Mutual Funds – Value Creation

13 April 2015 to 8 Sep 2016 – BSE Sensex performance is 0%

Compare this to some top quartile mutual funds’ schemes. I’ve taken the NAV (Net Asset Value) of a scheme on the same days as mentioned above; but, the returns are not 0%.

Large cap, Mid / Small Cap, Multi-cap or Balanced – all categories of schemes delivered…except the BSE Sensex.

Should we look at the Index value & Invest into Mutual Funds?

"Ultimate Cost of a Gadget / Spend" -

Assume that a family spends just Rs.50,000 /- a year, on a latest gadget or any other kind et al...The ultimate cost is an eye opener. Rs.50,000/- a year of thoughtless spending leads one to loose Rs.1.02 Cr of accumulated corpus, grown at an annual rate of 18% p.a, over a 21 year period. The same still delivers over Rs.27 lacs at a modest return of 8% p.a. 

Now, let's add a 'zero' to 50,000 rupees of unnecessary spending and make it 5 lacs....😀. I leave it to your imagination on the ultimate corpus. 

It is not a couple of % points in Returns that matter most....Before that, "COST OF SPENDING", matters.

And the 1st, 5 years of investment delivers 40% - 60% of the ultimate corpus. That is Compounding.

Think, before Spending. What to spend on & What to Avoid. That makes the difference.

Happy, 'less spending'

Happy, 'more investing'

In Life – “A Doctor might win many battles, but God always wins the war” (extract from a book by, Nick Murray).

In Money Life – “Any Asset class might win the battles, but Equities mostly win the War”.

I rest my case.

'Managing Money Life is both an Art & a Science.' - Unknown

Is a woman's involvement in her family's 'total money life', important?  Yes, Yes & Yes...infinite times.

The neural circuits in women are wired strongly between the 'Logical Left Brain' & the 'Intuitive Right Brain'. Whereas, in men, the circuits are strongly woven within a particular hemisphere. The medical research conclusion is that; women are good at Multitasking, Social skills & a better Memory; vs Men being good at Perceptions, Co-ordination & Motor Skills.

Coupled to the Neural Circuits, it is a generally accepted life principle that, women are at a higher level of competence vs men, in attributes like 'Patience & Tolerance'; the 2 critical components in 'Money Life Management'. In addition, for ages, we have seen too many Indian households being run with each woman's unique & extreme efficiency, suitable to one's family. Thanks, primarily to 'Her' 🙂

Women should break this boundary of 'household money & life management' and transcend beyond, into the realms of 'total money life management' within the family. The principles are the same as a household run...Patience & Tolerance with an added bit of scientific salt. And, with 'Her' added salts, the 'Family Money Life Dish' will taste even better 😀.

If anyone would have predicted the above numbers in Feb / Mar 2015...my salute to him / her. Retrospective - everything looks easy to predict & say, "I said so". In Real Time, everything looks like either a 'Dooms Day' or a 'Boom Day(s)'. Either way, the thought is not correct.

Life, Money or Money life; we always keep moving up & down...and those fortunate people who don't go through this roller coaster journey, have definitely missed 'Life' in a true sense.

‘Market Timing’ Myth – Compiled the last 2 decades data on Sensex’s High & Low values during a particular year. Assume that 2 investors invested exactly on the mentioned dates, one always at the highest point during the year & the other by a stroke of a Miracle, only at the lowest points of the year; for the last 20 years.

The results –

Investor investing only on the Highest Value day 😟 of every year - CAGR of 10.74%.

Investor investing only at the Lowest Value day 😱 of every year - CAGR of 14.46%

I've not assumed any dividends getting reinvested. Even if considered, the differential CAGR would not differ significantly.

Should 'timing' matter for long term investors? Even the worst timer for 20 years has been better off - post tax, post expenses 😀 on the Index. And I've not even come to pick on some top quartile funds.

Cloud storage firm Dropbox hacked, 68 million passwords leaked - http://economictimes.indiatimes.com/articleshow/53972955.cms

Using tech is an 'ART' in itself. One who learns it, benefits. Knowing which tech to use for what, in itself, is the truth of wisdom.

We can't have confidential data floating around in the 'Clouds' 🙂

Taxes: "A 'Financial Charge' or a 'Fee' or any 'Other Levy' Imposed upon an individual or a legal entity by a State or a Functional Equivalent of a state to fund various 'public expenditures'. A failure to pay, or evasion of or resistance to 'Taxation', is usually punishable by law."

A Fixed Deposit with a bank @ 8% per annum (we don't get this rate anymore 😟). 10 year period. Interest is Compounding Quarterly. Interest is not withdrawn at quarterly intervals but, is let to Compound / Grow with the capital. Assume a marginal 15% average tax rate on Income.

Impact: Interest earned (yearly) - treated as income from other sources.

Tax - One pays a 'yearly tax' (as per their tax slab), whether the interest is taken out or left to grow. "Cash from your pocket goes out". E.g. - a 1 crore deposit @ 8% interest for 10 years...Grows to Rs.2,20,80,397/- with an Interest Earned of Rs.1,20,80,397/-…………..Does that look good ? 🙂

In the process of getting Rs.1.2 crs; one has paid Rs. 18.12 lacs as TAX during the period @15% tax rate per year. If I increase the tax rate to 20% per year, one pays Rs.24.16 lacs as TAX & at the peak rate of 34.60%, it is 41.80 lacs 😳

In effect - 18.12% of one's capital is paid as tax @ 15% rate. 24.16% of one's capital is paid as tax @ 20% tax rate & 41.80% of one's capital is paid as tax @ the peak rate. Now, does this sound good 🙂

We haven't even explored the Inflation / Purchasing Power erosion, impact 😀

Your hard earned Money, matters. Taxes Matter, even more.

Jean Marie Eveillard described the best characteristic of a good investor - "The Capacity to Suffer". A smart investor must have the ability to suffer through periods of bad performance. He / She will be able to stay the course when they have the 'ability to suffer the pain'.

Bottom-line, a significant portion of risk in equity comes from the "Behavior of the Investor".

Stay the course. Stay focused.

Worked on this table – Sensex vs. BSE 500 vs. a Large Cap mutual fund vs. a balanced fund vs. a mid / small cap fund. Over 16 years of data points. Chosen mutual funds are the top quartile funds in their respective category over the said period. They are not necessarily the ‘Top Funds’.

Some inferences –

Investment made is a Lump sum (one time) on the mentioned date. So, 'Timing' is irrelevant, unless the 'Time' is, when everyone is selling. Can we buy, then? 😟

BSE Sensex gives the lowest returns vs the others 😀. Is it a suitable benchmark to track & draw conclusions for an investor? BSE 500 might be more an appropriate benchmark to track.

Mid/Small cap fund wins hands down over others. Short, Medium or Long term; this beats all. But, volatility needs to be checked. Balanced fund is the most consistent. Someone investing on 1 Jan 2015 gets a single digit CAGR. But, the time frame is too small to infer. But, it is also the Most Consistent & Most Ignored category in the long run....and busts a myth that, only equity funds deliver returns. Large cap fund falls in between all these. Neither a high nor a low. In fact it tracks the balanced fund very closely & losing to it in performance during some periods.

A lump sum invested in 2007, 2008 or 2009 - a decent mutual fund still made money for an Indian investor (marked in green, yellow & pink). Indian mutual funds beat Mr. Buffet handsomely in INR, CAGR terms (will have to check for $ adjusted).

And finally, if one can't choose their own stocks & better a mutual fund; there might be only one option - 'Invest in a Mutual Fund'. Investor Beware - more than 3000 schemes to choose 😳