Consider Practical and actionable aspects during corrections to take advantage
Most of us as investors know that Volatility and corrections are part of the market
However when the real correction happens, we not only forget this wisdom and but also get nervous & panic. In that state of mind we worry about unknown and loose focus on the useful and profitable aspects. Every market correction was followed by a recovery.
Corrections are normal
we have seen 6 times Nifty correct by 15% or more over past 15 years
Highest was 60% Jan to October 2008
Lowest correction was 15% Aug to October 2018
Longest Correction was Nov 2010 to Dec 2011
Shortest correction was Feb to March 2020
This is known only in hindsight but unfortuanately most investors try to predict the duration of the correction or the depth, this often leads to frustration and anxiety as no once can predict these events. Instead it will be useful to take advantage by focusing on investing more at these times as corrections will end and markets will bounce.
The Real Drama is not in the index
In 2021 while Nifty500 was up 30.2%, average return of the top 25 stocks was 244%
average return of the bottom 25 stocks was -33%
in 2018 Nifty500 was down 3.4% (-), average return of top 25 stocks was +49%
average return of the bottom 25 stocks was -68%
after the correction phase, the returns in the next 12 months of the index tend to be very healthy.
Do no get perturbed, it is impossible to predict the duration and extent of the correction. It is best to use systematic approach to investing , continue your SIP and increase allocation to equity.
This is brief summary of an article written by Harshad Patwardhan for ET Wealth October 3-9, 2022
Who does not want to invest in only
the best performing funds?
That’s why all portfolios look
the same, we look at historical data and invest based on what is glorified in the
media.
As a result, all our portfolios
will carry the top performers of the recent past or some legacy funds which
would have topped during a previous era.
Most investors choose funds by looking
at the top 5 funds based on past 3 years return. This could be distorted due to
a one-off great year, or a big risk that worked for the fund (but could have
failed).
The top performing funds are
based on past performance. We can no way assume their performance would
continue into the future.
So how do you choose a fund?
Check
if the fund performance has been in the 1st 2 quartile, meaning in
the first 50% in 7 out of past 10 years.
Avoid
flash in the pan performance funds
No
matter how hard you try, your fund is not going to remain in the toppers list year after
year (see chart above)
A
fund manager may take a view in a certain market condition, there are chances he
can go wrong even with the best experience.
There
can be times when a fund managers decision takes time to work, during which the
fund may temporarily underperform and then start doing well.
When
the call works right, the fund will be rewarded with top performance, but if you
had hoped to another top fund during the underperformance, you would miss on
the rally in both the funds
Top
performing funds will lose its charm soon enough and can underperform in the
next cycle. Remember markets are cyclical and no one stays at the top.
That’s why it is said the quest
for the best performing fund is futile.
Instead follow a disciplined process
and rebalance periodically.
If you see the data above, no best performing fund has remained on top the very next year
Systematically we can not predict who will be next winner, even if we get it right, it is just fluke and it will again change next qtr
The most imporant key to successful investing is asset allocation
As you can see from the chart below, winners keep changing and no one can predict which asset class will do well in the future, so be invested in all the asset class and rebalance regularly
Rebalance by moving funds from assets that have performed very well to those that have under performed
Whenever there is fear or volatility in the markets, many investors
pause or stop SIP due to fear taking over rational thinking. They fear market
could fall further and they may suffer more losses. However, they must realise
that volatility and temporary fall in value is what they signed up for when
they got into equity as an investment vehicle.
Allowing emotions to take over has serious cost to long term wealth
creation and overall returns suffer. When at the very time we are supposed to increase
our SIP to take advantage of discount sale, our human biases of loss aversion
will make us blind towards rational view. (see table) The
growth rate of uninterrupted SIPs continues to deliver better results compared
to the ones that are paused and restarted. Besides, it also helps to be on
track from a goal-based investment perspective.
the Original chart appeared here in this article of livemint
Risk simply denotes the probability of not getting back the full amount invested, or the possiblity of original investment declining in its value.
Deciding not to invest also carries a risk, as your money looses value due to inflation. Rs 100 today will be worth say Rs 94 or lesser after a year as Rs 6 is eaten away by inflation.
This is the risk of not acting, not investing.
As a broad rule, an inflation of 6% over 10 years will reduce the real value of money by 50% approximately.
The key to successful investment is to not avoid risk but striking a balance between Risk and Reward.
Why Fixed deposit is very risky inspite of looking safe ?
Assume you had Rs. 1 Lakh in 1980:
Rs 1 lakh in 1980 was equivalent to 15 plots of land in Bangalore in 1980.Value of those 15 plots are between 2-5 crores today.
Rs 1 lakh in 1980 in BSE sensex is now 6 crores today. So Investment of 1 lakh has become 6 crores in 2022
If that was kept that in fixed deposit, Value is Rs 42 lakhs now.
One can't buy even buy two room flat in Bangalore now for Rs 42 lakhs
The fixed deposit investor has become poor now inspite of investing in a fixed income generating asset.
Fixed deposits are good, but you should know when to use it and how much
(This is based on a research done by https://getmoneyrich.com/stock-market-correction/)
16 is the number of times that the market fell from 2009 to 2019 by more than 10% & still market has given > 14% over long term, handling stock market volatility & using it are the key to investing success.
So it is clear that markets will fall in the next 10 years also by more than 10% several times, so please do not panic during those times as market eventually recovers. Unless you use those dips to buy more you will never make money.
Based on the median analysis done in the above research, every time the index goes up by 13.7% or so, it corrects by about 10.90%. (looking at data from BSE500 2009-2019)
On an average it has taken about 2 months for each correction to end.
This should help us prepare our minds to accept volatility and help us buy on dips.
Unless we buy when markets corrects by 10% we are not going to compound our wealth in the best manner. Use this data as a broad direction and not an exact prescription on when to invest. Future is unpredictable and may follow a different pattern, but this data above should help us improve our odds of success or atlest help in reducing follys.
What could be the Best Time Frame to expect positive returns in Nifty?
▪️Investments with less than 3 Yr. horizon are highly prone to witness negative returns
▪️Negative Return expectancy falls drastically above 3 yr Horizon and almost Zero with 5 Yr and above.
If you had invested anytime between 2017 to 2022 and held for 1 year, you would have lost money 10% of the time. However if you had held the same for 3 years then your chances of loosing money is just 0.45% and if you held for 5 years you would have not lost money at all, hence the reason why invest only money you do not need for 3 to 5 years alone in the markets
Rolling Returns Calculated using prime investor calculator for 5 years time frame rolled over for 1,3 & 5 years
This chart provides a point of view on when to invest aggressively and when to book profits in equity. Eg. take the chart on 1 Jun2 2002, Yellow line is the previous 5 year NIFTY CAGR, when we say the last 5 year (1997-2002) return as on 1 June 2022 is (-) 2% then the orange line depicts the return given by NIFTY in next 5 years (2002-2007) which is higher at 32%, this says when nifty gave negative returns for past 5 years, the next 5 years was very rewarding with +32% CAGR return.
Inversely, when in Sept 2007 the NIFTY had returned past 5 year (2002 to 2007) CAGR of + 41% the next 5 year returns was close to 0.
The lines at extremes mean when past 5 years were good, the next 5 years were not very good and vice versa.
Also another data emerging is that in the period post 2010 NIFTY has never given a 20% CAGR over any 5 year period. Be conservative and expect < 15% CAGR (orange line data from 2017 will be available post July 2022 and hence depicted flat)
This also amplifies why invest thru SIP. When historic returns are very high we could avoid investing in lumpsum , rather spread them to times when historic returns are poor, this increases the probality of good future retruns as seen the chart above.
The lines at extremes mean when past 5 years were good, the next 5 years were not very good and vice versa.
Similar trend explained with 2 year interval, it proves again that when the last few years return are very good, lower the expectation for next 2 years. When the last 2 years have been very painful and you keep doing SIP from that painful period, you can expect good returns later
This chart denotes the number of days it took for the market to recover after a 15% crash
(see column - 'days to recover')
Chart prepared by Capitalminds
How to read?
If you invested after a 15% market fall, it took anywhere between 10 days to 1299 days (3 years+) to recover your investment and make a nominal profit.
What this means?
Invest only your Risk Capital, only that you can put away for a period of 5 years
And in the end, this is a probabilitic activity, there is no 100% certianity
Keep Emergency funds for Emergency, they are not for investing in risk assets like equity
Morgan Housel’s ‘The Psychology of Money’ forces you to take another look at personal finance, investing, and business success through the lens of psychology and behaviour. These fields of study have their roots in math, data, and calculations. However, in this book, Housel highlights how everything, from your personal history and experience to your unique world view, ego, pride, marketing, and odd incentives work together to help you finally form a financial decision.
Key Takeaways
When it comes to earning money and building wealth, it really doesn’t matter how smart you are. Instead, what really matters is how you behave.
Even the smartest people can lose control of their emotions and plunge into financial disasters while ordinary people with no financial education, but robust behavioural skills, can become wealthy.
It is not enough just to know how to do something. You must be able to fight with internal emotional and mental turmoil in order to make the best financial decisions.
Considering the lack of accumulated wisdom in terms of modern finance, many of the poor financial decisions that you end up making arise from peoples’ collective inexperience.
You must not risk what you already have and require for things which you do not have and do not actually need.
Creating wealth and maintaining wealth are two different things. Creating wealth is easy, but keeping it is very difficult.
While there are many ways to accumulate wealth, there is only one way to maintain it, and that involves being frugal and paranoid of potential losses.
Experience can be a boon and a bane
“Your personal experiences with money make up maybe 0.00000000001% of what’s happened in the world, but maybe 80% of how you think the world works.”
Stop the goalpost from moving
You should know when you have enough wealth and then stop wanting more. Throughout history, greed or a craving for ‘more’ has been the downfall of many of the rich and famous. When you keep running after more, you inevitably start taking more risk than you should. Know when to stop. Good investing is not about earning the highest returns. Instead, it is about making good enough returns for the longest period of time. Compounding is the way to create long-term wealth.
Savings is the dealmaker
The rate at which you save is far more important than your income or your investment returns. Generally, beyond a certain income level, you will find three types of people. First are the people who save. Second are the people who don’t think that they earn enough to save. And, third are the people who think that they don’t need to save. However, over a longer period of time, it will be the people belonging to the first category who will end up successfully creating and maintaining their wealth.
Leave a room for error
When you are investing, always remember that you are dealing with probabilities and not certainties. Thus, you should always leave a room for error, the best way of doing this is by avoiding single points of failure and spreading your investments. It is also a great idea to always have a good emergency fund.
Eight Fixed Income Instruments that beat the best FD Rates in India
The alternatives we will discuss are categorized into three risk buckets.
No-Risk
Lower or equal risk to FDs
Higher Risk than FDs
Risk category: No-Risk / Sovereign Risk
This is the list of alternatives where you can invest for better returns without taking any additional risk than Fixed Deposits. For that matter, these are way safer than any bank’s FD. Because you are lending money to the Government, they have a sovereign rating.
1. PMVVY Scheme
PMVVY is a government-subsidized pension scheme for senior citizens. It currently provides an assured return of 7.66% pa. The interest rates vary according to interest payouts (Yearly, Half Yearly, Quarterly, or Monthly).
The minimum purchase amount is 1.56L & maximum is 15L. You can lock the high-interest rate for ten years. There is no tax benefit for the scheme. The individuals are taxed at applicable rates, and TDS is not deducted. You can invest in PMVVY via LIC India.
2. Senior Citizens Savings Scheme
It is a government-backed savings scheme that was launched in 2004. The primary objective is to enable senior citizens to ensure a regular flow of income.
As the name suggests, it is only eligible for senior citizens. The interest rate has been set as 7.4% pa as of today. The minimum investment is 1000 & the maximum investment is 15 Lacs per individual. Interest payout is every quarter.
Maturity tenure is for five years with a one-time option to extend for three more years. So, in total, it will be eight years. You can invest in this scheme from any authorized bank or post office.
3. RBI Floating Rate Bonds
RBI has launched a floating rate savings scheme in July 2020, which has a maturity of 7 years. The interest on the bond is linked to National Savings Certificate. It offers an NSC + 0.35% rate of return.
The current interest rate of NSC is 6.8%, and you add 0.35% to it. So RBI Floating bonds will give a 7.15% interest per annum. You can invest in RBI Bonds from select banks like HDFC Bank, Axis Bank etc. or via brokers like ICICI Direct and HDFC Securities.
4. Government Securities
G-Secs are issued by the Government of India with various maturities (from 91 days to 40 years). The interest rate depends on maturity. The minimum investment is 10,000, and the maximum is 2 Cr per PAN. You can invest in G-Secs via the RBI Retail Direct platform or brokers like Zerodha.
Risk category: Low or equal risk as FDs
The below names will carry lower or, in some cases, equal risk when compared to Fixed Deposits. Some of these are bonds issued by Public sector companies. In adverse cases of stress, GoI will come to the rescue.
5. PSU Tax-Free Bonds
Major Public sector companies like PFC, HUDCO, NHAI, NTPC, NABARD, etc., had issued tax-free bonds from 2010 to 2015. These are traded in the secondary market and yield anywhere between 4.5% to 4.9% or higher.
They are AAA bonds & provide good liquidity. You can check with your broker/market maker for large quantities and get a better yield. Please note that you are not required to pay any tax on the interest received from these bonds, unlike others.
6. Savings account of Equitas and AU Small Finance Banks
Equitas Small Finance Bank offers a 7% interest rate on Savings accounts with a balance above 5L up to 2 Cr. Alternatively, you can also open a Niyo X (a Neo bank) account, which will open an Equitas bank account along with all the features of new-age banking.
Along similar lines, AU Small Finance Bank is also offering a 7% interest rate on Savings accounts with a balance above 25L up to 1 Cr.
But how safe are these Small Finance Banks? Before that, let’s try to understand DICGC.
Deposit Insurance and Credit Guarantee Corporation is a wholly-owned subsidiary of RBI. It provides insurance to the depositors up to a limit of 5 lakh per account holder per bank. It works as a protection cover for bank deposit holders when the bank fails to pay its depositors. Basically, it is like RBI saying to the depositors, ‘Hey, if shit hits the fan. We cover you up to 5 Lacs’. Both Equitas and AU bank are covered under DICGC.
Equitas Small Finance Bank interest rate
AU Bank interest rate
Risk category: Higher Risk than FDs
The names we are going to discuss bear some risk and can even lead to capital loss. You have to be very choosy here. There is no capital protection in this instrument. Please check with your financial advisor before investing in these instruments.
7. High rated Corporate Bonds
Many private companies and NBFCs will raise money from the markets by issuing Debentures, Commercial papers, etc. Based on the risk profile of the company, they trade anywhere between 6.5% to 8.5% or more, depending on the liquidity and financial situation of the company.
A word of caution:
Dealing with corporate bonds is tricky. The underlying company may look great from the outside. But the cockroaches can only be found if we look deeper. Debt markets are always a lead indicator for what the company is going through. If the bonds of a particular company are trading at an exorbitant yield, it would be better for retail investors to stay away from it.
8. INVITs and REITs
In recent times InvITs and REITs have gained popularity among investors. They offer retail investors the opportunity to invest in alternate asset classes like Real Estate, Power Plants, Roads, etc.
They are a mix of both Debt & Equity. The regularity of dividend payments gives it a touch of a debt instrument. At the same time, the unitholder participates in the company’s growth trajectory, much like an Equity investor.
There are 3 INVITs and 3 REITs listed in India. The Dividend Yield is in the range of 5.4% to 8.5% for different companies.
It is time to look for alternatives. At the same time, we shouldn’t compromise on RISK. These instruments provide you with:
Regular interest payments
Sovereign & PSU credit rating
Relatively better interest
Investments offering better returns than FDs
Data as of Apr 6th, 2022
PMVVY
Sovereign Risk
7.66%
10 years
Senior Citizens
G-Secs
Sovereign Risk
6% to 7.2%
3 months to 40 years
Everyone who is looking to have regular cash flows and build long term debt portfolio
RBI Bonds
Sovereign Risk
7.15%
7 years
Everyone who is looking to have regular cash flows and build long term debt portfolio
SCSS
Sovereign Risk
7.40%
8 years
Senior Citizens
PSU Tax Free Bonds
Low Risk
4% to 4.8%
depends on the bond
Everyone who is looking to build long term debt portfolio
Corporate Bonds
Some Risk
6% to 10%
depends on the company & the bond
Everyone who is looking to build long term debt portfolio
InvITs / REITs
Some Risk
5.2% to 8.4%
depends on the performance of investee companies
Everyone who has a higher risk appetite to invest in risky debt for better yields
Equitas SFB / AU Bank Savings account
Low Risk (up to 5 Lacs)
7%
No fixed tenure. However, the interest rate may change in the future.
Someone who wants to park t
This post is for informational purposes only. Before investing in any of the above mentioned products, check with your financial adviser about their suitability for your needs.
This article was originally published in LiveMint. Click here to read it.
Jim Collins in his best-selling book ‘Good to Great’, shares an interesting counter-intuitive insight which he refers to as ‘The Stockdale Paradox’.
This is named after Admiral James Stockdale, one of the most decorated US Navy officers, who was also awarded the Medal of Honor in the Vietnam War.
As a prisoner of war in Vietnam for 8 years from 1965 to 1973, Stockdale was tortured over 20 times, had no prisoner’s rights, no set release date, and no certainty of whether he would survive to see his family again. Despite all this ordeal, he survived, while many of his fellow prisoners did not.
How did he survive?
That is exactly what Collins asks Stockdale. “I never lost faith in the end of the story. I never doubted not only that I would get out, but also that I would prevail in the end and turn the experience into the defining event of my life, which in retrospect, I would not trade.”
Taking a few minutes to reflect, Collins probes further “Who didn’t make it out?”.
Stockdale had an unexpected response — “Oh, that’s easy. The optimists!”.
But didn’t he just say that you needed to have faith in the end of the story. Isn’t that how the optimists think?
Here is how Stockdale explains this inherent contradiction. “The optimists. Oh, they were the ones who said, ‘We’re going to be out by Christmas.’ And Christmas would come, and Christmas would go. Then they’d say, ‘We’re going to be out by Easter.’ And Easter would come, and Easter would go. And then Thanksgiving, and then it would be Christmas again. And they died of a broken heart.”
He then goes on to share a simple yet profound piece of advice. “This is a very important lesson. You must never confuse faith that you will prevail in the end — which you can never afford to lose — with the discipline to confront the most brutal facts of your current reality, whatever they might be.”
What a powerful lesson. While Stockdale had little to do with investing, this is exactly the ‘mindset’ that all of us as investors need to adopt.
The ability to stick to equities for the long run finally boils down to your faith that human progress, ingenuity and entrepreneurship will prevail in the end despite all the inevitable temporary setbacks. The recent invention of covid vaccines in record time is a humble reminder of our ability to innovate out of setbacks. We are simply betting that good entrepreneurs on aggregate will get rewarded with higher returns in the long run.
Justifying the faith, patient Indian equity investors have historically been rewarded with great long-term returns closely mirroring the underlying earnings growth of the companies.
So, the first key behavioural ingredient required for long-term equity investing is ‘faith in equities’.
As the legendary investor Peter Lynch says, “Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.“
Thesecond key behavioural ingredientrequired for long term investing — ‘Ability to Suffer in the Short Term’.
This will mean building adequate “room for error” via diversification (across asset classes, investment styles, sectors and geographies) to survive the short term while our long-term faith in entrepreneurs will help us stick to our plan patiently for a long enough period to benefit from the magic of compounding.
