Author: Sanjeev Govila

07 Jul 2020
Change Yourself Not Your Portfolio

Sometimes changing your behavior is more profitable than churning the portfolio!

The economy has taken a hard hit though the real impact is yet to be seen. As per RBI, India’s GDP will fall big-time! 

Many domestic and global agencies forecast the fall to be more than 5 per cent this year. The stock markets have sensed the downturn, falling almost 37 per cent in March this year. There has been some rebound but things are still pretty shaky.

Most of you are worried, and with good reason. You all have many valid questions: 

  • Should I exit my investments? 
  • Do I need to stop my SIPs? 
  • Should I change my asset mix? 
  • What should I do with my portfolio? 
  • What should I do??? 

Some change is needed, but not in your portfolio! See below.

What should I do? 

Yes, the situation is tense and may even worsen. But you as an investor have to follow a simple approach.

1. Differentiate between risk and loss: If you have long-term goals, then stay invested in the market. Don’t let the current market conditions deter you or spook you. Stay put. Don’t exit the market. If you get scared and actually sell your mutual fund (MF) units at lower NAV (net asset value) than your purchase price, you will lose money for real. A lower NAV is only a notional loss – don’t turn it to a real loss by selling.

As an investor try to differentiate between two things: being risk averse and being loss averse. Most equity investors are not risk averse; otherwise they wouldn’t invest in equities in the first place. But most of us are loss averse, which is what compels us to exit even our good investments at the wrong time.

Our tendency to be loss averse leads to another mistake. Many fail to invest in the equity market when the market is down or falling. Instead, they want to exit and mostly, move that money to fixed income avenues. Avoid making this mistake.

2. The right strategy always works: No matter what the market conditions are, an important rule of investment is patience. Often, ‘buy it, shut it, forget it’ (a la that famous Hero Honda advt…) is what works best. The way to wealth creation and achieving goals is to have the right investment strategy and process in place along with the ability to hold on for the long term.

One needs to change the attitude of chasing markets and returns. As an investor you know that equity is a must for long-term goals. You are aware that equity has given better returns even after adjusting for inflation over different time horizons and market conditions. Then why be averse to equity now? 

In fact, when the market falls, valuations become attractive and offer opportunities to fund managers to pick up more in the right companies and sectors thus averaging out the costs. So, leave your worries and let your fund managers deal with the situation.

3. Right time to react: As an investor, your role is to simply stick to your goals and the asset allocation of your portfolio. Of course, you need to take out time and go through the reviews and changes that your adviser suggests in your portfolio. Non-performers have to go out in your Six-monthly portfolio reviews and be replaced with more suitable funds or assets.

Please remember – Reviewing a portfolio is different from reacting to the stock market every time it goes up 1,000 points or loses 1,500 points in a few sessions. The latter is a knee-jerk reaction and does more harm than good. 

Instead of timing the market, build a comprehensive portfolio or a strategy for the long term and then stay the course. 

Time in the market is more important than timing the market!! 

20 Mar 2019
My equity investments are in losses, what should I do?

My equity investments are in losses, what should I do?

When the markets are going down, the value of people’s market related investments like stocks, equity mutual funds and ULIPs also go down. This has probably been the case for most investors who started investing within the last 2 years and now see their investments in the red after the markets started their downturn sometime in 2018.
So why have the such investments been disappointing lately and what should an investor do now? We’ll explain with the example of equity mutual funds.

Markets work in cycles

The answer, of course, is to deal with volatility. Over a period of 5 or 6 years, the returns are often great but the variability is high. In any given short period, you could face poor returns, or even losses. There’s another way to look at it. The equity markets move in cycles, and often it takes five to seven years to go through a full cycle of steep rise, fall, stagnation and back. To get the right level of returns, we need to invest through the whole cycle. That won’t happen in a year or even two.

There’s yet another way of looking at it, which was the subject of a study conducted by Value Research about a couple of years ago. It was found that on an average, if one invests through an SIP (Systematic Investment Plan) over four years, then the risk of a loss is negligible. For a typical fund with a multi-decade history, over all possible one year periods, the maximum returns were 160% and the minimum -57%. Over two years, it became 82% and -34%. Over three, 63% and -18%. Over five, 54% and 4%, meaning never any loss. Over ten years, the maximum is 30% and the minimum 13%. These are all annualized figures. The trade-off is absolutely clear – the shorter the period, the higher the potential gain but the worse the possible risk. This evidence squarely puts long-term at five years and above.

Don’t panic and redeem

Many investors actually buy when the markets are performing well, the prices are high and euphoria is even higher and quickly sell after panicking when the markets go down. One shouldn’t take his money out from equity mutual funds the moment he sees the markets go down. This is down to a few reasons:

  • Equity mutual funds that are redeemed before a year attract exit-loads of 1% in most cases.
  • Even after that, Long Term Capital Gains (LTCG) may be applicable if the interest earned is more than Rs 1 Lakh.
  • It should also be noted that the perceived loss when the markets go down is only notional. One should not convert notional loss into a real loss by redeeming his investments.

To illustrate this point further, here are a few instances from the past 15 years when the markets went down.

In each of these instances, the market – especially the small and mid-cap segment- fell by a large percentage within the span of just a few months. However, these are only specific periods of decline. When we put the entire 15 year performance on a graph, we get this:

Here, it can be clearly seen that even though there might be certain periods of downward performance, the general trend of the market remains upwards. While the market will go through its ups and downs, if you stay invested in it for the long run, you will generate higher and inflation-beating returns.

Perfect opportunity to buy

The best part is yet to come though. The downturns are not periods when one should just hold tight, sit back and wait it out. These are periods when the market is trading at a discount than what its value was before the downturn started. This presents you with the opportunity to buy more units of the same security at a lower price which means that when the markets eventually go up, you earn a higher return than if you had just waited it out and done nothing.

This is precisely why we recommend investing through the SIP route. By investing regularly, one buys more units at a lower NAV when such a fall occurs, thereby bringing down his/her average cost which eventually earns him/her a higher return.

So, to answer the earlier question, the returns from equity mutual funds have been disappointing lately in large part because that is the nature of markets. The only thing that a wise investor should do in such a scenario is to continue investing and wait it out. Given a long enough time-frame, such a strategy is bound to produce healthy and inflation-beating returns.

21 Jan 2019
Financial Question And Answer

Do these financial googlies worry you too as an Armed Forces Officer?-4

Q&A at talks on Financial Management given by CEO, Hum Fauji Initiatives, to Higher Command Course at Mhow and Armed Forces Program Officers at IIM, Indore on 9th Jan 2019

Our CEO, Col Sanjeev Govila (retd), had been invited to give a talk on ‘Personal Financial Management for Indian Army Officers’ to the students of Higher Command Wing, Army War College, Mhow. He also gave a talk to approx 35 officers undergoing the ‘Armed Forces Program’ (AFP) at IIM, Indore the same day. The talks were well appreciated at both the places and the Question & Answer (Q&A) Sessions at both the places far exceeded the time allotted.

Some of the questions asked, of common interest to serving and/or retired armed forces officers, are summarised below. Due to the sheer large number of questions asked, this will be given out as a series of 4 parts over next 8 days. This one is the last part of the 4 parts, previous part of series can be checked here.

Q. How much retirement corpus and pension am I going to get when I retire?
A. As on today, a Col retiring at the age of 54 years gets about Rs 55 Lakhs as the retirement corpus + his DSOPF accumulation, assuming he does not commute any pension. The pension received will be about Rs 1.15 Lakhs per month. If he commutes 50%, he will get an additional Rs 55 Lakhs or so and his pension comes down to about Rs 63,000 per month. Please remember that these are very broad ballpark figures, would vary slightly depending on your rank and years of service and would vary more if one is retiring as a Doctor since the NPA forms part of the basic salary.

Q. Is it good to go in for a property as an investment with a part of the retirement corpus since the property prices are quite depressed right now?
A. First thing to remember is that the old structure is changing in the country. Old-time ‘physical’ assets like real estate and Gold have not performed for a long time and may not do so for quite some time to come. Secondly, ‘financial’ assets are becoming more prominent since they have better liquidity and returns now, and hence, are able to meet our enhanced life-styles and requirements better.

Real estate in India thrived on black money resulting in the property prices zooming up to unsustainable, artificial highs. With a sustained clampdown on the black economy, property as an asset class has floundered. To top it, there is a huge demand-supply gap which has built up all across the country and it is estimated that in most of the major metros, next five years’ residential property demand is ready and waiting for buyers while new supply further keeps added to it. This is not what a good investment avenue should be like. Investing life-time savings into such an avenue is not recommended.

Q. Should serving or retired armed forces officers go in for National Pension Scheme (NPS) since it gives an additional tax rebate for Rs 50,000?
A. NPS is a retirement product which is designed to give monthly pension from 60 years of age. Hence, treat it as such – the additional tax saving on contribution of Rs 50,000 per year in NPS is just the icing on the cake, and should not become the cake itself. In NPS, investment is made till the age of 60 years.  The contributions are invested in a suitable combination of asset classes, primarily Equity, Government bonds, and Corporate bonds. NPS has some drawbacks as below:
· Liquidity is an important facet of any investment. In NPS, you will not be able to withdraw until the age of 60 years except in special circumstances. Hence, treat NPS as a true blue retirement product and do not confuse it with an investment product or your PF equivalent.
· You can withdraw up to 60% of the lump sum accumulated at the age of 60 years tax-free. Balance money is locked up for life to give you pension (called Annuity here). The pension is fully taxable when it starts.
· The worrying clause is that the Annuity has to be taken from a life insurance company. Annuities are high-cost, low-return products of life insurance companies.
· While much is made of the very low fund management charge, there are multi-level charges at various offices and levels of the NPS system, the cumulative effect of which make the NPS a more expensive system than it appears at first glance. And over the years, these costs have been slowly and steadily going up.

Just because NPS contributions are eligible for income tax deduction initially, does not make it an attractive investment avenue. While selecting any investment avenue, three things need to be analysed – safety, liquidity & returns. Assess yourself if you need NPS in light of the facts brought out above. If you are not likely to have any pension after your retirement, then NPS is one of the best products to have in your portfolio for retirement purpose if you do not much understand markets and want a hassle-free product. However, if you are slightly market savvy, a portfolio consisting of mutual funds along with an ELSS (Equity Linked Savings Scheme) or the Retirement Schemes of the Mutual Funds can better meet your retirement needs with more flexibility in terms of investment and withdrawal, better taxation and good returns.
Please also see the series of articles on this issue on our website on the link

Q. I have about Rs 30 Lakhs in DSOPF, am subscribing Rs 60,000 per month further and putting about Rs 20,000 in Mutual Funds (MFs) as SIPs. I have put in about 18 years of service and have another 14 years to retire in the current rank of Col. Is my subscription level for DSOPF and MFs correct or needs to be changed?
A. You have a long time to go before retirement and already have a large DSOPF accumulation. While DSOPF is a hassle-free simple investment product, the returns, in spite of the tax-free status, are just slightly above the inflation level. Taking DSOPF returns to be average 8% and inflation to be average 7%, you get ‘net real’ returns of just 1% per annum. Hence, it is important to diversify into higher yielding instruments. A largely equity Mutual Fund portfolio which balances your pure debt DSOPF Fund is required so that you get better ‘real’ rate of returns. While you are already doing that with your SIPs to some extent, the contribution to SIPs is very less compared to your DSOPF monthly subscription. We would recommend you at least an equal contribution of Rs 40,000 per month in each, DSOPF and a carefully-prepared and well-monitored MF portfolio with a predominantly equity bias due to your age and the fact that you already have Rs 30 Lakhs in DSOPF.