Getting Bad returns from your mutual fund? Do the Rolling Returns Analysis!

Posted on December 30, 2020October 22, 2021 by Jagoinvestor

Not happy with your mutual fund performance?

Do you think its a bad mutual fund, because it is not doing well from last many years?

A lot of mutual funds investors lose their patience looking at their mutual fund’s returns after they invest for 2-3 yrs. Its commonly suggested that an equity mutual fund will perform very good over the long term and one can expect double-digit returns, however, if the fund does not return back good returns within 2-3 yrs itself, the investors get very nervous and start judging their mutual fund quality and wonder if they made a right choice or not!

Today I will tell you how to judge the returns of mutual funds using “Rolling Returns” analysis, which will help you to get more confidence in your mutual fund and will help you learn many aspects!

Let’s start!

You Returns will invest a lot depending on when you invested!

Before we go into rolling returns, let’s understand the issue!

Take HDFC Midcap opportunities growth for example

10 yrs CAGR return: 14.96%
5 yrs CAGR return: 11.26%

At the time of writing this article, the returns from this fund are very good. But can this fund give bad returns in a 2 yr period. The truth is that this same “good fund” can give very different kind of returns in a 2/3 yr period depending on when you bought the fund.

Here is some data.

Mutual Funds returns when invested for 2 yrs timeframe in HDFC Midcap opportunities

You can see that the 2 yrs return can be 22.8%, 0%, 39.5% or -5.1% depending on when a person entered the fund. So a lot depends on when you entered in the fund.

Now let’s see the same thing for 3 yr time frame. Mutual Funds returns when invested for 3 yrs timeframe in HDFC Midcap opportunities

Again, you can see that for a 3 yr period – the experience can be very very different. It’s not always possible to enter at the lowest point and many times, investors invest their money for the long term when the near term returns are going to be bad. However, they never get prepared for this.

Investor mind is also not designed to stay calm when returns go in negative and that’s when investors make a wrong choice of exiting the funds even if at the fundamental level, the fund has no issues and its just the volatility of the equity which is driving the fund into negative return zone!

You can see that this approach of just looking at the point to point return does not give you enough detailed information about the fund and its volatility.

Rolling Returns – What it is and How to look at it!

Rolling return means a series of returns data for each and everyday investment for a certain time frame.

So in our example of HDFC Midcap opportunities, lets assume a period of 14 yrs from 1st Jan 2007 to 30th Dec 2020. Thats approx 5110 days. If you do a 2 yr rolling return analysis, it means that a period if investing for 2 yrs and you are plotting the CAGR return for each day of investment from the start. (that’s 730 days of investment)

So you invest on

1st Jan 2020 and exit on 1st Jan 2022 (1st instance)
2nd Jan 2020 and exit on 2nd Jan 2022 (2nd Instance)
3rd Jan 2020 and exit on 3rd Jan 2022 (3rd Instance)
….
….
….
30th Dec 2018 and exit on 30th Dec 2020 (4380 instances: 5110 – 730)

So you can plot these 4380 data points and that graph is called a rolling returns graph. In the same way, you can have a 3 yr, 5 yr or even 10 yr rolling return graph.

Check out the example of HDFC Midcap opportunities rolling return chart for 2 and 3 yrs period for last 14 yrs. You can see that in a 2 yr period, the highest CAGR has been around 60% and the lowest at -16% .. So it’s possible to see your investment go down by 16% in a 2yr period as per old data. The same kind of data is there for 3 yrs period too!

rolling returns data for last 2 and 3 yrs period

Rolling return graph will give you a deeper understanding of how volatile fund returns have been and even the probability of your return being in a certain range (only with past data). Note that its only historical data and the maximum and minimum returns can change depending on future performance.

Rolling Return data analysis

If you look at the chart above, you can conclude that if you want to invest in this fund – then you can see a downside of up to 10% in a 3 yr period because it has happened in the past. Also, you can see flat returns even in 5 yrs period which has happened in the past.

This kind of analysis tells you that because of volatility even this kind of good funds can see a period of non-performance and flat returns.

I hope I was able to explain what is rolling return in a simple manner.

Conclusion

Remember that rolling returns exercise is a great tool for analyzing the mutual fund, but it’s not the final exercise in itself. There are many other kinds of analysis which is possible and this exercise alone does not give any final judgement.

If you are not happy with your fund performance, then I suggest going through this exercise!

Do share your comments on this!

4 Empowering ways to look at your job

Posted on December 18, 2020October 22, 2021 by Jagoinvestor

In the last article – 10 benefits of being an employee vs an Entrepreneur, Manish has highlighted some amazing points with some interesting sharings from some real-life entrepreneurs. The article surely has struck a chord with many. After the article was published we decided to write a sequel to the article. We want to leave all you with a new possibility so that you can see your work or job with a fresh pair of eyes.

job vs business mindset

If you really want to become successful in life, I invite you to step beyond the job and business conversation. A lot of people debate on which is better – job or business?

In this article, we just want to add a fresh perspective to your work life. I have been into several jobs and businesses and I want to help you create a whole NEW relationship with your work.

Here are the 4 Empowering ways to look at your work

1. Job or Business is a SYSTEM you choose

Always look at a job or business as a system you choose to make a living.

At the end of the day, it is a system you choose in your life which helps you to earn money. Job or business both are different systems, now every system will have a different input and output attached to it. Our Business coach Mr Ravi Iyer is a system person. He sees life as a system. He finds a system in everything around him. Whatever system you have chosen, see that you respect and love your system.

Look at what is your relationship with your system (job or business). If you create an empowering relationship with your chosen system you always grow and shine in life, and if your relationship with your system (job or business) is weak it always leads to confusion and chaos.

Two different systems:

Job – This is a system that generates X amount every month for the person – one has to produce X for the company from which the person gets the share. This system is more stable and growth is predictable by nature. The system is linked with the performance and efforts you bring inside the company.

Business- This is a system that can lead to profits or loss at the end of each financial year. Here you cant predict things and the growth can be non-linear by nature. The system is linked with risk vs reward. As a business person – every day you have to find a job for yourself and for your team.

2. Your work has to be your SELF-EXPRESSION

Let me share my relationship with my work or what is right now in front of me.

Let me share how to fall in love with your system (job or business) and how you can grow and shine in your career. I look at my work as my true self-expression.

I love to write
I love to lead sessions
I love to train people
I love to empower people

Most of the time I am addicted to helping people help themselves. Right now I am writing this article as part of my self-expression. Trust me it is not about doing a job or business, it is about expressing yourself fully out in the world through work.

Just try it out, the next 7 days you will fully allow your work to BE your self-expression. In your job or business let your expressions flow, don’t worry about the outcomes just keep on expressing yourself.

For example: If you are a software engineer, express yourself through the software you can create for the world. Your everyday focus has to be on what can you create out in the world using your skillset and knowledge. You go to the office not for the targets or for completing the task, but to express your true self out in the world. You literally fall in love with your work when the game shifts from getting the work done vs. expressing your true self.

Let me give one more example, if you are an architect, give the best designs to the world. Let your designs be your expression, let your work become your expression. You are expressing who you are to the world, you are sharing a part of you with the world through your designs and creativity. Let self-expression be the context of your work and not getting the work done or achieving targets or trying to please someone.

In any field of work you can shine if you chose a different path, you choose a path of self-expression. Sharing WHO I really am with the world.

3. Learn to Operate as an Intrapreneur

I did my master’s in business entrepreneurship. After completing my graduation, I wanted to do a program that helps me to become an entrepreneur.

I finally found an institute which was not just creating manager but entrepreneurs. I gave the entrance exam and got selected. On the first day of college, I created my company “Integration consultancy” and I also got some visiting cards printed. On the first day of college, everyone had to introduce themselves to the stage.

I got on the stage and made a declaration. I said “Here is my company and I am going to to use the college training in setting-up my company”, my professors were amazed and everyone in the class was taken aback by my announcement. I always wanted to be into business but I also did all kinds of jobs in my career. I have worked in the call centre, I have worked in a cyber cafe, I use to write articles in Indian express, I have been into multiple jobs and organizations but not as an employee, but as an intrapreneur.

An intrapreneur is someone who operates or runs a unit within a business created by someone else. We have people in our team who really operates like an intrapreneur, we have Sagar Maheswari and Kunal Purohit (our team members at Jagoinvestor) who have demonstrated several times being an intrapreneur. My professors taught me to always operate like an intrapreneur and I invite you all to start operating like an intrapreneur. Trust me Life is not about business or job when you operate like an intrapreneur

4. Always Work and Operate Like an Artist:

When you are in a job or business, you do think about retirement, But do artists ever retire?
The answer is maybe NO.

An artist is into a job or business? or maybe none. They operate in a different zone, which we should learn to be in. An artist looks at his or her work as their self-expression and nothing else, you take their art away from them and they start shrinking.

A painter will think of something in his or her imagination and will start working on making the painting a reality. It can take a few days or months for creating that one thought a reality. Artists love the game of creating a future in their mind and then converting the future into a reality. Once you learn to master this art of creating, you start to enjoy the process of creation. You master creating wealth, you master the game of self-expression and you live a fulfilled life.

Talking about wealth creation, you can create a vision of creating your first 1 crore in the next 5 years and literally live into that future day in and out. Your vision has to wake you up in the mornings, your vision keeps you to stay in action. You start to enjoy the process as the process is driven by your vision. Artists are driven by vision and we can apply the same to wealth creation or any other important area of our life.

Conclusion

Be it a job or business – it is about loving your system and let your work become your self-expression. When I get on a call with someone, I get totally engrossed with the other person, I will express myself fully and will allow my humanness to touch the other person’s humanness. I know this will sound a bit weird or new to you, but when you connect with people at a deeper level through your work everything shifts. Your sales, numbers, financial goals, business targets everything becomes like a by-product in life.

Your work has to become your self-expression that is the main point we want to leave you with as an end conversation for both the articles. Our blog is a place for our self-expression and will continue to express our heart and soul with all of you.

Thanks for reading the article to the end. Thank you for being our partner in spreading financial literacy. Do share your comments below and let me know your thoughts

This article was written by Nandish Desai!

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Don’t buy “Return of Premium Term Plan” – It does not make sense!

Posted on December 22, 2020October 22, 2021 by Jagoinvestor

Does it makes any sense to buy “Return of Premium Term Plan”?

The one-line answer is “NO – it does not make sense”

A “Return of Premium Term Plan” or TROP as its called – pays back all your premiums at the end of the period, whereas the plain term plan doesn’t return back anything. Before we get into the analysis further, I want you to know why these return of premium term plan came into existence!

Term Insurance with Return of Premium

Why the Return of Premium Term Plan came into existence?

Term plans have become very popular in the last few years. We are seeing so many advertisements screaming about term plans importance. However, a lot of investors who don’t understand term plans fully, still feel a pinch that their premiums get “wasted” if nothing happens to them.

They equate “paying premiums” as “losing premiums” if they dont die. They compare it with an investment policy (read traditional insurance plans) where they get back there a sum assured towards the end of the policy.

Insurance companies sensed this behaviour and they introduced something called “Term Plan with Return of Premium” which can now proudly tell customers that they have nothing to lose. They get claim money on death, and if they don’t die, they get back all their premiums paid. Many investors who do not understand the time value of money concept fall for a product like this, as to human mind “getting back all your premiums” sounds very attractive offer.

Now, let’s talk about why it does not make sense as a product.

Return of Premium Term plan has an extremely low return

The premium for the TROP (return of premium term plan) is higher than the plain term plan and it can be 2x-3x times the normal premium in some policies.

So basically, you are paying an extra premium for getting your premiums back after 30-40 yrs!

Let’s look at an example of a 30 yr old male, who wants to buy a 1 crore term plan till 60 yrs of age (for 30 yrs tenure). In which case the premiums are as follows (Example is of Max Life Term Plan as on 21st Dec 2020)

[su_table responsive=”yes”]

Type of Plan	Yearly Premium	Details
Simple Term plan	Rs 9912	One has to pay Rs 9912/yr for 30 yrs for Rs 1 crore cover. You don’t get back anything at the end on survival
Return of Premium Term Plan	Rs. 17,969	One will have to pay an extra amount of 8057 for 30 yrs (apart from 9912) and will get back Rs 5.01 lacs (this is all premiums paid excluding the tax amount) at 60th year

[/su_table]

If you look at the example above, you can see that in both the plans you are paying Rs 9912 for the Rs 1 crore cover. Only difference is that in second policy, you are paying an extra Rs 8057 to get back Rs 5.01 lacs (excludes the taxes part) at the end. This is the only difference between the two versions.

So internally, the term plan with return of premium is simply a bundled product of a normal term plan and an investment policy. If we ask what is the return of this investment policy where you are paying Rs 8057 per year and getting back Rs 5.01 lacs after 30 yrs.

The answer is 4.05% CAGR.

Yes, its barely above saving account rates and a little below a normal fixed deposit interest.

I did the same analysis for the tenure of 40 yrs and 50 yrs policy (read why you should not take such a long tenure term plan) and the IRR return was 3.92% and 3.00% respectively, which means that if you buy the policy for a longer tenure, the return gets lower and lower and the product becomes even worse.

Below is the IRR return calculated in an excel sheet for your reference

return of premium term plan irr return

Note : The above calculations are done in Excel for just one company plan, however similar kind of numbers are expected from other companies return of premium term plan. Please do IRR calculations yourself if you looking at other companies plans.

Return of Premium Policy ties you up with the product

What do you do, if you want to stop a “Return of Premium Term plan” in-between? Let’s say after 10 yrs?

It will not be as simple as a normal term plan, because, with the return of premium policy, your mind will tell you that you just have to continue it for another 20 yrs and you will get back all your premiums. Very smartly, the insurance company has converted a pure term plan into an “investment policy cum term plan” with very bad returns.

so the better alternative than a “term plan with return of premium” is to buy a simple term plan (here are 20 checklists before buying term plan) and invest the extra amount in another investment products like PPF, FD’s, Equity mutual fund or debt mutual fund and you will have better flexibility and returns.

Check out this video from Subramoney talking about this product

What happens if you stop paying a premium for Return of Premium Term plan?

There is an option to get a surrender value if you stop paying the premiums in between. Just like traditional plans, there is the concept of “Guaranteed Surrender value” in these kinds of policies which comes into picture once you have paid 3 yrs premium. However, the amount you get back is a fraction of what you have paid. There is a percentage assigned for every year which tells what part of the premium paid will you get back if you surrender the policy in a year. Below is a snapshot of the chart taken from Max Life Brochure

Surrender value chart of the max life insurance return of premium term plan

So, as per this chart – if one wants to surrender the policy in 10th year, they will get back only 55% of the premiums paid (excluding premiums).

Some other Info

The TROP gives you income tax benefits as per sec 80C
There is an option to pay premiums on a monthly, quarterly or yearly basis
There is also an option for limited pay (pay in 10 yrs) or in one single premium

Conclusion

So TROP is a very carefully designed product which favours the insurance company but makes the product look very good and works on the psychology of the investor. Better stay away from it. The best idea is to buy the simple term plan with the lowest premium.

If you have already invested in this kind of plan, then you need to evaluate what will make sense for you!

Do let us know if you liked the article and does it make sense to you? Share in the comments section!