Thursday, August 20, 2015

Double your money - LOL

Recently, I came across an advertisement by a real estate company highlighting 33.33% annualized return on investment in their property. The tagline read: “Why ______________ double your investment offer is the best investment option”. It showed a table comparing various avenues:
Comparison against investment options
Investment option
Average annual rate of return
No. of years required to double investment
Risk of investment
Double your investment offer
Equity / stocks
17% *
Mutual funds
Fixed deposits
* Average returns for investing in stocks over the last 3 year period. Risk involves price fluctuations and volatility
(The above table is reproduced from the advertisement that appeared in leading dailies)
What an offer! Looks mouthwatering!
A word of caution may be required here. (In fact, many words may be required).
Let us start with the fine print here. The advertisement has an asterisk (*) mark against the 17% shown in front of equity/stocks. The note below the table says “… Risk involves price fluctuations and volatility.”
“Volatility” of what? One may be referring to volatile prices or volatile returns. Incidentally, volatile returns are a result of volatile prices. And volatile prices and price fluctuations indicate the same thing.
Let us now come to the table. In the second column, average annual return numbers are mentioned for four different investment options. Whereas the returns in case of equity/stocks are the average for the last three years, there is no mention of where the same for mutual funds is taken from. The range of returns indicated here (8 – 10%) simply suggests that almost all mutual funds offer very similar returns, which further means there is only one category called mutual fund and there is no difference among various schemes of mutual funds.
Further in the second column, the “Double your investment offer” is expected to give 33.3% annualized return. 33.3% multiplied by 3 would give you 100% in 3 years – exactly what the advertisement claims. So far so good, but the moment you analyse the numbers in the third column, another error props out.
“Double your investment offer” doubles your money in 3 years and hence the returns are mentioned as 33.3%. In that case, if a fixed deposit doubles your money in 8 years, its returns should be mentioned as 12.5% and not 9% (12.5 X 8 = 100, whereas 9 X 8 = 72). This is where one can make out that the copywriter does not understand the difference between simple interest and compound interest. Or is it convenient to make the mistake here? If you use simple interest in one case, why should you use compound interest calculation in another, within the same table?
The final column is the most interesting – risk. What is the basis of concluding whether an investment carries high risk or low risk? Incidentally, if we look at the mutual fund row, once again the myth (that all mutual funds are the same) shouts loudly. How can the risk of all mutual funds be mentioned as “medium”? If that is the case, why did SEBI introduce the “Riskometer” recently?
What is the basis of mentioning that “Double your investment offer” is “low risk”? Is it because someone guarantees buy-back at double the price? Does it mean there is no price fluctuation since someone guarantees? If that is so, ever heard of “credit risk”? What if the guarantor cannot honour the guarantee? What if the guarantor does not?
Ok, ok, I know you would still be holding the property. Really? Or would you only be holding a property “under construction”?
Be careful. The money invested would be yours. It is always better to be prudent and not get swayed by advertisements that promise the moon. Someone has rightly said, “If it sounds too good to be true, it probably is.”
Exercise due diligence. Check all the claims made. Only after satisfying your doubts, go ahead an invest your money.
One more point: there are investment avenues and issuers that fall within the ambit of various regulations and there are some that do not. Real estate is one such area that does not have a regulator. In all such cases where a regulator does not exist, you got to be more careful.

Next chat on 25th August

Chat session on on 25th August at 4 PM

Monday, August 17, 2015

Are all rules of thumb trustworthy in personal finance?

Rules of thumb are approximations and one should not over rely on these rules. It is better to take a bit more cumbersome but accurate route. Read on ...

Are mutual fund expenses justified?

My article in Mid-day Gujarati

The English translation is as under:

“Expenses matter. They bring down your return on investments”. Someone argued. He continued, “That is why I buy stocks myself and do not invest through mutual funds.”
This person was referring to the expenses charged by the asset management company towards fund management and administration. His argument is right in a way: lower the expenses, higher the returns. However, this argument looks at only one side: the price, but ignores the other: the value.
Price and value are two sides of the same coin. You pay a price only if you are expecting to get enough value, and not otherwise. Between the two, while price is objective, value is subjective. Price may be the same for everyone, but the perceived value may differ from person to person and from situation to situation. For example, a sweater may cost the same, but offers a different value as per the season.
It is in this context that one should evaluate whether the expenses paid are high or low; justified or not.
So let us look at the expenses charged by various mutual fund schemes. Asset management companies take care of various functions, including management of funds and various other administration tasks, e.g. follow up on corporate actions like dividends, buy backs, bonus, rights, etc. There are teams that handle investor accounts and fund accounts. Trustees ensure that the AMC works in the best interests of the unit holders. Bankers and custodians handle the funds and securities, respectively. Fees for all these activities are paid out of the expenses charged to the fund. The total expenses also include the commission payable to the fund distributors for selling the fund to investors as per the suitability as well as for providing post-dales services.
Consider these tasks to be done yourself. If the cost still works out to be cheaper, one may consider avoiding mutual funds altogether.
Incidentally, in such discussions most investors make the mistake of ignoring the cost of their own time and efforts. Assigning value to these two is very difficult and subjective.
Any decision regarding the cost must be taken only after considering the benefits available for incurring the costs. One must also consider whether the benefits are relevant for one.
Sometimes cost saving may turn out to be the biggest virtue and sometimes it could be “penny wise, pound foolish”.
Happy investing!
-        Amit Trivedi

The author runs Karmayog Knowledge Academy. Recently, Amit has authored a book titled “Riding the Roller Coaster – Lessons from Financial Market Cycles We Repeatedly Forget”. The views expressed are his personal opinions.

Friday, August 7, 2015

Live chat on

I would be doing a live chat on, where questions regarding mutual funds and equity markets would be answered

Date: 10th August 2015
Time: 4 PM to 4:30 PM

Wednesday, August 5, 2015

An investment option for safety seeking investors

Article in Mid-day, Mumbai on 3rd August

The English translation is as below:

MIP – Monthly Income Plan – do not go by the name, there may not be monthly income, after all.
Among the various mutual fund products, there are some that invest in more than one asset categories. These schemes are known as hybrid schemes. One such hybrid category product is known as MIP or Monthly Income Plan. These schemes are predominantly debt funds with marginal allocation to equity. Whereas the debt component provides stability, equity has the potential to boost up the returns.
The objective of combining the two assets is to get the best out of the two as mentioned above. However, one needs to be more careful while considering investing in MIPs.
While in some of earlier articles we talked about the debt funds and equity funds separately, in a hybrid fund, one must check both the debt and equity portfolios.
The equity portfolio could be large-cap or mid-cap or multi-cap; concentrated in few stocks or well diversified. Normally the equity portfolio of MIP is diversified across sectors and market capitalization (or size of companies).
The debt portfolio could have different maturity papers (higher or lower interest rate risk); higher or lower credit quality of the debt papers. In most cases, the average maturity of the portfolio is not long, but not too short, either. Thus, the interest rate risk may not be too high. At the same time, even the credit profile of the portfolio is good in majority cases.
Another important thing one must check is the allocation between equity and debt. One could see many variations here. The equity component could be as low as 0% to as high as 35%. The debt component on the other hand would typically be more than 65%, and could go up to 100% of the portfolio. Higher allocation to equity increases the risk of price fluctuation. At the same time, the same has the potential to increase long term returns of the scheme.
While talking about the allocation between equity and debt, some schemes try tt maintain constant allocation between the two, whereas in some cases, the fund manager may want to have the flexibility to change the percentage allocation based on one’s view on the markets.
Having said that, let us go back to the statement made in the opening paragraph. Due to the equity component, and sometimes due to the debt component, too, the NAV of the fund may fluctuate such that no surplus may be available for payment of monthly dividends, occasionally. In such cases, the scheme may skip dividends for some months.
This does not mean the scheme is bad. It only means that some time the monthly dividend may not be available, especially in the initial period after the launch. However, once the scheme has built reserves, it has the potential to pay regular dividends.
Overall, an MIP is a good investment option for the conservative investors since:
1.     It is a stable portfolio
2.     The long term returns are more tax-efficient
3.     It has potential to deliver higher return than traditional fixed income products without significantly increasing the risks.
Make sure you make a wise choice.
Happy investing.
-        Amit Trivedi
The author runs Karmayog Knowledge Academy. Recently, Amit has authored a book titled “Riding the Roller Coaster – Lessons from Financial Market Cycles We Repeatedly Forget”. The views expressed are his personal opinions.