Category: Insurance

11 Nov 2022

Mutual Fund Investment: Are you a Do-it-Yourself investor by choice or by FOMO?

It is well known that most retail investors rarely ever make long-term wealth in stock markets due to their emotional, jerky responses to adverse situations which an experienced investor sees as an opportunity.

Investing in mutual funds to realize one’s long-term goals has already emerged as a popular investment option with retail investors. No wonder, SIP accounts stand at an all time high level of 5.39 crore in April 2022. While there are a variety of mutual fund schemes across asset classes, there is another variation in them.

All MF schemes, including equity and debt, offer two plans – Direct and Regular. In a Direct Plan, there is no intermediary to help you in completing the purchase and hence the expense ratio is low in them while in a Regular Plan, the investor invests through an intermediary such as a distributor, broker or a banker who is paid a distribution fee by the fund house, thus reflecting in a higher expense ratio compared to a Direct Plan.

Col Sanjeev Govila (retd), Certified Financial Planner, CEO, Hum Fauji Initiativesshares his perspective on these two investing modes with FE Online readers. Read on to get a grasp on some interesting data highlighting the importance of making the right choice while deciding between a Direct Plan and Regular Plan.

‘What? Are you still doing your mutual funds through a financial advisor? Do you know how much extra will you pay over the next 15-20 years by paying that extra 1% to him?’

How many of us have heard similar arguments in person, in whatsapp groups, in various articles written on websites or articles in magazines and newspapers.

To put it in money perspective, let us see what you would save if you were to do it all by yourself or by following the tips that keep floating around.

Say, you invest Rs 10 Lakh initially and a SIP of Rs 10,000 per month in an equity MF. Assuming an average annualised growth of 12% in your portfolio, you would save approximately Rs 3.04 Lakhs of commission/fees in 10 years, Rs 7.17 Lakhs in 15 years and Rs 14.86 Lakhs in 20 years in commission/fee if we assume 1% as the commission or advisor fees that you would pay per year.

During this period, you would’ve made a profit of Rs 32.6 Lakhs, 76.8 Lakh and 1.59 Crores respectively in this simplistic model. Thus, the fees paid out to the advisor amounts to about 9.33% of your profits.

Also, going by the past trends, in those 10-20 years, for more than 90% of the trading days, Sensex would’ve traded below 10% of its peak more than half the time, below 20% of the peak 30% of the time and below30% of the peak 17% of the time. Also, the markets would’ve temporarily declined 30% – 60% once every 7-10 years and there would’ve been 1 or 2 sharp declines of more than 30% every 10 years.

What would a common retail investor do during such ‘scary’ times if she’s on her own? When a profit of Rs 76.8 Lakhs dwindles to say, Rs 30-40 Lakhs, or if the principal investment itself has gone down from Rs 10 Lakhs to 5-6 Lakhs, it is difficult to remain sane and invested for most investors.

What happens if you get out with the aim of getting in again ‘when the time is right’ but market volatilities – markets shooting up for a few days and trending down for a few days – make it difficult for you to decide when to enter?

The past data has shown that, over a period of past 17 years of investing, if you miss just 5 best days in those 17 years, your CAGR (Compounded Annual Growth Rate) reduces by 3% to 11.5% from 14.4%. Missing 10 best days brought it down by another 2% to 9.6%, missing just 30 best days in 17 years brought it down to just 3.3% and, hold your breath, missing only 50 best days in 17 years meant your returns would be down to a Negative 1.1%. (Source: Funds India)

And remember, many of these best days could happen in the middle of a market crash too!

It is well known that most retail investors rarely ever make long-term wealth in stock markets due to their emotional, jerky responses to adverse situations which an experienced investor sees as an opportunity. But if you are steel-willed and understand this, you could be a successful Do-it-Yourself (DIY) investor.

What, therefore, are the attributes of a good DIY investor?

The investor needs to realise that ultimately the markets will align to fundamentals, and short-term movements of particular stocks or markets do not alter this fundamental fact. Asset allocation is always the king and all investing should have that as the inviolable base. Financial investment conclusions should be based on logical analysis of data and emotions that need to remain in control while investing. While monitoring and rebalancing a portfolio periodically is a must, sometimes doing nothing could be a great strategy too!

Another important aspect to realise is that passive investments like Index Funds or ETFs are still 100% equity products and will face the very same market volatility as the markets themselves, while having no capability to beat their benchmark.

So, my final take?

If you can manage all the nuances associated with managing a portfolio as well as your emotions, you could be a person who should be a DIY investor but if you are going to depend on others’ help (aka tips) to do investments, have a rethink. Remember, it doesn’t matter how fast you are going if you’re on the wrong train!!

If you decide to be a DIY investor in Mutual Funds, be careful and check the platform you use as there are many online platforms giving Regular plans for MFs. So, while you’re being charged the same commission as with a financial advisor, the advantage of customized advice is missing.

Check out the originally published article on financialexpress.com by the author

If you need any further details or wish to connect with a Financial Planner, please write to team Hum Fauji Initiatives at contactus@humfauji.in.
08 Nov 2022

REITs: Consider Ticket Size, Transaction Costs, and Other Factors Before Investing

With the real estate market showing signs of stabilising, many investors desirous of investing in real estate are now considering real estate investment trusts (REITs) as their next investment destination, in order to diversify their portfolio.

Incidentally, the structure of REITs is similar to that of a mutual fund.

That said, while in mutual funds, the underlying asset is bonds, stocks and gold, REITs invest in physical real estate.

“The money collected is deployed in income-generating real estate and this income gets distributed among the unit holders. Besides, regular income from rents and leases, and gains from capital appreciation of real estate is also a form of income for the unitholders,” says Shobhit Agarwal, managing director and chief executive officer, Anarock Capital, a real estate services company.

How REITs Can Diversify Your Portfolio?

To begin with, REITs can help retail investors diversify into an alternative asset class.

Says Rishad Manekia, founder and managing director, Kairos Capital, a Mumbai-based financial planning firm registered with the Securities and Exchange Board of India (Sebi): “After the slump in the real estate market over the last decade, capital values in major markets seem to be stabilising. REITs could thus provide effective diversification to the aggressive investor who is already invested in equites and is looking for alternative options. Of course, this should all be done in line with one’s asset allocation and risk profile, and should be thought of as part of the satellite investments in an investor’s portfolio.”

That said, there are a few important things to keep in mind before one begins investing in REITs.

Things To Keep In Mind Before Investing In REITs

  1. As REITs are listed entities, they are a lot like equity shares. Hence, you would need a demat account to be able to invest in REITs in India.
  2.  At present, there are three listed REITs in the Indian market—Mindspace REIT, Brookfield REIT, and Embassy REIT.
  3. Consider the ticket size and other costs before investing. Says Colonel Sanjeev Govila (Retd.), a Sebi registered investment advisor and CEO of Hum Fauji Initiatives, a financial planning firm: “Things like transaction costs, returns, ease of investing, taxation, and other factors make these products different, although real estate still remains the underlying asset. So, one should decide investing in them depending upon his/her own objective of investment, assets allocation, availability of funds and other factors.”
  4. In India, 80 per cent of investments made by a REIT need to be in commercial properties that can be rented out to generate income. Thus, investors of REITs earn returns in the form of dividend (rental income from leased properties) and capital appreciation of unit value at the time of exit, as all REITs have to be compulsorily listed on the stock market.
  5. There is vacancy risk in case of REITs, and development risk in case of real estate funds. “When comparing the two—REIT and real estate funds— for investments, I would prefer REITs, if my main aim is to invest in real estate. That said, REITs should be looked more as an income generating avenue, while real estate mutual funds should be considered as growth avenues,” says Col. Govila (Retd.)
  6. REITs can provide regular income in the form of dividends, but it is not a certainty – there could be bad periods when the dividend could be low or nil. So, depending on the amount of regular income required, one would be better off with investing in fixed income products.
  7. Thus, one could consider investing a portion of his/her total corpus in REITs to diversify the portfolio, if their own financial circumstances permit doing so. Broadly speaking, one should not have more than 5-10 per cent in real estate or real estate-oriented investment avenues.

Check out the originally published article on outlookindia.com by the author

If you need any further details or wish to connect with a Financial Planner, please write to team Hum Fauji Initiatives at contactus@humfauji.in.

Also Read: Last Minute Tax Saving Tips For Senior Citizens, Pensioners and Others

17 Apr 2021
asset allocation

With markets so High, is it time to rebalance your portfolio? | Asset Allocation

The year 2020 was a depressing one for a large part. Thankfully, 2021 is looking significantly better financially though the covid scenario has turned grim again, though hopefully temporarily. The most important concern that most of us have right now is getting addressed as vaccination is picking up pace globally. On the economic front too, things are improving.

The Indian economy, for instance is expected to grow at a double-digit pace in 2021 after a long time. This is also reflected in the way the stock markets are behaving. The benchmark BSE Sensex has been buoyant. It is difficult to comprehend that the same market, which is around 49,000 points now was around 27,000 a year back, in March 2020.

However, the sharp rise in equity markets should also caution us a little. While being optimistic and hopeful for positive developments is good, it should not lead us in to hubris. When it comes to money, personal finance and financial planning, it is critical that we do not lose sight of the fundamentals. One such thing to revisit from time to time is asset allocation.

What is asset allocation?

While our regular readers must be aware about this terminology, we have also had many people who have joined us only in the last few months on their financial planning journey. With the sharp rise in markets, there has been a renewed interest among all the sections to tap in to equity investments. Many of our readers have also reached out to us for this and we are aware that many more are contemplating entering the markets right now. Hence, it is imperative that we revisit this time-tested concept of asset allocation.

In simple words, or as we like to refer it, as grandma’s wisdom, asset allocation is nothing but the strategy of not putting all your eggs in the same basket. The logic is simple. If all eggs are in the same basket and something hits the basket, it is likely that all the eggs will be damaged. On the other hand, if the eggs are spread across different baskets, the eggs in the other baskets will remain safe.

We should be aware for sure that no asset class ever performs consistently well for a very long period of time.

See the chart below (1990 till Jun 2020), made out for 30 years.

Now extrapolate this situation on your investments, where equity, debt, real estate, gold are the different baskets, or asset classes. Traditionally, if one asset class performs poorly, the other asset classes may not follow suit and may behave differently. For example, when the equity markets were in a downward spiral in early 2020, gold prices were firming up.

If we extend the above argument to Indian asset classes (various types of equity, safer investments, Gold, Real estate) etc and over a shorter 10-year period, even then the aspect of asset allocation holds good.

asset allocation

The idea is that even if a part of your investments performs poorly, there will be other investments that will balance out the negativity to some extent, thereby protecting your investment corpus if you have adequate diversification in your portfolio.

What needs to be understood is that asset allocation needs to be revisited and rebalanced from time to time as your life situation changes, your financial goals’ time horizon changes and also because of the changes in the market.

How to rebalance your portfolio?

To be sure, it is important to understand that asset allocation could be very different for two different people. So, for simplicity, we would only consider equity, debt and gold here. If someone has his ideal asset allocation of 60:30:10 for the three asset classes respectively, it is possible that it has skewed in favour of equity due to the sharp rise in valuation in recent months. Accordingly, that person would need to reduce exposure to equity to rebalance their allocation, by moving some money from investments in equity to debt or gold.

While this might appear to be an innocuous or simple adjustment to some, it can act as a major hedge for the value of your portfolio. The surging valuation of the equity bucket of your portfolio might appear exciting right now. However, you also need to take control of your emotions of greed, particularly in a bullish market environment.

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