Falling Markets, Ailing Mutual Funds: What Should You Do?

The Indian Equity markets saw one of it’s worst nightmares over the past few weeks. In the first week of October alone, the Sensex slipped more than 2,500 points. Overall, the Sensex has shed around 5,000 points since it’s all time high of around 39,000 towards the end of August. For the previous few months, Mutual Funds were showing early signs of the storm, owing to ailing mid caps and almost half of the Sensex and Nifty composition were in Red. However, some sectors like IT, and few banking and conglomerates stocks were holding the flag high. But with the recent fall in these stocks, the indices experienced massive jolts.

Markets are volatile because of various macro and micro factors, there is a lot happening around, global oil prices are increasing, US trade war sanctions, depleting Indian Rupee, the recent ICICI loan controversy, IL&FS’ potential loan default, etc.

If you look at the excerpts from the experts, you’ll come across diverse opinions, some are of the view that the markets may correct further due to the above factors and poor economic indicators, others opine an advancement, they are seeing at the positive growth estimates for the economy.

So, looking at the uncertain market scenario, falling NAV’s, varying notions, what should be your plan of action?

Ideally in the current situation, you should Do Nothing.

Volatility is inherent in the markets, Equity, by nature doesn’t grow in a straight line, there will be peaks and there will be bottoms, prompted by various factors, like the ones cited above are behind the current bottom. You cannot control it, so if it is not in your hands, let equity only exhibit the show.

Secondly, equities although are volatile, but if you look at the long term performance graph of the Sensex or the Nifty, the growth of the underlying companies and the economy takes over the peaks and the valleys, concurrently registering superior overall returns.

This is because the temporary factors don’t determine the growth of Equities, these factors can influence the prices for the time being, but over the long term, the indexes are actually a slave of the underlying companies potential. If the companies grow, the indexes will grow. The Sensex Value on 30th Sep 1998, was 3,102.29, and exactly after two decades, the Sensex closed at 36,227.14 on 28th Sep 2018, translating into a CAGR growth of more than 13%. And that was about the Sensex, the return generated by most Equity Mutual Funds in India, is much more.

The best you can do in such a scenario is, Ignore, you don’t even have to look at your Portfolio’s value, the turbulence will subside and eventually the markets will stabilize, leaving your investments growing over the long term. Consider you have invested in a PPF, the lock-in of the PPF investment is 15 years. Do you keep checking the value of your PPF whenever there is a hike or cut in the bank rates. No you don’t do that, rather you wait patiently for 15 years before you get the corpus credited into your account. The same logic applies to your Mutual Fund investments too. Be patient, give them time to demonstrate their potential, and let them fulfill your goals, the reason why you invested in them.

To conclude, amidst the current shaky situation, do what you have always been doing.

For your short term goals: Stick to liquid funds and short term debt funds

For your long term goals:

> Continue your Equity investments.

> Don’t stop your SIPs. One of the core factors behind the superior returns generation in the SIP mode of investing is through Rupee Cost Averaging, which means at high NAV you get less units and lower NAVs will fetch you more units of the scheme. So, it’s because of these volatile times, when the NAVs are low, you get more units in the SIP mode, which can give a boost to the overall returns over the long term.

So, let the cramps in your stomach rest, don’t pay heed to investment recommendations from finance gurus on TV channels or from people around you. Trust your financial advisor, stick to your financial plan and keep moving towards your goals.

  • Source: NJ Publication

6 Simple Truths About Money

Becoming RICH & more importantly staying RICH is actually NOT a complicated one. If we follow the below 6 simple steps, any one can become rich over a period of time. While practicing this, care should be taken to ensure that enough time is given to accumulate riches – Wealth, like growing a tree, building relationships & education TAKES TIME. Our hastiness makes sure that we don’t become rich at all – and even if we become one – we would either not have become peacefully rich or we would be still be unhappy despite our riches.

  1. Put 10 Coins in a Box daily & pick up 9 coins daily – Soon the box will be over-flowing. This rule emphasize on the simple formula: Income – Savings = Expenses & not Income – Expenses = Savings.
  2. Money Pick only 9 coins. This rule emphasize on the discipline factor. Many a times we start something & we don’t continue it till the goal is reached for whatsoever reasons.
  3. Allow the coins in the box to go out & bring along with them a few more coinsThis rule talks about investments & not keep the money idle.
  4. Let the coins go out to only places of repute; lest they can never come back. This rule emphasizes on the fact that Gold & greed never stay together – in an urgency to make quick money we should not invest in things which promises quick money or in quick time.
  5. Insure the source of these 9 coins – this is very important & should ideally be the 1st rule. Insurance forms the foundation for any financial planning & if that is not taken into account – it is more like building a 10-storied building with no foundation.
  6. Aspire & find ways to earn more than 10 coins. Be happy with your current work – but never settle for less. Focus your energy in becoming a better person every single day in all aspects of life – after all life is not only about getting materialistically rich.

Lot of good things from the latest figures released by the IT dept.

Lot of good things from the latest figures released by the IT dept:

1) The no. of salaried taxpayers has increased from 1.70 crore to 2.33 crore in the last 3 yrs – rise of 37% : Indicates more jobs were created (or) more jobs were brought under organised segment.
2) Average income declared by the salaried taxpayers has gone up by 19% from 5.76 lakh to 6.84 lakh – Meaning Income also has been rising although we always talk about only Prices going up…
3) Growth of 19% in the no. of non-salaried individual taxpayers from 1.95 crore to 2.33 crore – more tax compliance is seen in this segment which is a good sign…
4) Average non-salary income declared has increased by 27% from 4.11 lakh to Rs 5.23 lakh
5) Direct Tax to GDP ratio is at 5.98% which is the best in the last 10 years
6) The no. of people who file tax returns has also increased by about 65% during this period from 3.31 crore to 5.44 crore

Way to go – but looks promising for now…

L.I.C’s JEEVAN SHANTI plan

  1. Are you looking for A Safe & 100% Guaranteed Pension through-out life-time along with passing on the guaranteed income to your spouse through-out her life too?
  2. Do you want to FIX your interest rate of your retirement corpus today itself?
  3. Do you want to just pay once for building your retirement corpus?

Jeevan-Shanti-850-Sumassured-750x410.png

Then… you may consider L.I.C’s new guaranteed pension plan (Deferred Option) – JEEVAN SHANTI. As the policy name conveys, the plan provides “Shanti” against worrying on reducing interest rates & guarantees the pension today itself through out your life time. This plan would be an ideal one for those in the age group of 35-50 years to plan their pension by making just a one-time investment today.

You may choose the deferment period from 1-20 years & the guaranteed interest rate varies accordingly. The Interest rate also varies as per the age of the person. What more – Jeevan Shanti also provides for life insurance cover by way of Purchase Price + guaranteed additions during the deferment term (and) minimum 110% of Purchase price during the pension receiving period. You may opt for various modes of receiving pension – Monthly, Quarterly, Half-yearly or yearly.

Let us take a quick example of a 45 year old investing 20 lakhs in L.I.C’s Jeevan Shanti – the guaranteed pension pay-out for different deferment periods will be as below:

GST @ 1.8% is payable on the purchase price in addition.

Interest-Rate-Jeevan-Shanti

Now presuming, I invest this 20 lakhs in any other instrument & decide to take up the pension from Banks, Post Office (or) L.I.C’s Immediate annuity plan at the end of the deferment period of say 10 years – the corpus we can build over this time period and the expected pension is given as below. Here I have assumed the annuity rate to be at 4% (which itself in my opinion may be a little higher after a period of 10-15 years).

Returns.png

As we can observe from the above table, JEEVAN SHANTI (without taking Risk) guarantees today a life-long pension of 2,45,400/- p.a.

To achieve this pension, one has to expect his money to grow at 12% CAGR for the next 10 years if he considers investing in Equity Mutual Funds & then utilize the corpus to take up as pension after 10 years.

Conclusion: If you have a surplus amount that you want to park exclusively for your retirement & guarantee the pension pay-out today itself, then you may consider L.I.C’s Jeevan Shanti – a plan whose importance will be truly felt during your golden years of retirement.

Corrections are Temporary; Growth is Permanent…

Just go through the following pictures to see market falls & subsequent corrections…

One has to stay at markets highs as well as lows to average out the ups & downs (or) for one simple reason no one knows in advance which way the markets are headed…

Correction1Correction2Correction5Correction-2015

How long is long-term in Equity?

Equity and Long Term go hand in hand. Whenever you hear or read about investing in Equity, the concept of long term follows. That we should invest in Equity for Long Term, because Equity is risky in the short term.

But what exactly is this long term? How long is long term for Equity investing?

Over the short term, equities are volatile, there are times when stocks have even doubled overnight, but there are also times when stocks have fallen by half over a night. So, the principle of long term stands to negate the volatility associated with equity over short periods.

The following is the BSE sensitivity table, it shows the returns from the Sensex for different investment periods from March 1979 until March 2018.

This table explains what we narrated above, as we see over short periods, both the maximum as well as the minimum returns are on the extreme, but as we move towards longer periods, the returns are stabilizing and the gap between the maximum and the minimum is alleviating. In shorter investing periods, the probability of making losses is quite high, but as the horizon increases the probability of loss significantly decreases and eventually becomes 0. So, an Equity investor in order to get desired returns and maintain enough distance from the risk arising out of the volatility, must have a holding period where the probability of loss is low or Nil.

So, coming back to the main question, how long is long term?

The longer the better. There is no ceiling to the term long term, the more time you give to your investment, the less prone is your investment to risk and compounding works to generate superior wealth for you. Quite often we come across anecdotes where people totally forgot about their share certificates and made humongous wealth when they eventually sold their investments. In some cases, the investor died and his family got enough money to sustain a lifetime from his Equity investments which he made decades back. There is a popular equity investing strategy which is called ‘being dead’, that is invest and then forget about it.

Holding an investment perpetually can generate breathtaking returns and create spectacular wealth for you, but may not be practical. You have your needs, you have your goals to be fulfilled, which is why you invested in the first place. Equity markets grow in cycles, there is surge, then there is a steep correction before the markets eventually stabilize. To neutralize the risk in the investment, the holding period must cover all the phases of a cycle, which is generally between 5-10 years.

Generally Indian investors do invest for long periods of time, but mostly in traditional investment instruments. Investors invest in traditional tax saving instruments like PPF and then maintain their cool till the PPF’s maturity, which is 15 years. But when it comes to Equity, they will keep checking the prices/NAV’s, get tensed when their investments fall or get excited when they are making profits, and eventually end up selling their investments to avoid losses or to book gains. If the investor gives the same amount of time to his ELSS investment as he gives to his PPF, and simply forget about the investment as he does in case of his PPF, he will be amazed by the amount of wealth he could create by being invested in Equity.

Following is a snapshot of the value of Rs 1 Lac invested in PPF and in an ELSS scheme for 15 years.

  PPF ELSS
Investment Date 1st August 2003 1st August 2003
Investment Amount Rs 1 Lac Rs 1 Lac
Return 8%** 19.36%*
Value as on 31st July 2018 (15 years) Rs 3.17 Lacs Rs 14.22 Lacs
* Average return of 13 ELSS schemes in operation since 2003
** Assumed

An investor who invested in an ELSS scheme 15 years back would have made 4.5 times more wealth than an investor who invested in a PPF at the same time. And such superior returns are witnessed in all kinds of equity schemes over long periods, be it diversified schemes, large cap schemes, mid or small cap schemes, thematic schemes, etc. So, like you give time to your other investments like PPF’s, or gold or property, if you maintain the same amount of patience in case of your Equity investments also, some of your greatest blessings will come with these investments.

Note: Always Diversify your investments across various investments – no single instrument can be called as the BEST ONE!