Category Archives: Mutual Funds

Volatility in Asset Classes

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Warm Greetings from PenguWIN:

            The crux of this article is about the volatility in asset classes, physical and financial with specific reference to Real Estate, Gold and Equity investing, more specifically Equity MFs

Investors who started investing in equity funds since 2017 and seen the value go up and up, will probably be a little impatient, experiencing the 2000+ points correction in Sensex in the recent past and the associated high level of volatility. I make sure that I tell this to all our clients (at times more than once), that Equity funds are long-term investment products and needs to be looked at only for 5+ years, more the better. There may be a few who are lucky to enter the market when it was low, make money and exited before the fall. Even these people will fail if they try to replicate it for the second time. But, accepting the reality is always difficult.

Let me take couple of my favourite examples.

Let’s assume that a person buys an apartment in Adyar/Besant Nagar area. A 1000 sqft 2 BHK (basic price of 16,000/Sq. Ft.) will set him back by 2 crores, including registration, car park, corpus fund, club fees, EB, water, sewer etc. Once he takes possession of the apartment and moves in, within a couple of months, let’s say there is a slump in the RE (Real Estate) market and basic price drops to 15,000/- per Sq. ft. The investor will feel bad as his Networth has gone down by 10 Lakhs. On the other side, if the price increases to 18,000/- sq. ft, he feels happy that he has got a good deal, saving 20 Lakhs. Whether it is a question of 10L loss or 20L gain, there will no action of purchase/sale of the house as its notional and he has to live in the house. The value matters when he moves to a different place within or outside the country and decides to sell it or when he bequeaths the property to his children and they decide to sell it.

The same holds good when people buy gold jewellery or even coins. Gold has lost about 35% of its value since 2012 (35% is the consumer price Inflation) and the current price in INR is lower than the Sep/Oct 2012 price which was Rs. 3000/- plus. Several people have asked me this question – Is it a good time to buy gold? No one has asked me if it was time to sell gold. The worst thing is if its close friends or relatives and you tell them the facts of Gold (inflation hedge, intrinsic value and so on) which may be negative at that particular time, they feel that this guy is keen to drive Goddess Lakshmi away from our house.

Though many of the investors I encounter, have significant allocation to RE and Gold, they don’t get perturbed due to changes in price while even minor changes to stock markets (going down) is something that makes them anxious as they can easily relate numbers. So, even if the investor buys a fund for 1 lakh, that turns out to 1.25L in a year, the subsequent fall to say 1.1L is apparent as the mind relates to only the 1.25L figure, forgetting that the original investment of 1L.

Equity investing is for the long term (may not be that long as in the case of RE) and our patience will be tested by the market similar to RE and Gold, more severe at times. Some are unable to digest the volatility, especially people who have invested for short term that is just 1/2/3 years, going by the healthy returns of 2017. They tend to think that if 2017 has given 30% returns, then our investment should be able to fetch atleast 24% or 12% per year, in 2 years (fair assumption from their perspective). There are others who get excited by the returns that their friends and family members have made and move huge money to equity funds (Big Bang Investing), in a matter of few days, trying to make up for opportunity loss.

Whether 2018 or 2019 turns out to be as rewarding like 2017 (I will also be delighted to see my portfolio go up further), a time horizon of more than 5 years, higher the better, will definitely reward us with good returns and will continue to be the asset class that will provide the best returns.

People who hold less than 100% equity portfolios – Balanced Funds, Equity Savings, MIP can expect stability of returns in less than 5 years, approx. 3 to 4 years

What is the basis for my confidence? Equity market growth is a reflection of how the economy (GDP) does in the country, growth of companies in revenue and profitability, increase in consumption, increase in per capita income. The scepticism that prevailed in the market for the past few quarters is attributed to some of these indicators, not in green, while the markets were scaling new peaks. However, the Dec 2017, Q3, results have been positive and analysts expect that this momentum will continue in the coming quarters. Excluding the troubled Banking and Financial Services sector, Net Profit of a sample of 2043 companies rose to a six-quarter high of 27.5%, Net Sales by 11.5% YoY. We practice what we preach and your money is in safe hands.

We will only do with your money what we do with our won – Warren Buffett

 

<Blog # PenguWIN 1058 – Volatility in Asset Classes! >          

Wishes for a Happy Diwali 2017

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Dear Friends,

                            Advance Diwali wishes from team PenguWIN !

Right from my childhood days, Deepavali day has been my favourite day of the year (birthday comes latter) as I used to be deeply obsessed with Crackers. I have even had ideas to open a fireworks shop during Diwali eve, not with money-making motive, but get a chance to visit Sivakasi and buy fireworks at cheap prices so that I get a huge quantity to burst. But till date, it remains an unfulfilled wish.

I am aware that Fireworks cause health hazards, but was unaware of its intensity – Apparently, burning snake tablets is equal (how many boxes is something that was not published and obviously it’s not just 1 tablet or a box containing a dozen tablets) to 475 cigarettes (courtesy NDTV). Fireworks have been banned in many places in NCR (in and around Delhi) and I guess it’s only a matter of time that it ceases to exist for retail consumption.

I would like to brief about a category of equity funds called Equity Savings Fund, which as a concept I am really impressed. The fund category has only a 2-year history and long-term performance is yet to be tested. All major fund houses have launched this fund, starting 3rd quarter of FY 15-16. After the 2014 budget when the Finance Minister changed the taxation of debt funds, all debt funds need to be held for 3 years for indexation benefit and subsequently taxed at 20%. Manufacturers in mutual fund industry (who create new schemes) are extremely savvy and came up with the concept of Equity Savings Fund.

For a fund to be categorized as Equity Fund, it has to have a minimum of 65% exposure to Equity (Stocks) and the balanced fund category is based on this principle, though SEBI continues to say that Balanced Fund should be 50%:50%, Equity and Debt. Meanwhile a separate category of funds called Arbitrage Funds came into existence, where the fund manager tries to identify opportunities of mispricing between cash and futures markets. Without getting too technical, Arbitrage Funds belongs to equity category but potential returns are like debt category (about 5 to 6% ROI now). There is no issue of losses in these funds as purchase and sale of securities are done at the same time.

Using the advantage of Equity for high returns, Debt for stable returns and Arbitrage for Equity tax treatment and stable returns, Equity Savings Fund was conceptualized. They take 1/3rd exposure to Equity, Debt and Arbitrage, with specific schemes taking a little higher or lower proportion of securities. They maintain a minimum of 65% exposure to Equity and Arbitrage so that the fund enjoys equity taxation. From a risk perspective, it’s a lot lower than Balanced Funds giving a comfort feel to investors.

This category of fund, caps both the upside and downside quite well through its composition and has potential to generate 10% to 12% (net of tax) over a 3-year time frame. If this fund category proves its mettle, they will become a great hit among investors who don’t have the appetite for high exposure to Equity and Tolerate Volatility. Balanced Funds have attracted huge inflows in the recent run, higher than any other equity fund category – good returns with reduced risk. Equity Savings Fund could well be the next category to bet on.  

< PenguWIN TITBIT # 103 – Equity Savings Fund>

Equity Market Dynamics

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Friends,

            Apologies for the long silence (excluding the folks for whom it might have been a bliss) – Some investors even asked me if I had stopped writing Blogs. Income Tax Filing and GST Registration took a toll on my time – Need some excuse, right?

I have realized that starting a new habit like walking, running, swimming, meditation is easy. But, sustaining it for a long period of time is extremely difficult. I am telling this in the context of publishing blogs on a periodic basis rather than adhoc.       

  • ‘Invest cautiously through dynamic asset allocation funds’
  • ‘Move from mid-caps to large cap’
  • ‘Lower your return expectations’
  • ‘Earnings continue to be muted’
  • ‘Cash holding and arbitrage positions have increased’
  • ‘Risk-Reward is unfavourable for Equities’
  • ‘GDP growth takes a hit’
  • ‘Foreign Money is chasing India’s Reform Story’

 

The above statements were made by key fund managers and analysts, both Indian and International, in the recent weeks. Has our reform story taken off or yet to take-off? Statements like price to earnings P/E is more than 10-year average; 1 to 15 is considered cheap, 16-20 is considered fair and greater than 20 is considered as expensive may not be relevant in the current context. Currently Nifty and Sensex are trading at close to 24 P/E. I would tend to argue that there are major changes to the investment pattern which will change the contour of equity investments and following are some of the points why I think so.

  • Retail Investor participation in markets through MFs and ULIPs is at all time high with inflows increasing month over month. Equity MFs had an all-time high net-inflow of Rs. 21,875 Crores in Aug 2017. How was it before? Equity MFs had an all-time high net-inflow of Rs. 14,480 Crores in July 2017. This highlights the appetite of Indian Retail Investors which was not the case earlier.
  • Other than MF Equity route, inflows are high from sources like National Pension Scheme, Provident Fund, ULIPs.
  • The reason attributed to this heavy inflow is not that Investors have started embracing equity but also due to stagnant Real Estate Sector, Gold still struggling to cross 2012 levels and lowering of Bank/Post Office/Company Fixed deposit rates.
  • Instead of yearly dividend payments which was the norm until a few years ago, Quarterly and Monthly dividends in Equity Funds are being paid to attract gullible investors.
  • Some Wealth Management firms and independent practitioners, enticed by the volume and immediate benefits, invest huge lump-sums of their clients, running into crores, even in the current market.
  • The argument of average 10-year Price Earning is something that I don’t subscribe as there will be demand-supply mismatches which inflates the PE of a good stocks with earnings visibility

So, as sensible investors, what is that we can do in this frenzied Bull Run:

  1. Investors who embark on direct equity in this period need to know that, during bull runs, even the worst of stocks do well. Warren Buffet, the Oracle of Omaha and considered as the god of equity investing quoted ‘Only when the tide goes out do you discover who’s been swimming naked’.
  2. Do not go for Lump-Sum investments and invest through systematic plans – SIP and STP – Almost all Chief Investment Officers and Fund Managers of Fund houses are unanimous with this message.
  3. Medium and Small Company stocks have become overvalued and the hit will be heavier during correction. Advice is to stick with Large Company Stocks or move allocation from Small and Mid to Large. This is also a unanimous message
  4. The Equity markets would have changed the asset allocation pattern – skewed towards Equity than Debt and this needs to be rebalanced.
  5. Cashing out of Equity, especially MFs, is not a good idea as it is extremely difficult to predict when the correction will happen and when the market will go back to the original high. I remember atleast 3 popular fund houses, that took cash calls during the 2008-9 global crisis and for a short period those funds were doing better as they contained losses. But the celebration for those funds was short lived as the markets turned around sharply, not allowing the funds to re-deploy the cash. Some of these funds are still languishing.
  6. Even if there is a 10 to 20% correction, the macro factors for India is good which will life the markets – Inflation down, GST Implementation, Current Account and Fiscal deficit, Government gaining due to low Crude Prices – The only reason to be cautious is if we get another shock like Demon. or Beef ban or unrest with neighbours

 

<Blog # PenguWIN 1055 – Equity Market Dynamics>