance level, further room for rate cut may get generated.

Devendra Pant, chief economist, India Ratings & Research, feels governments enacting the insolvency and bankruptcy code is likely to benefit the domestic bond market outlook. It may well have a salutary positive impact on the Indian currency.

The RBI's rate cut in April 5 by 0.25 basis point and liquidity measures announced by the central bank through open market operations (OMO) are likely to make government bonds more valuable to hold which will benefit the debt mutual funds holding such papers.

Murthy Nagarajan, head, fixed income, Quantum Mutual Fund, explains, "When the RBI buys dollars or buys government bonds, it releases (sells) rupee into the system and thus adds to banking system liquidity. We expect the RBI to add `2,00,000 crore in FY17. And the majority of this money would be added by buying government bonds."

"If indeed the RBI buys so much of government bonds; what do you think will happen to prices of government bonds? And if the bond prices rise, the value of the portfolio of bonds that debt funds own will increase. And hence its net asset value will increase."

Iyer of Kotak Mutual Fund says, "Liquidity measures will continue to drive short-term yields lower. We continue to recommend duration (funds) to our existing investors. Accrual funds can be looked at by investors, since the possibility of spread compression has increased."

Debt mutual funds as a category have done better compared to equity fund in the past one year as analysed above as well as their tax adjusted returns are better than bank FDs, if one goes for redemption after the minimum holding period to get a waiver on capital gains tax.

On the flip side, debt mutual fund returns are not guaranteed like in FDs, funds are subject to interest rate and credit risk and often return can be as volatile as equity funds if there is credit down grade or the fund house has taken exposure to a risky paper.

Last year, J P Morgan Mutual Fund's exposure to Amtek Auto created a scare in the market among the debt mutual fund investors. Two JP Morgan Mutual Fund's debt schemes JP Morgan short term income fund and India treasury fund had to take a hit on their portfolios, which had Amtek Auto's debt papers (rate AA- by rating agency CARE). These schemes had to partially write down the value of their investments in these schemes and their NAV came down sharply. Fortunately, no other mutual fund held Amtek Auto debt papers and thus debt fund investors in the other fund houses were saved from the possibility of their investment getting eroded.

While discussing such risks associated with debt mutual fund investment it is ideal here to remind that debt fund investments do run the default risk from corporate issuers as well given the high indebtedness that prevails in certain sectors like steel, power and infrastructure sector among others.

The risk with bank FDs are that they guaranteed by the government up to `1,00,000 and beyond that credit rating of respective banks matters. Tax liabilities in FDs are higher as the interest earned is added to individuals income for tax liability. The tax liability in debt mutual funds was reworked in July 2014 by the finance ministry when the first Union Budget of the NDA government was tabled in Parliament.

As per the changes made there is an increase in longterm capital gains tax from 10 per cent to 20 per cent and a change in the definition of 'long term' for debt mutual funds to 36 months from 12 months. If debt funds are redeemed within three years, the gains are added to the individuals income and taxed as per the applicable income tax slab. However, if the investor can hold for more than three years, a debt fund is more tax-efficient than a fixed deposit. In a fixed deposit, the entire interest earned is taxed at the rate applicable to the investor.

The changes were made to bring in a level-playing field with the bank deposits. Still investment in fixed maturity plan of the mutual funds, which have moved from shorter one to three year tenure, to above three year tenure are now gaining currency after the temporary dip seen in this category after the tax treatment came into force and existing FMPs started maturing. A Crisil Research report, which analysed the latest fund launches, showed the industry has moved to more than three-year FMPs to reduce tax incidence on investors. In the January-March 2016 quarter, fund houses garnered `9,052 crore by launching 53 FMPs of mostly three-year maturity.

Source & Courtesy: Ravi Ranjan Prasad, Financial Chronicle

Retirement planning You're a recent college graduate. Now that you've started your first job, you're probably wondering how to spend some of that new salary. A vacation? A car?

Maybe you should be thinking instead about saving for retirement. That's right. It's time to put money away - ideally 10% to 20% of your annual take-home pay - and come up with a saving strategy that works for you.

It's all about using the secret weapon of young savers and investors, which is time. Money compounds, but it really grows if you start early and give yourself time to save and grow a real retirement.

To quote the billionaire investor Warren Buffett, "Life is like a snowball. The important thing is finding wet snow and a really long hill."

Ready to climb that hill? Please call ECS to know best snowball savings vehicles:

How Not to Fail in the Current Market

The 20 per cent decline in the stock markets between August and February, signalling an official bear market, saw many bears emerge from their winter hibernation to offer scary statistics about equity investing.

One analysis found that the gilt and debt options of the National Pension System had outperformed the equity option in the last one year. Another took a longer-term view and pointed out that investors who bet on the BSE Sensex in February 2006 had made just an 8.2 per cent CAGR, worse than fixed-deposit returns, in ten years. On social media, financial advisors had a heated discussion on how SIPs in equity funds weren't delivering on their promises. Over a ten-year period, many leading funds had given SIP returns that were in single digits.

All this was accompanied by some complicated theorising about why the good days for Indian equities are probably over. There was talk of the end of easy money with the US Fed hiking rates, doomsday scenarios were painted about the coming collapse of China. And warnings were issued about the exodus of sovereign wealth funds from emerging markets as their petro dollars evaporated.

In India, as foreign institutional investors pulled out some `42,000 crore between August 2015 and February 2016, this was rationalised on grounds that these investors were disappointed with PM Modi and his reforms agenda and were thus lugging their money back home.

As a result, some market strategists have suggested raising cash levels until the global volatility is over. Others are trying out tactical switches between debt and equity based on market valuations.

But if all these discussions are psyching you and making you wonder if you should keep a closer track of 'global cues' and have a smarter strategy for equity investing, let us reassure you that it pays to be dumb in equity investing. It is actually those extra-smart investors who try to analyse every new global development and try to get at a perfect strategy who end up at the losing end in the long term. Equity investing is really quite simple. All you need to do to succeed at it is to not over-analyse every market move and stick with your plan.

If you're still sceptical, here are the mistakes that many smart folk make that you can avoid. The numbers offered should tell you why the simple strategy of staying with your equity funds through markets ups and downs is really the best. 'Waiting out' the volatility

When stock prices are in a free fall, you'll find many experts warning investors to 'stay on the sidelines' and 'wait out the volatile phase. Often, this is accompanied by advice not to 'catch a falling knife'. This advice may fit traders very well, but it can mean the death of wealth creation for long-term investors.


Indian markets have been in a downward trajectory for many months now due to a mix of global and domestic factors. As usual, many investors are tempted to do certain 'obvious' things, when they are better off avoiding them.

These things are: stopping Sins and waiting for the volatile phase in the market to get over, changing the asset-allocation plan, and buying stocks directly rather than investing in mutual funds.

Data show that these obvious strategies to cut the bear-market pain aren't rewarding over the long term and the gains made from them don't outdo the gains made by simply stalling put in the market through all thick and thin.

It makes sense to 'wait out a volatile phase, provided you know exactly when the 'volatile phase' will be over and done with and the next secular uptrend is set to begin. But the reality is that no expert is able to flag the exact time when a market bottom has been made and the stage is set for a new bull market. Market bottoms are always evident only in hindsight.

Therefore, if you sell your equity funds or stop your SIPs during market falls (especially after an official bear market is announced) in the hope of 'waiting it out', there's a pretty good chance you will not know when to re-enter equities or resume your SIPs. If you wait too long for stability, there's a good chance of missing out on the next bull run. Even missing a few months in the initial part of a new bull market can really decimate your long-term returns.

If this sounds alarmist, just consider this hypothetical story. Consider Mr. Hasmukh who parked `1 lakh in the BSE Sensex in January 2000, 15 years ago. Had he just bought a Sensex ETF and slept on his investment till date, his original capital of `1 lakh would have grown to `4.66 lakh, an effective CAGR of 10.8 per cent over a 15-year period.

Now consider his brother Mr. Chintamani - an investor who checks on his portfolio every month and tunes in to all market experts. He doesn't believe it is wise to catch a falling knife.

Therefore, he is in the practice of booking out' of his ETF every time there's an official bear market. In the last 15 years, whenever the Sensex fell by 20 per cent, he would immediately cash out on his equity portfolio and wait it out for the next nine months for the volatility to subside before re-entering equities.

As the Sensex has fallen by 20 per cent or more on eight occasions in the last 15 years, Mr. Chintamani would have thus had to exit his ETF and re-invest in it eight times each in 15 years.

So how much money would Mr. Chintamani have made through this start-stop approach to investing? You'll be surprised to know it would barely match the savings bank interest of 4 per cent. That's far inferior to that of his brother Hasmukh and 6.8 per cent a year lost to 'smart' market timing. Returns apart, imagine all the sleepless nights he would have spent deciding when to sell and when to buy his ETF!

But wait, how did this happen? How come long-term investing didn't pay for Mr. Chintamani even after holding equities for 15 years? The answer lies in the fact that in stock markets - just as bear phases tend to be unpredictable and intense, robbing you of a great deal of your wealth in just a few weeks -bull phases tend to be unexpected and rapid fire too. In fact some of the biggest monthly gains put on by the Sensex in the last 15 years have come within six-nine months of a record market fall (see Figure 1).

Mr. C.hintamani's returns are to anaemic because while waiting out the volatile phases after market falls, he has also been forced to sit out the sharp rallies that marked the beginning of the next big bull run. Getting psyched by the 27 per cent fall of May 2004, for instance, and staying away until February 2005 would have caused him to miss out on 40 percentage points of the 60 per cent gains put on by the Sensex between May 2004 and July 2005.

Or his running for cover in March 2008 would have kept him out of the market until April 2000, which is when markets began to settle down. This would have meant missing out on the record lows of sub-8,000 for the Sensex in October 2008.

This just goes to show that exiting equities after a market fall is the easiest thing to do. Getting back into equities at the right time is the hard part. If you dilly-dally too much, the bus will leave you far behind. Tinkering with asset allocation

When equity markets are bathed in red after a meltdown, your fixed-income portfolio often begins to look good. Many people begin to ask if equities are really worth all the trouble and heart attacks, when you can get 8-9 per cent for a no-brainer investment. This lime too, there are plenty of unfavourable point-to-point comparisons between equity funds and debt funds or fixed deposits.

But getting tempted by such data to make drastic changes in your asset allocation is the worst thing you can do. If equities can decimate your wealth in the blink of an eye, remember that they are also the only investment which can recoup that lost wealth in double-quick time.

If you pull out of equity funds during market lows and take cover in fixed income because you are spooked by losses, that is the equivalent of taking a high-speed elevator to get to the basement of a shopping mall and then trying to get back to the roof restaurant by climbing a rope ladder.

Let's go back to Mr. Chintamani. Assuming, he invested a corpus of `1 lakh in a balanced fund (we have taken Birla Sun Life 95 as the chosen fund, purely for illustrative purposes) in January 2000 with the intention of building long-term wealth. By March (spooked by the big crash of January-February) he switched to a fully debt portfolio by moving his portfolio to an income fund (Birla Income Plus, for illustration). If he never regained his nerve to get back into equities and held on till date, the opportunity loss from that one move would be enormous.

Had he not made the switch in 2000 and simply held onto the balanced fund from January 2000 till date, his investment of `1 lakh would have grown to a handsome `8.34 lakh, a 13.2 per cent CAGR. But with the shift to the income fund, his portfolio value would be at just `4.08 lakh (an 8.2 per cent annual return) till date. Similar panicky shifts in favour of debt, in May 2004, January 2008 and December 2011 would have also cost him stiffly in terms of investment returns (see Table 1).

That yawning differential between pure debt returns and returns on a balanced portfolio over the long term arises due to two factors. One is the ability of equities to more than compensate for setbacks in bear markets through manifold gains in bull markets. Second is the wonderful rebalancing feature of balanced funds, which ensures that your equity allocations are automatically increased when markets are down and reduced after exceptional gains. This analysis argues for simplicity too. Once you have opted for a certain asset-allocation pattern based on your risk appetite and your holding period for the corpus, don’t deviate from it just because of market noise. Sticking to the plan will pay off handsomely in the long run.

Jumping straight into stocks

It is not just ditching equities in a panic that can cost you dear when building a long-term portfolio. For smart investors who know enough to 'buy when there is blood on the Street', the temptation to play the market directly can cost them too. Every time the market hits a new low, there are usually dozens of stocks languishing at 52-week or even life lows, seeming to be great bargain buys.

This can make it very tempting for savvy investors to take a direct plunge into equities, instead of buying equity funds or even continuing with their SIPs. It's quite easy to think ‘At these prices, even a fool can make money. So why should I depend on a fund manager? Let me just bet my shirt on some stocks and see them turn multi-baggers in short order’.

Well, the problem with doing this, even if you're a pretty good stock-picker, is that it is not enough to just buy and hold stocks to make long-term returns in the Indian context. After buying a stock at the right time, it is equally important to exit at the right time if the earnings aren't keeping up with expectations. This would require tracking both sector and company fundamentals for every stock in your portfolio and reviewing if the earnings are keeping up with expectations quarter after quarter.

As this requires devoting a great deal of attention to your equity portfolio on a day-to-day basis, most people wouldn't find the time for it. If you neglect to keep track even for a few months at a time, you may end up holding a stock well after it went from the hottest new idea to a complete dud.

But won't the multi-baggers in my direct equity portfolio make up for the duds, you may ask? Well, there's no such guarantee because in Indian markets the survival rates for stocks over periods of ten years or more are pretty low. Over a ten-year period, the business cycle can go from boom to bust, a sector may completely lose its relevance (think of Y2K companies, optical-fibre cable makers or CD makers, for instance). Even if the sector is doing well, the company's promoters may mismanage it thoroughly to drive it into dust (the NPA candidates from steel, jewellery and airlines would fit this description). Therefore, unless you're a professional investor who is able to constantly book profits and find new candidates to replace them, you actually cannot participate in the long-term wealth-creation story of Indian equities.

There's data to support this assertion of the 800 NSE-listed stocks which have traded since 2006 (for which data are available), 40 have stopped trading on the bourses by now as they were either suspended by the exchange authorities or turned illiquid. 260 stocks of the 800 stocks have delivered losses after ten years with a majority of them from the mid or small-cap category. Yes, there have been chart topping stocks too in this period, which multiplied investors' money by over ten limes. But the odds of finding these stocks were not extremely high. For every single stock that turned out a ten bagger, there were as many as five that were lemons.

That's why, for investors who bottom-fish during market falls, it is critical not only to get the stock choices right but also to keep reviewing and replacing the portfolio. If you don't have the time to do this or you are a conservative investor, the equity-fund route may suit you far better. With equity funds (even if you prefer small or mid-cap funds), your investment may not go up 80 or a 100 fold, but then, neither will you end up losing 90 per cent of your capital! After all, the fund manager will churn his portfolio enough to ensure that the lemons are quickly thrown out. As our analysis shows, direct investors who bet their shirt on mid and small-cap stocks after the market rout of January 2008 had a 27 per cent chance of picking up a dud (ten-year loss-maker). But with funds, there was a zero chance of a dud (see Table 2).

While all this number crunching seems quite complicated, the lesson from it is really very basic. In equity investing, as with life, KISS (keep it simple, silly!) is the best strategy. Else you may end up kissing your peace of mind goodbye.

So if you've been spending sleepless nights from last August watching the market, or worse, have cashed out of your equity funds on 'expert' advice, don't waste a moment and get invested right away. After the Sensex zoomed 1,500 points in a post-Budget rally, experts are now debating whether this is a 'dead-cat bounce' or a short-covering rally.

If the past is anything to go by, it can also turn out to be the beginning of the next bull run. We don't know yet. But by the time experts agree on it, you can be sure it will be too late for you to do anything about it!

Source & Courtesy: Aarati Krishnan, Value Research Mutual Fund Insight

Article by Parag Parikh

With the elections drawing near and the political fights becoming fierce we see fluctuations in the stock markets. Swayed between greed and fear volatility in-creases and is here to stay. People are worried as to what will happen to the markets. Will it go up or down. They wager their bets on which political party will win and how would that impact the markets.

I would call this as the noise of the markets. It tends to distract you. Frankly no one knows what is going to happen. It is all guess work. However it is important for you to know some time tested wisdom of investing.

Investing is an act of faith. When we invest in Indian companies we have faith in the Indian economy and are confident of the long term success. Yes short term upheavals could be there as we have seen in the last five years, but that is no reason to lose faith in the India dream. All throughout the past we have seen fluctuating fortunes for the investors and the faith of Indians in investing has waxed and waned due to the various bull and the bear markets. What can shake our faith in the promise of investing? Another economic shock triggering a de-pression or an unforeseen calamity. Perhaps excessive overconfidence in smooth seas can blind us to the risk of storms. History has shown that excessive exuberance of investors and enthusiasm has driven equity prices to such heights due to brute speculation only resulting in huge losses . The recent IT , Infra-structure, Real estate booms are examples. They were speculators in the guise of investors. There is little certainty in investing.

But as Long Term Investors we cannot afford to let such possibilities frighten us away from the markets. Without risks there is no return. Some wisdom and common sense will help us to understand the law of investing which is linked to the law of nature. You cannot sow a seed and reap tomorrow. The seed has to go through the various seasons like spring, autumn, winter, summer before it turns in to a fully grown tree and starts giving fruits. Now this takes time. It does not happen in the short run. Many of us forget that nature and society are one. Like nature our economic system remains stable in the long run and we must not be unduly perturbed. We welcome the inevitable seasons of nature but we get upset by the inevitable seasons of our economy. At present we are going through one of the most difficult seasons of our economy but that will also change as nothing is permanent. In 1991 we were in a much worse situation but we bounced back.

Within this repeated cycles of colourful autumns, warm summers, vibrant springs and harsh winters our stock markets have shown a rising trajectory. From 1980 till this date the BSE sensex has returned approximately 16 % per annum compounding. But did all investors reap this benefit? No. It is only the long term investors who have been able to reap such rewards. Why? Because they had the courage to sit tight through all the seasons and had conviction in the India story. Those who came to the markets as speculators with an idea to make quick gains had to embrace bankruptcy and exit the markets. This chart shows the sensex movement from 1999 to 2002. This was the Internet boom followed by the bust. A steep fall and we know of the way people lost money.

Then we come to the chart from 2007 to 2009. A steep fall during the global meltdown. The subprime lending defaults and the fall of Lehman Brothers. The world was shaken and the markets all around tumbled.

The above two charts give a shocking display as to what can happen to one's wealth. It can just get wiped out. This fear in the minds of the investors make them believe that investing is a very risky proposition. That can be true if you entered the market as a speculator looking at quick short term profits. Those who entered the IT boom as speculators lost money. Similarly in 2007 we had the infrastructure, power and the real estate boom where stocks of these sectors were commanding hefty valuations. Then came the global melt down and the markets crashed.

However if you were a long term value investor you would not be perturbed with these short term disturbances. On the contrary you would look upon them as opportunities. Now see the chart below. These are the sensex returns from 1980 to 2013 over a much longer period of time. Observe the trajectory; it is moving upwards. Observe the period 1999 to 2001. Can you identify the big panic and the fall that followed. The global meltdown of 2008/2009 is evident but does not look as scary as what it looks in the chart above.

Do you find equity investing risky? Equities have returned around 16% annual compounding from 1980. If you are a long term investor you cannot go wrong. But to be an astute investor you require discipline and patience. Go through the seasons of the market with equanimity. Have conviction in what you do.

To invest with success you must be a long term investor. The stock markets are unpredictable in the short run but their long term patterns of risk and return have proved durable enough to serve as the basis for a long term strategy that leads to investment success.

Investor Education Initiative from: PPFAS MF

Surviving the stock market downturn

Seven tips to come up trumps in the long run

With the Sensex down 20.64 per cent since the closing peak of January 29, 2015, investors, especially those who entered the equity markets for the first time in the post-election rally, are experiencing a lot of pain. But, panicking now would only hurt them further. Some tips on what they should do to survive this downturn.

Ignore volatility: Investors need to learn to ignore volatility - a part and parcel of equity investing. "If your investment horizon is long and you have made sound investments in a diversified portfolio, do nothing".

Only tactical investors lose money in a downturn due to their short investment horizon. "Longer-term investors can just stay invested and ride out the downturn."

This piece of statistic should reassure investors. "If you had invested in the Nifty on any day in the past 20 years and stayed invested for at least seven years, you would never have made losses," says Kaustubh Belapurkar, director of manager research, Morningstar India. A long investment horizon is, thus, the best antidote to volatility.

Avoid market timing: Don't exit the markets now, thinking you will get back in time for the next rally. It has been proven time and again that no one can time the markets to perfection consistently. The best course during a downturn is to stay invested. Nagpal says people try to time the market because they believe it is the smart thing to do. "Our experience says it is not smartness, but discipline that leads to wealth creation," he adds.

Continue your Systematic Investment Plans (SIPs): Rupee-cost averaging (the purchase of more units at lower prices) boosts long-term returns; so stopping your SIPs during a downturn is the worst thing you can possibly do. "An SIP of one or two years won't always fetch you positive returns; so you must run it for at least 5 - 10 years," says Nagpal.

Rebalance portfolio: The weight of equities declines in your portfolio during a downturn. If you have the risk appetite, deploy more of your fresh money in equities and benefit from the lower entry prices. Do so gradually over the next three-to-six months. Only capital that will not be needed over the next five years should be deployed. Don't invest borrowed money.

Reduce exposure to mid-and small-cap funds: Ideally, 50-70 per cent of your portfolio should be allocated to large-cap funds and 20-30 per cent to mid- and small-cap funds. Owing to the run-up in mid-caps over the past two years; the weight of these funds would have increased in your portfolio. Pare your allocation to these more volatile funds.

Don't redeem now when net asset values have declined so much. "Allocate fresh money to large-cap funds to reduce exposure to mid-and small cap funds," Belapurkar adds.

Invest across investment styles: Instead of investing only in growth funds, have some exposure to value and dividend yield funds, which invest in low-beta stocks and hence are more resilient during a downturn. "A 15-20 per cent allocation to these funds will help protect your capital to some extent," suggests Belapurkar.

Diversify internationally: To reduce country-specific risk, invest at least 10-15 per cent of your equity portfolio in international funds. Do so via globally diversified inter-national funds. US-focused funds, which invest in US-domiciled multi-national companies, are another good option.

Source & Courtesy: Sanjay Kumar Singh / Amar Pandit / Manoj Nagpal - Business Standard

For investors, the onset of a new year means making more investments which yield profitable returns. However, often they are not sure about where they should park their money and depend on sources such as news reports, word-of-mouth information etc. This is not the correct approach as one wrong decision can impact your cash flow. In order to understand where you should invest your funds the first step is to be aware of your goals, the duration and your risk appetite. These three factors should be in place before you decide the investment avenues.

The key to a rewarding portfolio lies in asset allocation. This method basically works on the rule of diversification, a fact which is often echoed by experts but highly neglected by investors. More significance is given to a particular instrument say which stocks one should hold. It is essential to have the perfect mix of asset classes spread across various investments in line with your monetary objectives and risk tolerance. This includes moveable and immovable assets such as gold, real estate, fixed deposits, equities, mutual funds etc.

The process of diversification helps to reduce risks and bring about stability in returns. If you are unable to work out the ideal asset allocation to build your portfolio, you can make use of online calculators or seek

RIS is the new mantra for retirement planning

Whatever amount remains is left for the retired life, as it comes last chronologically. As the common savings are not earmarked for any specific financial objective, investors may overspend, due to emotional reasons, for meeting various social / personal requirements till retirement, leaving inadequate corpus for retirement.

Since there is a mental accounting involved when it comes to saving for a particular purpose, it makes sense to save separately for a retirement corpus."Mental Accounting" is an economic concept as per which investors divide their current and future savings into separate, non-transferable portions affecting their consumption decisions and other behaviours. Hence, building a corpus that is specifically meant to provide pension during retirement is of utmost importance. The idea goes in sync with the old saying "Saving for a rainy day". This is where dedicated retirement funds come into picture.

Our experience with HDFC Children's Gift Fund, another goal-oriented product, also suggests that investors tend hold on to their investments for a long period of time, regardless of market cycles, when the money is earmarked for a particular purpose.

HDFC Retirement Savings Fund targets corpus that is intended for providing pension during one's retirement through regular savings into the three different investment plans in the Scheme. The three investment plans are Equity, Hybrid - Equity and Hybrid Debt that differ in the varying degree of equity and debt allocation and are suited for investors of different age group and risk profiles.In the course of one's saving years, when a situation arises requiring large amount of one-time spending, say for medical requirement or other social / personal requirements, we believe, he / she is expected to withdraw funds from a regular open ended fund or a bank deposit rather than touching a Retirement Fund that is mentally earmarked to provide pension.

WF: The fund industry's key competitor in the retirement savings space is ULIPs. In what ways is this product a better solution than ULIPs?

Kiran: We would refrain from comparing our offering to a ULIP which is primarily an insurance product. HDFC Retirement Savings Fund ("the Fund") is a long-term investment vehicle (mutual fund scheme) that helps channelize one's monthly savings in a systematic manner to amass a corpus that one can withdraw when the regular income stops at the time of retirement.

WF: Have you considered a life insurance wrapper around this Fund to compete more effectively against ULIPs?

Kiran: Our offering is solely an investment vehicle targeting retirement corpus for individuals. Adding any other feature unrelated with the core objective of the offering would dilute the same.

WF: What is the lock-in period and what is the extent of flexibility in switching across the three plans within this Fund?

Kiran: The Fund has a lock-in period of 5 years from the date of allotment of units, during which the units cannot be redeemed or switched out. Upon completion of the lock-in period of 5 years, the units can be redeemed with an exit load of 1% till the age of 60 for an investor. After completion of 60 years of age, the investor can redeem the units without any exit load. Switches are not allowed during the 5 year lock-in period. Any switches between the three plans of the Scheme after the 5 year lock-in will not attract any exit load, allowing an individual to alter the asset allocation as he/she moves from one life stage to the next.

WF: What will be the equity and debt management strategies for this Fund? Which of your equity and debt schemes will they most closely resemble?

Kiran: Under normal circumstances, the three different investment plans under the Scheme will have different asset allocation among equity and debt as below:

Equity Plan: The equity exposure is expected to be between 80% to 100%, rest in debt and money market instruments.
Hybrid Equity Plan: The equity exposure is expected to be between 60% to 80%, rest in debt and money market instruments.
Hybrid Debt Plan: The exposure to debt and money market instruments is expected to be 70% to 95% and the equity exposure is expected to be between 5% to 30%. Within equity, the focus will be on businesses with superior growth prospects and good management that are available at a reasonable price. Within debt, the Fund will retain the flexibility to invest across all the debt and money market instruments of various maturities.

WF: In recent times, key industry players have vigorously promoted new launches in the retirement savings and saving for children spaces. Business results it appears, are falling short considering the effort put in. What more do we need to do to promote such need based solutions? What are you planning to do to promote your offering?

Kiran: The funds that are need based or goal based like retirement or children's education are simple products but have a strong potential for wealth creation in a risk controlled manner over the life of an individual. The awareness of the retirement funds among investors is increasing and they have a great potential to be a large mutual fund category primarily through SIPs. Since the funds targeting retirement savingsare long term in nature, it will take time for them to be of significant size. We believe, HDFC Retirement Savings Fund is not intended just for garnering assets through an NFO, but would be regular saving tool for individuals for 25 or 30 years down the line. The Fund is suitable to every working individual whether employed or self-employed.

This being a retail offering, we are trying to reach out to the length and breadth of the country using our branch and the vast distribution network. We are also actively using print media and digital campaign to promote the Fund.

WF: What is the key message you would like distributors to take to investors, which can help build awareness of and interest in retirement savings solutions from our industry?

Kiran: India is a relatively young country as compared to many large nations of the world and it is important to take the savings habit seriously. While years of working is on a decrease on an average and the years of retired life is on the increase. One needs to plan for at least 30 years of retired life and be ready financially. "Retire peacefully" used to be the tag line a generation ago, now it is "retire in style" as the standard of living and the overall aspiration levels of people have increased by leaps and bounds. So, one needs to start the saving habit through either lump sum investments or SIPs. Accumulate a sizeable corpus at the time of retirement. Post retirement, one needs to identify a reasonable standard of living and the monthly costs associated with it. One needs to make sure the standard of living is either maintained or improved post retirement and plan accordingly. HDFC Retirement Savings Fund has the choice of 3 plans that help manage risks across the investors' life cycle. Further, the option of systematic withdrawals from the Fund works like a pension in a tax efficient manner. To conclude, the three mantras of retirement savings are:

1. Start early to save for retirement.
2. Invest regularly.
3. Stay invested till retirement.

Source & Courtesy: Kiran Kaushik, National Sales Head, HDFC AMC in Wealth Forum

A good question...Unfortunately, there is no 'one' right answer.
One thumb rule which often works is :
"The best time to buy is when stock prices are falling sharply and you least feel like buying'.
Most often, we ask this question because we are terrified of the unknown. What if I purchase today and...

• Oil prices or interest rates start rising?
• Europe slips back into recession?
• There is a war, etc...

Here is one statistic that may reassure you...The BSE Sensex was 100 on Aprill, 1979. It is around 26,000 currently. This amounts to an annualised return of nearly 17% p.a.

During this period, most of what could possibly go wrong, did go wrong, both on the local and global front. Yet, those who invested at that time and held on, have multiplied their wealth by over 260 times. They have also comprehensively beaten inflation. Those who tried to time the market were often left frustrated... and poorer.

For those who worry about losses due to stock market fluctuations, here are two charts. From these it is evident that the longer you stay invested, the lower the chance of losses and even if you had invested on days when the Sensex was at its highest value, you would not have lost money, had you held on.

What seems earth-shattering at one point in time, is reduced to a mere blip on the chart, after a few years.

The bottomline:
There is enough evidence to prove that equities have beaten other asset classes over the long term. If you find it difficult to invest in stock markets on your own, opt for a mutual fund and invest through the Systematic Investment Plan (SIP) route.

If you find it diffcult to invest in stockmarkets on your own, opt for a mutual fund and invest through the Systematic Investment Plan (SIP) route.

An educated investor is an empowered investor Investor Education Initiative from PPFAS MFA

While 2015 has been disappointing, investors and analysts are betting big on 2016. Speaking to Bloomberg TV, Motilal Oswal Financial Services Joint MD Raamdeo Agrawal explains why it is still profitable to invest in companies which are beneficiaries of the commodity price collapse. The first point from where FIIs will enter into global equities will be from India, he said.

Consumer retail has emerged as one of the largest wealth creating sectors. But at this point of time how should one approach that sector because you have still got very high quality companies which are extremely expensive?

The troublesome part of the investment process is that you need to have Moat and growth, which the market has not priced in. Because of this, not all consumer companies will make money and the return from this segment might remain subdued.

Huge re-rating has happened - companies which had PE multiples of 20-25 are now trading at 50-55. Over period of time, the PE multiples do get adjusted. If PE multiples remain heightened for a long period then you get the total earnings as your return. But if they get de-rated for some reason, your return would be less than your earnings growth. One has to be very careful. When any company goes on to the growth trajectory it will be rewarded. If consumers get used to a particular thing it is default to make them change their habit. Opportunity to grow is very high. So I will not sell what I have but I will be cautious in buying or building up the portfolio of consumer companies.

The other sector conversely is metals and mining which have from biggest value creators become the biggest value destroyers. Do you think they can be wealth creators going to the future?

Personally, I would not but at some point of time it will be. What has happened in 12 years has been demolished in 18 months. What we are passing through is unprecedented. What is currently happening is the complete destruction of the franchise - whether it is iron ore, aluminum, zinc, oil, gas and coal - nothing is spared.

For some time at least it will require stabilisation. Right now it is still falling but maybe in six months or a year’s time it might stabilise because this will lead to lots of bankruptcies.

And, then, supply side will get squeezed and demand will suddenly pick up and somewhere equilibrium will come. So we have to wait for that period to happen. And if you know something very well in a company, and you know they are the lowest cost producers that are scalable and you are getting it for good price, then you should buy.

The other concept that you talk about is reverse value migration. One sector that comes to mind is public sector banks. How should one really approach this space?

You are talking about value migration. That has been one of the biggest value creators in India. In the last 15 years, the size and breadth of wealth created by this concept is unprecedented. In value migration, the world will always be looking for better business model.

One largest value migration is from Boston to Bangalore in information technology. In global pharma sector, Sun Pharma is making lot of money by value migration.

Same way public sector banks - they commanded 100 per cent market share in 1995. Then private banks started coming in and today they (PSU banks) are one-third of the entire sector.

So the value has migrated from public sector banks to private. So if PSU banks have to come back, they will have to change their business model. They (PSU banks) can become like Doordarshan or BSNL. But it’s a very large sector. Two-thirds of the economy runs on this. The government is under tremendous pressure. That’s why it is prescribed that if you can’t repair it, you should sell it. Whosever gets it can repair it and make it competitive.

Is the IPO segment now looking exciting after seeing some interesting listings in 2015?

This year has particularly been good. I think the most celebrated listing was IndiGo, which is market leader in the segment, and now is almost 50-60 per cent up. We are seeing quite a few high quality companies coming in. This is a tough time, so very bad companies will not fly. This is terrific time for investors to log in.

Markets are a slave to earnings growth. The year 2015 is one prime example. When do you see the earnings picking up or do you think it will take some more time? Will it be in 2016?

I don’t know. The market has become a two-speed market. It is a complete reset for the global economy with oil and all types of commodities down by 30-50 per cent - oil is down 65 per cent. This is clearly an unprecedented kind of adjustment.

The producers of commodities are in a bad shape and are on the verge of bankruptcy. That has hurt the total aggregate corporate profit. But the users of commodities are benefiting, but that path is slow. In FY17, things could be much better.

For 2016, any specific sectors that you believe are poised to outperform?

The biggest theme running across, whether it is consumer, automotive or pharma, are companies benefited by a burst in the commodity cycle with a good pricing power.

A company like, say, Britannia is in consumer segment but their raw material cost has come down because plastic packaging price has come down. So, their marginal profit is going to be expanded a bit. They do not have to pass it on.

Bulk of it they keep with themselves so that if inflation firms up they will be able to set it off against that. So these kinds of companies will do very well because right now they are still in slow growth mode. So you will find a slow top line growth in the next 12 months. All the companies that have pricing power and are significant beneficiaries of the commodity price collapse are the ones to buy. If the power sector reforms really works out, then all the discoms will become profitable in three years.

This is going to be the biggest source of making money - they will be requiring lot of equipment to be bought and then you have the power generation companies, many of whom are nearly bankrupt today. These kinds of themes under the new government, under the new cycle of investment and reforms, and beneficiaries of commodity collapse and reasonable price - put all three together, you will get ideas.

Where do you stand on this mid-cap versus the large-cap debate? Given the value erosion in mid-caps, any bias on that?

No I don’t have any bias. If I get quality and growth, I don’t care about the size (of the company).

Any final word of advice for investors who are planning their investments for the New Year?

Currently, the markets are at about 70 per cent to GDP and we are underinvested as a class. But serious money is made here - 15-20 per cent return compounded is made in equities. So downside is limited, but upside nobody can tell.

On a five-year basis you have got a very good chance that the index itself will double and well-managed portfolios might triple. So downside is limited and upside is very attractive.

There is a good time to invest in a good quality portfolio. Do not bother too much about individual stocks. Serious investors must take help of fund managers and deploy the money or buy into managed portfolios.

Do you think FIIs will view the Indian growth story in the same way? Do you see flows coming back? It is a matter of time. There is no other way. Either we do not grow, but if we do, they will take notice of this. The first point from where they will enter into global equities will be from India.

Source & Courtesy: Raamdeo Agrawal, Bloomberg TV INDIA, BusinessLine