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Look at your Mutual Fund Portfolio and think how you came about having this particular composition. Did you, like most people pick up a top performing fund every time you decided to invest or did you get a set of funds from a Mutual Fund Distributor or a Robo-advisor? Are you satisfied with the results so far? More importantly, how do you know that your current portfolio will not disappoint you if you held it for the next 3 years? And if you are currently investing through SIP, should you continue in exactly this set of funds or is something not quite right?

It’s healthy to have these doubts and seek answers. Only a naïve investor avoids asking these questions but then he doesn’t remain an investor for too long- most exit when their portfolio corrects.

Fund Portfolio Analysis Tool

Now, you have a tool to find the answer to your question-will your mutual fund portfolio disappoint you or make you happy?  We call this the Sher ya Billi Tool. It’s like going for a walk in the woods and finding a small orange coloured baby of the cat family. It looks feisty, but you can’t quite figure out whether it is a cub or a kitten-Sher hai ya Billi?

Investing is about the likely future performance and hence not certain, nor is it likely to repeat the past. We must therefore look for the tell-tale signs that indicate to us that we indeed have a strong portfolio that can withstand the uncertain times, the tough times that the future will bring? And if not make the necessary changes now rather than wait and be disappointed later. The Sher-ya-Billi Tool helps you know the important risks in your mutual fund portfolio-the ones that could and probably will adversely impact your portfolio’s performance.

Fund Manager Risk:

Investing in one or two mutual funds exposes you to the risk called the Fund Manager Risk. The fund can underperform for one of these 3 reasons 1) His investing style underperforming in the market situation (A single strategy cannot outperform the market all the time) 2) an error of judgement or 3) his moving out of that job/role and his replacement’s investing style or competence is not the same.  If this happens you are likely to see a huge loss on your portfolio at the time the fund underperforms. And at such a time even the best of us incorrectly redeem our MF investments.

Over-diversification:

This risk arises from having invested in too many mutual funds. Many investors falsely believe the more the number of funds, more the diversification and hence it’s better. Diversification reduces risk, but beyond a point, adding more funds to a portfolio, does not serve the purpose of reducing risk but rather lowers the returns.

Portfolio Quality:

Most investors incorrectly think that they’re not taking any risks when investing in MFs. The fact is that you are taking on all the risks that the fund manager has taken when building the portfolio. In the rush to be the top performing fund, has your fund manager taken more risk that you can handle? And do you have a large exposure to funds with a risky portfolio? If so, you need make corrections to avoid being disappointed.

False diversification:

You might be at ease thinking that you have sufficiently diversified your MF portfolio by investing in 5-6 funds. However, this might not be the case. You may be holding funds that have similar portfolios and hence you may not be well-diversified. This exposes you to the risk of a sharp correction in your portfolio should some stocks/sectors under-perform.

Low returns:

There are no guarantees of great/good returns by investing in MFs. After all they are subjected to Market Risks. What if you are currently holding funds that have a very large proportion of stocks that are highly over-priced? You are very likely to earn low returns on your MF investments, period. In fact, some funds can give you less than FD/Debt Fund returns. Eventually, the market prices stocks close to the real worth, and when all the irrational exuberance is over markets could hover around this for a long time.  You need to ensure you are not overloaded with funds that have a low upside potential.

Check if your mutual fund portfolio is good enough to hold onto or do you need to make changes. Use the Sher-ya-Billi Tool now. Make sure you are investing in mutual funds the Sahi way.

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MoneyWorks4ME by Team-moneyworks4me - 1w ago
Review

Nifty Total Return Index (Nifty including dividends) earned 8.5% Year to date 2019 and ~16% CAGR in last 3 years. FIIs under-own Emerging Market Equity due to poor performance of Emerging Markets in last 5-10 years. We saw increased interest in EM due to i) Cheaper valuation (except India) ii) Fed’s signal to not hikes interest rate leading to Risk ON behaviour iii) Slowing down of Developed market growth after long bull market. India too saw increase in FII interest. Most of the stocks that rallied were either beaten down or index heavyweights like Banks. Some undervalued stocks have also moved up thereby reducing number of investment opportunities. Due to narrow rally in select stocks led to all advisors and MFs underperforming headline index, Nifty 50.

Outlook

As on date, average upside of our coverage universe is likely to be ~8.5% CAGR over next 3 years. Given quality companies are trading at steep price multiples & our coverage mostly has quality companies, expensive valuation is getting reflected in poor upside potential too.

We are seeing rise in stock prices of already performing stocks due to better predictability in earnings and quality. We believe no stock is so great that no price is too high. We believe it’s much safer (relatively) to invest in stocks that are priced favourably for reasonable upside.

Howard Marks, a renowned investor, describes a good thought process on how to think while buying stocks. He says that most investors apply first level thinking while making decisions. First level think is simplistic and superficial; it doesn’t involve analysing a situation in-depth to reach any conclusion. Second level thinking, on the other hand, is more detailed and convoluted. It involves understanding that asset prices already reflect expectations of other investors in the market. Following the same opinion would not result into superior results. One has to think differently to earn superior returns. For example:

First level thinking says, “It’s a good company; let’s buy the stock.” Second level thinking says, “It’s a good company; but everyone knows it’s a good company and stock is probably overpriced; let’s sell the stock.”

First level thinking says, “The outlook calls for low growth and rising inflation; let’s sell the stock.” Second level thinking says, “The outlook stinks; but everyone is selling in panic and the stock may have become underpriced; let’s buy the stock.”

We believe that last 10 years belonged non-cyclical companies who exhibited linear growth rates. Also, some stocks that showed non-cyclicality despite being part of cyclical sectors, saw massive outperformance versus their peers. Our expectation is that there will be “reverse to the mean” in stock prices that have run up a lot versus their earnings growth.

Some pockets of the market didn’t see any meaningful returns over last 4-5 years, rightly so due to lack of earnings growth. We may see these stocks earning reasonable returns over 3 years and/or may not correct as much in near future. Select asset based companies provide reasonable upside albeit with moderate to high risk. Investor must consider investing in Infra & Infra-related companies through stocks or funds for medium term. Some of the Auto stocks have seen deep cuts and trading at low valuation multiples versus last 5 years.

Risks

Major risk is slowdown in GDP growth and even consumption volumes numbers. Even if long term growth trajectory may be intact, stocks can be very volatile due to high equity valuation.

Many cite elections result to be one of the risks. Equity returns are not dependent on which government comes to power, but it depends on earnings growth of businesses. We have seen Indian corporate earnings grow at 13-15% CAGR for past 30 years. Sensex has risen at more or less similar rate. This growth is more to do with underlying economy and entrepreneurial spirit of the nation. We believe that going forward as well, young population, under-penetration in several sectors, under-investment in infrastructure would provide ample opportunities for the companies to grow. This will get reflected in rise in stock prices as well.

Elections result, although not a fundamental reason, can only increase volatility of stocks in short term. Those who are avoiding equity because of uncertainty over which government comes to the power, must avoid sectors that have high government influence, rather than avoiding equity investing. This will reduce fear of unexpected outcome of elections. For the rest of you, Elections result is nothing but just another event that may lead stocks to move up and down. Even UK referendum of Brexit, North Korea Nuclear threat shaked investors’ confidence in India, but it staged a smart recovery in matter of months. Volatility in stocks must be embraced rather than getting scared of.

We want stocks to come down, not go up in hurry. Stock prices going up is dependent on earning growth, we cannot do much about it. What we can certainly do is buy more when stocks are trading cheap. This improves our returns for similar earning growth. A stock can grow only 15% if underlying business grows at 15% CAGR, but if bought cheap, a stock can earn more than 15% CAGR even if underlying business grows at same 15% CAGR.

If you liked what you read and would like to put it in to practice Register at MoneyWorks4me.com. You will get amazing FREE features that will enable you to invest in Stocks and Mutual Funds the right way.

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The post April 2019: MoneyWorks4me Outlook appeared first on Investment Shastra.

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MoneyWorks4ME by Team-moneyworks4me - 1M ago
Review

Nifty Total Return Index (Nifty including dividends) earned 8% Year to date 2019 and ~17% CAGR in last 3 years. March saw very high FII buying due to increased fears of recession in US and developed world. FIIs under-own Emerging Market Equity due to poor performance of Emerging Markets in last 5-10 years. Most of the stocks that rallied were either beaten down or index heavyweights like Banks. Some undervalued stocks have also moved up thereby reducing number of investment opportunities.

Outlook

As on date, average upside of our coverage universe is likely to be ~8% CAGR over next 3 years. Given quality companies are trading at steep price multiples & our coverage mostly has quality companies, expensive valuation is getting reflected in poor upside potential too.

We continue to remain cautious except for select opportunities where we find downside risk is low. There are times in the market when protecting downside becomes more important that earning higher returns. As soon as we see increase in upside potential in coverage universe, we will get more aggressive and try to remain fully invested in opportunities with higher upside.

Investors and brokers are excited that favourable new government could take the stocks higher just like in 2014. Investors are awaiting large jump in earnings of companies. Nifty/Sensex valuation continues to remain at 20-22x earnings. But there is no visibility on growth.  We believe that on the contrary, stocks do not have room to scale higher. They are already trading at very high valuations. Even if we remain positive on economy and companies over long term, current upside is lower than long term average returns of equities i.e. 13-15% CAGR. We can’t predict any type of market correction but we can certainly won’t give a big BUY call like we did in 2013-14.

Based on today’s valuation, we are very good upside in Pharma, select utilities, NBFCs, corporate banks and Autos. As on date, our recommended stocks are likely to earn 13-15% CAGR versus current Nifty upside of around 8-9% CAGR over three years. Our average company earns ROC of 15-18%+ versus average Nifty company with ROC of 12-14%. Since there are not many quality companies providing higher upside potential we suggest parking uninvested amount in liquid funds and wait for our BUY signals. For those who have more than 30-40% in cash, you can also consider “Close to Buy Zone” list to accumulate those stocks slowly.

Select asset based companies provide reasonable upside albeit with moderate to high risk. Investor must consider investing in Infra & Infra-related companies through stocks or funds for medium term. Some of the Auto stocks have seen deep cuts and trading at low valuation multiples versus last 5 years.

Risks

In month of February, we saw Pulwama attacks and Indian Government’s response to that. Initially, it appeared that it would lead to war like situation but now things are normalizing. We believe this risk though present, is not very significant for market as of now.

Major risk is now coming from slowdown in GDP growth and auto sales numbers. Even if long term growth trajectory may be intact, near term volatility could be high due to high equity valuation. Few pockets continue to remain expensive and remain vulnerable to steeper correction. We may see poor returns on the index levels. The gap between quality growth stocks and rest of the market has widened more than in the past. This is due to high liquidity finding its way into only quality stocks irrespective of valuation. This could trigger a reversion to mean at some point of time in future. Buying stocks below fair value is the most reliable way to profit in market. We stick to our process in every market cycle.

Excerpts from the book “The Most Important Thing” by Howard Marks

Consider the possible routes to investment profit:

  • Benefiting from a rise in the asset’s intrinsic value. The problem is that increases in value are hard to predict accurately. Further, the conventional view of the potential for increase is usually baked into the asset’s price, meaning that unless your view is different from the consensus and superior, it’s likely you’re already paying for the potential improvement.
  • Applying leverage. Here the problem is that using leverage—buying with borrowed money—doesn’t make anything a better investment or increase the probability of gains. It merely magnifies whatever gains or losses may materialize. And it introduces the risk of ruin if a portfolio fails to satisfy a contractual value test and lenders can demand their money back at a time when prices and illiquidity are depressed. Over the years leverage has been associated with high returns, but also with the most spectacular meltdowns and crashes.
  • Selling for more than your asset’s worth. Everyone hopes a buyer will come along who’s willing to overpay for what they have for sale. But certainly the hoped-for arrival of this sucker can’t be counted on. Unlike having an underpriced asset move to its fair value, expecting appreciation on the part of a fairly priced or overpriced asset requires irrationality on the part of buyers that absolutely cannot be considered dependable.
  • Buying something for less than its value. In my opinion, this is what it’s all about—the most dependable way to make money. Buying at a discount from intrinsic value and having the asset’s price move toward its value doesn’t require serendipity; it just requires that market participants wake up to reality. When the market’s functioning properly, value exerts a magnetic pull on price. Buying at the right price is the hard part of the exercise. Once done correctly, time and other market participants take care of the rest. Of all the possible routes to investment profit, buying cheap is clearly the most reliable.

Even that, however, isn’t sure to work. You can be wrong about the current value. Or events can come along that reduce value. Or deterioration in attitudes or markets can make something sell even further below its value. Or the convergence of price and intrinsic value can take more time than you have; as John Maynard Keynes pointed out, “The market can remain irrational longer than you can remain solvent.”

Trying to buy below value isn’t infallible, but it’s the best chance we have.

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Dividends are nothing but your own money being returned to you. The fund’s NAV will fall immediately after announcing dividend, by an amount equal to dividend per unit.

Dividend option in equity plan is a losing proposition as compared to growth plan. Here’s why:

Dividend Plan: If a fund pays you Rs. 100 as dividend after Rs. 1000 becomes Rs. 1100, the net dividend to you after tax would be Rs. 90 and tax of Rs. 10

This is applicable for everyone not just for those who have more than Rs. 10 Lac in dividends.

Growth Plan: However, imagine you have growth plan, if you redeem Rs. 100 when fund NAV grows from Rs. 1000 to Rs. 1100, and you sell Rs. 100, your principal of Rs. 90.9 gets redeemed and capital gain of 10% on that i.e. Rs. 9.1. Tax will be charged on capital gain 10% of that is Rs. 0.9 versus dividend tax of Rs. 10 in above example.

But isn’t dividend plan better than growth plan in Debt funds?

NO.

Short term: Dividends in Debt funds pay dividend distribution tax (DDT) of 25%. Along with surcharge, the total DDT reaches roughly 28.33%. This is almost equal to marginal income tax rate of 30% in short term. In case of capital gains, short term capital gains on debt funds is paid at individual tax rate. Hence if you are a 30% slab investor, you will liable for similar tax  rate on growth and dividend plans. However if you are a 10% or 20% slab investor, you will incur lower tax rate on growth plan.

Long term: Even in long term i.e. more than 3 years, long term capital gains tax on debt funds, you pay 20% after indexation, regardless of your income tax slab. This is substantially lower than dividend distribution tax at 29%. Hence, growth plan must be preferred.

What if I want regular income from my investments?

Since many investors rely on monthly/yearly dividends for personal consumption, it is wiser to opt for Growth Plan and sign up Monthly Systematic Withdrawal Plan rather than Dividend Plan. This works in reverse fashion of Systematic Investment Plan (SIP). Every month you will receive fixed number of value.

If you liked what you read and would like to put it in to practice Register at MoneyWorks4me.com. You will get amazing FREE features that will enable you to invest in Stocks and Mutual Funds the right way.

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The post Mutual Funds: Growth Plan is always better than Dividend Plan appeared first on Investment Shastra.

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What is Nifty@MRP?

As investors, we constantly track the Nifty movements. To make investing more profitable and not a game of mere chance, we need a solution, a solution which could help us identify whether the market is grossly depressed or irrationally exuberant. This is exactly what Nifty @ MRP is for!

What is the latest value of Nifty@MRP?

For Q3 2019, considering the free float market capitalization and the MRP of individual stocks as of 05th March 2019, the Nifty@MRP is at 10130. On the day of writing 05/03/2019, Nifty closing index value is 10,987.45, which implies 8.5% overvaluation.

Future Outlook

The markets have remained subdued in 2018. Global equities have declined 10.4% (worst performance since 2008), while emerging markets declined by 16.6%, mainly due to concerns on impact of the US trade war with China. Among emerging markets, Brazil and India outperformed on a relative basis. The US was the best performing market amongst developed markets.

The same headwinds also led to weakening FII sentiment. Indian equities witnessed six consecutive years of FII inflow worth US$ 75 billion. With emerging markets witnessed a generalized sell-off pressure in 2018, India too witnessed a marginal outflow of US$ 4.4 billion in 2018. Domestic institutional investors, on the other hand, continued to pump in money for the fourth straight year (US$ 16 billion).

2019 is seeing some weakening in Indian macro catalyzed slowdown in public expenditures and translating into weakening FII sentiments and external account, depreciating rupee, and rising interest rates. Fuel and core inflation ticked up but ultra-low food prices kept the overall inflation under check. At the same time, GST collections didn’t witness the desired buoyancy. The banking system liquidity turned from surplus to deficit. Looking ahead, it appears unlikely that there will be a big revival or turnaround in 2019.

MoneyWorks4me Opinion

Although our Nifty@MRP doesn’t imply large overvaluation, but select 15-20 stocks are quite overvalued while rest of the Nifty stocks are trading at reasonable to undervalued levels. Overvalued stocks are forming higher weight in Nifty and hence even if one invests in Nifty, he will end up allocating more to overvalued stocks and not undervalued ones as they have become smaller. We believe stock picking will work well over next 1-2 years over index fund and hence recommend active investing via stocks or mutual funds over passive investing.

We expect the corporate utilization to normalize and investment cycle to pick up in FY 2020-21. Corporates are in a better shape to undertake capital spending given improved interest and leverage coverage ratios. Banks are also better placed to lend now.

The de-rating of equities in 2018, sluggish macro, erratic earnings recovery, and fall in liquidity should help us get good bargains in 2019. Elections, global geopolitical risks may keep intra-year volatility high in equities.

Based on valuations, we feel asset based business like Infra & infra related companies, Autos and Ancillaries, Oil & Gas provide good investment opportunities in this year. We are participating in these sectors either via stocks or mutual funds.

Also, NPA resolutions should help corporate banks to continue to out-perform. However, NBFC’s may continue to face pressure on margins and growth. Also, the over-valuation in the consumer sector make it unlikely for consumer stocks to perform over next few years.

We advise our investors to take advantage of these investment opportunities in 2019 and invest in our recommendations for good portfolio returns.

If you liked what you read and would like to put it in to practice Register at MoneyWorks4me.com. You will get amazing FREE features that will enable you to invest in Stocks and Mutual Funds the right way.

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MoneyWorks4ME by Team-moneyworks4me - 2M ago
Review

Nifty Total Return Index (Nifty including dividends) earned 0% Year to date 2019 and ~15% CAGR in last 3 years. Although Nifty value is at same level as 16 months ago, less than 15% stocks listed on NSE have made any positive return. Barring banks, IT and select FMCG, most of the stocks gave negative returns and currently trading at fair to undervalued prices. This year has been tough for investors as well as advisor as they couldn’t dodge steep losses in some of the stocks in the portfolio. At an index level, mid and small cap indices have fallen harder than large cap.

Outlook

As on date, average upside of our coverage universe is likely to be ~9% CAGR over next 3 years. Given quality companies are trading at steep price multiples & our coverage mostly has quality companies, expensive valuation is getting reflected in poor upside potential too.

We continue to remain cautious except for select opportunities where we find downside risk is low. There are times in the market when protecting downside becomes more important that earning higher returns. As soon as we see increase in upside potential in coverage universe, we will get more aggressive and try to remain fully invested in opportunities with higher upside.

Based on today’s valuation, we are very good upside in Pharma, select utilities, NBFCs, corporate banks and Autos. As on date, our recommended stocks are likely to earn 13-15% CAGR versus current Nifty upside of around 8-9% CAGR over three years. Our average company earns ROC of 15-18%+ versus average Nifty company with ROC of 12-14%. Since there are not many quality companies providing higher upside potential we suggest parking uninvested amount in liquid funds and wait for our BUY signals. You can also consider “Close to Buy Zone” list to accumulate those stocks.

FMCG is getting more than necessary valuation boost due to uncertainty of growth in other sectors. This is due to i) Better Corp Governance sought by FII; ii) Better dividend yield; iii) stable profitability even if growth rates are low. MFs do not own FMCG heavily, it is over-owned by the FIIs. Sales growth is mediocre and profit margin expansion is not a sustainable growth. There are limits on cost savings and fall in working capital. We suggest caution in FMCG and consumer space. Though these are one of “the best companies” to own from long term perspective, acquiring them at overvalued prices would make them “the worst investments”.

Investors are awaiting large jump in earnings of companies. Nifty/Sensex valuation continues to remain at 20-22x earnings. But there is no visibility on growth. IT and Pharma are growing at single digits. FMCG growth rates could come down as kicker from profit margin expansion goes away. Autos are likely to experience single digit to flat growth. We find it difficult to justify high valuation for the overall market. Asset based companies provide reasonable upside albeit with moderate to high risk. Investor must consider investing in Infra & Infra-related companies for medium term.

Risks

In month of February, we saw Pulwama attacks and Indian Government’s response to that. Initially, it appeared that it would lead to war like situation but now things are normalizing. We believe this risk though present, is not very significant for market as of now.

Major risk is now coming from slowdown in GDP growth and auto sales numbers. Even if long term growth trajectory may be intact, near term volatility could be high due to high equity valuation. Few pockets continue to remain expensive and remain vulnerable to steeper correction. Some of the Auto stocks have seen deep cuts and trading at low valuation multiples versus last 5 years.

If you liked what you read and would like to put it in to practice Register at MoneyWorks4me.com. You will get amazing FREE features that will enable you to invest in Stocks and Mutual Funds the right way.

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MoneyWorks4ME by Team-moneyworks4me - 2M ago

Passive investing is picking up pace in developing markets. Passive funds follow a strategy of tracking a particular index performance or a factor like quality, value, etc. In developed markets like US, passive funds currently account for 29 percent according to Moody’s.

Merits

The primary reason for rise in passive investing trend is cheaper way to earn an index return than it is to employ portfolio managers with the skills to outperform the index return. The second reason is performance by majority of the fund managers is very poor in beating the index even over longer periods.

In India as well, an active mutual fund costs 1-1.5% per annum in expense ratio versus an index fund that charges 0.1-0.3% per annum. Recent S&P SPIVA report indicates that only 37.22% active Large Cap funds have managed to beat Large Cap Index BSE 100 over a 10 year period. Also, only 50% of active Mid and Small cap funds have managed to beat BSE400 MidSmall Cap Index in same time period.

The reason for this underperformance is:

i) MFs AUM size has substantially increased as a % of free float Market capitalization to construct very different portfolio than the market;

ii) Expense ratio & turnover ratio (higher brokerage and impact costs) of MFs is very high which offsets excess returns generated by skill.

Demerits

Passive investment strategy selects stocks based on a particular criterion without any bias or insights from fund managers. This may lead to poor selection of stocks at times. Let’s take market weighted index for example, it invests more money in companies that are larger in size and less in smaller sized companies, irrespective of quality of the company or valuation of the company.

In bull markets, the pockets that are in bubble will have higher allocation and undervalued stocks will be pushed to much lower allocation. During correction, index can correct more and would take time to recover until these stocks are not moved out of index. This also means that index will take longer to recover from drawdown as opposed to active mutual funds who will exit stocks based on their assessment. (Eg. Jan’08- Dec’13).

Over 3-5 years at bull market peak, most mutual funds may end up earning very similar returns to an index fund; however, some funds with portfolio of only quality stocks and lower turnover & expense ratio will tend to stand out over time. They will have lower time to recovery from drawdown, ability to dodge overvalued space and accounting frauds and outperform over longer time period of 10-15 years. The comfort of being invested in quality stocks handpicked by managers after intense research is more comforting to park large retirement corpus versus investing based passive strategy, even if it means a portfolio of quality stocks underperforms sometimes.

We like Index funds for low cost, simplicity and discipline. Someone without an advisor can certainly consider Index fund to be core part of one’s portfolio. Recently, DSP mutual fund has come up DSP Nifty 50 index Fund, DSP Nifty Next 50 index fund. They are charging just 0.2% p.a. and 0.3% p.a. respectively. There are many other index funds from ICICI, HDFC, SBI, etc. that offer such low cost Nifty & Sensex Index funds.

There are some interesting passive funds available in the market like DSP Equal Nifty 50 Fund, Edelweiss ETF Nifty Quality 30 and R*Shares NV20 ETF. They follow a different process than market cap weighted index and have potential to make higher plain vanilla index funds. However, they are recently launched hence difficult to review their performance; hence deserve only a small allocation.

Index ETF and index funds are similar except that Index ETFs require demat account and incur brokerage costs but can be sold in the market immediately to buy other stocks. Index funds are better than ETFs if one is investing for long term.

Select active mutual funds with passive fund-like characteristics of following a single process and maintaining discipline are better options than index funds but it’s not necessary that every investor would have a temperament to stick along with the fund through its underperformance. One needs advisor’s help to understand pros and cons of every process before shortlisting funds. Currently, we recommend 3-5 active mutual funds following different process and hold them tight for long term. In diversified process portfolio, 1-2 funds will keep outperforming which will help our clients ride out underperformance in others rather than moving in and out of underperforming funds incurring unnecessary Exit loads and Long Term Capital Tax.

If you liked what you read and would like to put it in to practice Register at MoneyWorks4me.com. You will get amazing FREE features that will enable you to invest in Stocks and Mutual Funds the right way.

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MoneyWorks4ME by Team-moneyworks4me - 3M ago
Review

Nifty Total Return Index (TRI) (including dividends) was flat for Jan’19. IT and energy performed well and Media and Auto went south in last month.

Although Nifty TRI ended flat for the year, there were less than 15 stocks that made any positive return.

This has been a tough time for investors as well as advisors as no one could dodge losses in some of the stock in portfolio.

Outlook

As on date, our coverage universe of 170 stocks is likely to earn just ~8% CAGR over next 3 years. Some pockets of the markets have corrected from the peak, but the companies we like continue to remain expensive. We continue to remain cautious except for select opportunities from time to time.

Just to make sure that our opinion on valuation is not drastically different, we checked trailing Price-Earning Ratio of a Large index versus its own history. In above graph, one can see that Nifty is not cheap either.

At MoneyWorks4me, we focus on building a portfolio of stocks with higher upside and lower downside. After broadly classifying good quality companies, we don’t have any favourites. Whether Dr. Reddy’s or HUL, we will buy only those companies where we see more upside and lower downside based on valuation. Valuation doesn’t matter only in hindsight as people tend to see only winners who made good returns despite high starting valuation. Data suggests most companies with high starting valuation earn poor returns in long term.

Our current portfolio has return on equity of 15-18% and median valuation of 15-16x PE. Nifty currently trades at 22x consolidated PE ratio and return on equity of 15%.

Risks

In our previous note, we had highlighted two key risks –Loksabha elections and US Fed interest rate hikes. The latter risk has come down as Fed informed they will go slow on interest rate hikes in the interim.

One new risk that has emerged off late is from money market. IL&FS triggered fear of default in money market in Sept’18. Debt Mutual Funds, one of the largest investors in NBFCs, have seen huge fall in inflows as corporate/HNI investors have turned risk averse. This has put an end to access to new capital and roll over of debt for NBFCs.

One of the housing finance NBFCs has been making headlines lately. We had highlighted in our analyst note in August’17 that we do not prefer this particular NBFC due to risky nature of loans it extends. We are seeing that it is facing issues with debt rollover. It is forced to run down its portfolio. In desperation, it will have to give up on good quality loans and hold on to risky ones. Defaults in risky loans can threaten very existence of the company as it’s a leveraged business. We are not sure about severity of the issue but prima facie we believe it will have hard time coming out of this crisis. In view of these risks, we are advising to stay cautious on NBFC/leveraged businesses. Established business models and long execution track record of the management could be exceptions to this rule.

One of the recent news was with respect to Essel Group. Essel group operates in multiple businesses like broadcasting, entertainment, infrastructure, education, etc. Essel group is facing liquidity crunch to service the loan in their infrastructure business. Promoter’s stake in all of the group businesses is also attached as collateral for these loans. Most of the businesses are listed and in case of default, bankers may liquidate the pledged shares thereby causing sharp drop in group companies’ stock prices. We are not very worried about business fundamentals of Zee Entertainment Enterprises in the face of stock price volatility, but since Zee is a run by promoter’s family only, we need to monitor whether this business is getting adequate attention.

A second order effect of tighter liquidity is fall in asset purchases done against loans. We saw drop in 2W, 4W and CV volumes in previous quarter. We believe these issues are temporary; with some government and central bank intervention, this too shall pass. Despite good return ratios and long term growth potential, these stocks saw a sell off.

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The post January 2019: MoneyWorks4me Outlook appeared first on Investment Shastra.

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MoneyWorks4ME by Team-moneyworks4me - 3M ago

Since this was an interim Budget we must not assume all the announcements to materialize in exact form.

This budget, also labelled as election campaign, was to woo vote bank and reduce stress in real estate and SMEs.

Rural/Agri: Though Agriculture and allied contributes 17% to GDP, it employs 42% of the population directly and indirectly. Budget announced Rs. 6,000/year in minimum income scheme to marginal farmers (less than 2 hectares). Rather than considering this as free lunch, if farmers use it effectively to generate income from these funds can create ripple effects in long run. But we are sceptical if enough awareness will be created. From investors’ point of view, one must look at quantum of the package. Its whopping Rs. 70,000 Cr added in hands of rural population every year. This will reduce the severity of rural distress which India faces from time to time due to poor monsoon and food deflation.

While this may not materially add to consumption immediately, it removes a lot of uncertainty in minds of farmers and they would live and spend more freely going forward. We may see them increasing spends on education, healthcare, good farming equipment and fertilizers, etc as food and shelter would be taken care by minimum income plan. Positive for: Rural based companies like farm equipment, fertilizers and consumer staples.

SME: Exemptions in GST, attractive rebate on loans, reduction in frequency of GST filing for those upto Rs. 5 Cr sales are some of the positives. SMEs have been under stress due to i) slow growing economy, ii) Demonetization, iii) GST implementation and current liquidity crunch. The government has still not done enough to get SMEs out of pain. Many SMEs evading taxes deserve this pain but it has caused some contagion effects across the board. SMEs are not very strong to afford advance GST payments, accounting consultancy, etc. And bankers have turn risk averse to lend them temporary overdraft. Only economic uptick can get many SMEs out of their problems. Positive for: Banks with exposure to SMEs.

Individuals: No tax deducted at source on fixed income interest upto 40,000 and no taxes for salaries up to Rs. 6.5 Lac per annum are some of the positives. After seeing fall in savings rate from 9% in 2008-09 to just 7% in 2018, this will definitely add to consumption basket of individuals. In our opinion, the government could have increased exemption under 80C which would have encouraged more saving culture. Positive for: Consumer discretionary.

Real estate: The obvious victim of demonetization and liquid tightening is Real Estate. Although this sector is run by many shady operators, it employs a lot of population and accounts for bulk of nation’s wealth. Current relief on taxes on notional rent of unsold inventories, allowing to buy 2 properties from capital gains on 1 property and no tax on second self-occupied home are positives for real estate demand. We are hopeful that with current drive of affordable housing along with some tax relief could provide some fillip to prospects of real estate. Stability in real estate sector is very important for growth of economy as real estate value gives comfort to individuals and helps corporates to draw loans for business expansion. Positive for: Housing Finance NBFCs, select Real Estate companies.

There was no major announcement on our areas of interest – corporates and equity market. Overall, this budget may have improved NDA’s prospects for upcoming elections.

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The post INTERIM BUDGET 2019 appeared first on Investment Shastra.

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There are only handful of fund managers who have beaten an index for more than 10 years, in India and abroad. There are so many investment management courses and books to teach us how to get better at stock picking; but why is that there are limited number of people who have managed to earn respectable performance?

The answer is an “illusion of validity”.

The term “illusion of validity” was first introduced by Amos Tversky and Daniel Kahneman in a paper published in 1973. It describes the tendency to overrate our ability to make accurate predictions. This bias exists because of confirmation bias – the desire to find information that fits our prediction and the representativeness heuristic – predicting based on what how much this situation resembles other situations. This effect persists even when individuals are conscious of the objective limits in the predictive power of their data. For this reason, simple models are often more effective than expert opinions at accurately predicting outcomes.

Investors and analysts alike have the fallacy of illusion of validity. Based on available data, investors think they are capable to predict outcome of a particular event or future prospects of a company. Managers churn their portfolio several times over in 3 years span based on their short term view on multiple stocks. However, behavioural economists on several occasions have found that simple models/processes can beat the experts at the game. Even an index fund manages to beat their performance because it is based on a simple model.

In investing, it is very difficult to separate skills from luck. Anyone can build a 20 stock portfolio and beat market returns in short term. This is unlike other professions like dentistry or pastry chefs where skills are distinguishable from luck almost immediately. In investing, we will know about one’s skills only after several years of repeated success. Investing with him after 10 years of success can again be unreliable, as till then he/she may have lost the edge. We haven’t found many investors being able to pick winners one after another on consistent basis. One goof up can takeaway several years of stellar performance. In India, no fund has been remained a top performer on more than one occasion.

Luckily, investors today have access to a comprehensive solution. Research houses like Research Affiliates, AQR and O’shaughnessy Management have demonstrated that simple models constructed on certain key metrics like low price to book, low price to sales and price strength tend to beat index returns quite consistently with an occasionally lag. In our opinion, this is more reliable way to invest as we will stick to it because of evidence and risks of occasional underperformance are known in advance. We can diversify across couple of processes and sit tight. Many Indian investment managers are also following one or the other process, we are one of them. Mutual Funds with a process have remained in Top Quartile over any 10 year period; other funds come and go.

At MoneyWorks4me, we follow a process of buying companies that have earned high return on capital for long periods. It is likely that these companies enjoy narrow or wide competitive advantage to continue earning superior returns on capital in the future. We are careful to buy them when they are out of favour so that we can improve our chances to earn good absolute returns. This process was popularised by Warren Buffett, later practiced by Tweedy Browne, Gotham Asset and Sequoia Fund.

As anyone whoever follows a particular process must, we do not second guess what will happen in next year or next quarter. Also, we don’t expect every stock to turns out to be a winner; it will be known only in hindsight. Hence, we recommend holding a basket of them so that few disappointments do not affect portfolio returns. Handpicking companies within that basket based on available knowledge is nothing but fallacy of illusion of validity. We believe, over long term, process is more powerful than expertise. We like them for its repeatability and durability.

One may own all the processes, like we do in our Omega Product. Or one may stick to one process that suits his temperament.

If you liked what you read and would like to put it in to practice Register at MoneyWorks4me.com. You will get amazing FREE features that will enable you to invest in Stocks and Mutual Funds the right way.

Join our Telegram Channel:
Stock Investing
Mutual Fund Investing

Join our Telegram Channel:
Stock Investing
Mutual Fund Investing

Need help on Investing? And more….Puchho Befikar

Kyunki yeh paise ka mamala hai
Start Chat | Request a Callback | Call 020 6725 833 | WhatsApp 8055769463

The post Illusion of Validity and Power of Process appeared first on Investment Shastra.

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