Author: Jagoinvestor

I am Jagoinvestor Admin

What can Repiblic Day teach us about Financial Planning

Posted on by Jagoinvestor

India gained its Independence in 1947 . At that time India was free , and ready to grow on its own , with its own decisions . But it was not possible without a set of guidelines to guide the decision making process .

Success comes when you are disciplined and have a decision making process. On Jan 26 , 1950 our Constitution came into effect and now we had laws for different things .

Financial Planning

We knew exactly what we have to do when thing happens . We had a road map to follow. From there on we progressed and have came a long way . We can now say that we are much better than we were at that time and we continue to grow and make better decisions.

We need amendments from time to time and that helps us to change the bad laws and adapt to new situations.

How do we relate it to Investing?

We can learn from anything … really anything . Let us try to map each event discussed above and relate it to our Investing world .

1. Gaining Independence

When we get a job and start earning on our own, we are full of confidence. we are independent, We don’t need to ask for money from our parents. Rather we have to support them. We have responsibilities. There are many goals for us like buying house, car, saving for our retirement, Marriage etc etc.

2. Republic day

This is the day when we understand that we need to do our financial planning and have a set of guidelines to guide our decision making regarding our investments .When we know how exactly we are going to invest to achieve our goals, we have a clear road map and time duration .

We just need to follow it with discipline.

Example : If a young 25 yrs old want to retire at 55 with 2 crores at the end . He can take two approaches .

a) He can try to save money here and there, some month he can invest 10k, and some month he can skip it and down the line, he has a vague idea where is he going and how is he making progress. This kind of approach often leads to failure, because there is no road map and sometime will come when you will have no idea whats happening.

b) Second approach can be very easy . You have to make sure that you understand some thing very well and be clear about somethings. Those are

– Equity outperforms every other asset class in long term .
– Equity in long term has given 15%+ returns and its possible in future too .
– You should have understanding about the power of compound interest.

Now when you are clear crisp about this idea , then you can use a simple compound interest formula to see , how much you need to invest every month for rest 30 years (55 – 25) , which can generate 2 crores at 15% annual return .

The formula is

Final_amount = monthly_contribution * (1+rate) * ((1+rate)^months – 1)/rate

where
rate = monthly rate = 15% / 12 = .15/12 = .0125
months = total number of months you will invest = 30 * 12 = 360

Now you can calculate what monthly_contribution fits the values .

The amount comes to little below 3,000 per month .

Which means if you invest 3,000 per month for next 30 years , you can achieve your retirement target easily without fail. (Invest in Equity Diversified Mutual funds to target 15% returns for long tenure).

When you do this, you go with a plan (constitution) and dont have to doubt your self and you will not get lost. Just follow it with discipline without fail.

3. Amendments

Just like amendments are made in Law , because of change in environment and situations . You also may have to change you plans with market change and new products coming in (this happens rarely , because fundamental things remain same) .

Summary and Learning

What I want to point out here is that just earning money and being independent in not enough and cant make you successful with money , Discipline and proper understanding with good planning will help .

So if you are Independent but have not put your constitution in place , do it soon to really succeed . Make this day as your teacher and learn from it . Don’t be afraid of mistakes .

“Success is a ladder where every step is made up of Failure . If you cant fail !! , Winning will not be easy ” .
Manish

Review of Jeevan Astha Collections

Posted on by Jagoinvestor

Few days back I had talked about “why an investor should avoid Jeevan Astha Policy”

But looks like Indians have developed unshakable belief and trust in these companies. Let us see some statistics about the policy.

review of jeevan astha collection

A report from Economic times (Thursday, 22nd Jan 2009) says

“Collections for the policy which closed on Wednesday is expected to cross Rs.8,000 Crore. Some insiders say that collection could go even higher. Although the corporation had said that it targeted collections of Rs.25,000 Crore this was seen as a marketing gimmick not a real target.

– A sports person is understood to have put Rs.35 crores.
– A leading Film actor has invested Rs.8 Crores.
– A little known business family has invested Rs.50 Crores.
– Insiders day that over thousand of policies are over Rs.1 crore plus.

The policy has helped to bring LIC’s flagging mark ship back on the track and has enabled several offices in metro centers to achieve there targets for whole year.”

Despite the success the scheme has some limitations. Jeevan Astha is more of a bond and less of an insurance policy. Although the sum insured is five times the premium in its first year, the cover declines to 2 times in the second year. Smaller investor who were not all that savvy in reading the fine prints were mis-sold the policy promising returns of 10%.

My comments :

Goodwill and trust is the biggest thing, especially in country in India where people are not not much educated and can not take much informed decisions.

I can imagine SBI failing or running with public money, but not LIC (pun intended). That’s the kind of faith and trust in India. Which is fatal.

It may make sense for a filmstar or a sportsperson or a big business family to put there money in this kind of Policy, because there 10 crores will become 20 crores in 10 years (10 crores in 10 years is the return), and I am sure even if that is 7% CAGR return, its a good return for them as 10 crores is a big money. But we have to see it as a small investor point of view and goals.

A small investor who invests 10,000 or 50,000 in it and get double of his money after 10 years.

I am not sure if he is getting any return at all when you consider 6-7% of inflation. He is just getting his capital back with almost same purchasing power.

I come from a very small town in UP and I am sure that it represents India when you see per capital income, education level and living standard. And people there are not ready to hear anything other than LIC policies and FD’s of SBI or some other nationalized bank, will a small percentage having heard of Mutual funds or ULIPS even term insurance etc.

This is the story of India.

When millions of uninformed and unrealistic investors come together and put there small money together in these kind of polices, its bound to generate thousands of Crores of Rupees.

But I am sure of one thing, who ever invested in these kind of policies will get guaranteed returns, but I am not sure if he will get guaranteed and benefit for there investments when you take it for 10 yrs period. People investing there money in this policy are going to double there money in 10 years to buy something which will more than double in price in 10 years.

Fear is an excellent thing to take advantage of, when financial markets are down heavily and thing are looking bleak in short term, Anything with guaranteed “tag” will act like a magnet to hard earned money.

I am happy to not invest in anything like this and do not want my money to double in 10 years.

Jago Investor, ab to Jago !!!

Do you have an insurance policy? -Read an amazing irony about Insurance

Posted on by Jagoinvestor

Imagine you are 25 years old earning 6 lacs/year, with a family to support financially. A Term insurance policy with some cover (may be 25 lacs) will have premium of 5k per year (for 25 years old) as the premium for this policy.

Almost 99% people need Term Insurance, But most of the people show good amount of reluctance, because they see “wastage of premium” incase nothing happens to them.

The amazing irony about Insurance

Let us try to see what are the reasons for this?

This happens because of some psychological reasons. Some of the reasons and counter arguments are :

1. People are not ready to accept subconsciously that they have equal probability of death like others; everyone assumes themselves to be little safer than others.

Counter Argument : A different case, someone tells this person that he has chances of dying within 20 years somehow explicitly, there are greater chances that his perspective about Term Insurance will change and he may go for a good amount of cover with this premium, the reason is that now he sees these [premiums as risk cover fees and not wastage.

Now he has convinced himself that there are good chances that his “death” is possible and his family needs some good cover, although there has not been any change in his lifestyle or life in general, all what matters is his attitude towards Risk coverage.

2. People do not concentrate on the value provided by Term Insurance and its cheapness, it is taken for granted.

Counter Argument : I did this very small survey where i asked my friends online. See one of them below

manish_chn: if your company says that it will cover your family for 25 lacs, but will cut your salary to some %
manish_chn:what will be the max % you are ok with
manish_chn:just the first number which comes to your mind
manish_chn:no calculation
manish_chn:please
rajagopal: hi
rajagopal: never thought about such things.
rajagopal: probably 5%?
rajagopal: without any calculations

This shows that a person somehow feels comfortable with 5% of his salary getting cut for just 25 lacs of cover for his family; it means that he can pay the price of 5% of his salary per year for 25 lacs cover.

Some people were even ok with 10% or 7%, on the average it was greater than 5%, whereas the real worth of cost is less than 1% of their salary (everyone’s salary is more than 6 lacs/year ). Cost of 25 lacs cover in market = 5k – 5.5k per year.

3. People pay money from their pocket after getting salary, so it feels that they are giving money unnecessarily.

Counter Argument:

If you make term insurance mandatory for everyone and cut 1% from their salary (6 lacs salary, and cut 500 per month for insurance premium of 25 lacs). In this case there are very high chances that almost everyone will feel that it’s a good thing. And they will even appreciate this move (there are always exceptions, but i can’t help those people).

What it shows is that people are lazy, when you do things purposefully; there are great chances that they will understand the importance of something.

So, if you give them 100% salary, they might not take the term insurance.

But if you give 99% salary and 1% is cut as insurance premium, many people will tell others how great there Company is !! (You can also just cut 1% and put it in your pocket and give them 99%, some people don’t even notice these things)

Summary

Understand that a lot depends upon yours perspective about something. When you see things in a different way, its meaning and importance chances totally for you.

What is Nifty BeEs ?

Posted on by Jagoinvestor

Nifty BeEs an Index based ETF, which tracks Nifty index . Nifty BeEs can be a important part of your portfolio.

One unit equals around 10% value of index , Means if Nifty is around 3000 , one unit of Nifty BeEs will be around 300 (can be less or more a bit also , depending on demand and supply)

Some Advantages of Nifty BeEs

Simplicity : It is very simple to invest in Nifty BeEs, You can buy and sell it easily on stock exchange from your demat account, treat it just like a share.

Economical : It has no load scheme. The annual expense ratio including management fees is a maximum of 0.80% of the Daily Average Net Assets, which is one of the lowest for any mutual fund scheme in India. The costs reduce further to 0.65%.

Liquidity : Any time you want money, you can sell your units in the markets.

No Human Error or Bias : The performance of Nifty Baes is simply the result of performance of shares in the S&P CNX Nifty Index and demand & supply in the market. There is no Fund manager bias. Hence there is no chances of Human error.

If you see the returns, it has consistently outperformed Nifty.

Annual Returns
2008 2007 2006 2005 2004
Fund Return -51.28 55.97 41.49 37.75 12.30
Rank In Category 7/22 4/22 10/22 8/20 8/18
Category Average -51.78 49.97 39.13 37.22 10.16
S&P CNX Nifty -51.79 54.77 39.83 36.34 10.68
Sensex -52.45 47.15 46.70 42.33 13.08

What are the disadvantages of ETF?

As such, there are no disadvantages , but obviously there may be many mutual funds which may perform better than Nifty BeEs, It may be because of good decision or pure luck.

Who do ETF work?

See this article from Deepak Shenoy to know about this.

My view

Any one who wants to participate in long term growth and with less risk can divert some part of his cash in Nifty BeEs. It scores really high when it comes to convenience and returns over long term. Its easy to purchase. Just invest some small amount every month with discipline over long term.

Other ETF’s

There are many other ETF’s you can go for, they are

– ICICI Prudential SPIcE : Tracking NIFTY
– UTI Nifty Index : Tracking NIFTY
– PSU Bank BeES : Tracking Banking Stocks

ETF’s are the best way to invest in a sector, you can also go for sectoral funds , but these are ETF’s.

Secure Your Family , Risk Management Part 2

Posted on by Jagoinvestor

Why do we invest ?

Answer : For ourself, for our Family, for there better future , for our kids , for there better life , for financial independence, at last the answer comes down to Our Family.

But, before investing, do we make sure that , do we secure our family at first place against any risk and problems which may arise. You can invest in great things, whatever it is like Mutual funds, ULIPS, direct shares, gold, blah blah blah …

Why Do We Invest

But what if some bad things happens to you and your family is left behind with no money at present, what is your wife, kids or your parents meet some accident and go to hospital. Is that more important or creating your wealth for future.

What is more important is to first concentrate on “Now” and if everything is taken care of, only then think about the future. How do you secure your family.

There are two things :

1. Life Insurance for yourself (assuming you are the bread winner)
2. Health Insurance for your entire family, especially if your have old parents, or going to become old in some years 🙂 .

1. Life Insurance : Read https://finance-and-investing.blogspot.com/2008/06/life-insurance-revisited-one-of-my-good.html for understanding it better .

2. Health Insurance : Read https://finance-and-investing.blogspot.com/2008/07/health-insurance-what-is-health-or.html

Let me talk about a case study .

– Robert is in his 30’s earning 5,00,000/Annam. He is married and has 2 kids .

Robert needs life insurance of around 50 lacs to secure him Family . also he should take a health cover of 4-5 lacs each .

He can take a term cover of 50 lacs for 6367 . He can also take Health Insurance of Rs 4 lacs each for him , his wife and his 2 kids (family floater plan) @Rs 5000 (Check click2insure.in for these quotes) .

Means , he can take both of these things at 21,000 / year . It comes out to be 4.2% of his yearly Income.

Now think , can you spend 5% of your yearly salary for safety and coverage of your Family ? I thing YES !!

Once you do this , you are free of any tension , and now you can use your 95% money to generate long term wealth for your family and there security . You can effectively use your 95% , only if you use your 5% for your risk management .

There can be many cases when you dont cover your family and things can go wrong, like

1. You invest heavily in Mutual funds or ULIP’s or what ever and in 2 years you die in an accident, what will happen then …

2. You invest your money in ELSS (tax saving mutual funds) for last 2 yrs and have life insurance also , but suddenly you wife meets an accident and you require 5 lacs for an operation , but you never took Health Insurance .

Investing your money is important, Covering your risks are Vital !!

Live in the moment, “now” is the truth … Keep you family happy with covering then and yourself now .

Some tips :

– Take a life cover ASAP if you have not taken it yet.

– Buy a family floater plan if your family has spouse and kids, for Parents you need to take a separate individual policy, as parents are not covered in Family floater plans.

– You can also claim tax benefit for this under section 80D.

– Don’t feel that life insurance from other companies (other than LIC) are very risky and anything like that . Insurance sector is now getting mature enough and govt is taking all measures to confirm that the companies which enter Insurance Industry are from great Business families and conform with the guidelines . But its true that LIC will always be the safest (100%) .. but 99.999% is also safe …

Summary

Its more important to cover your Life risk and family Health risks first before any investments for future , when you put your money in Insurance and Health Insurance you are already taking steps for strong invesments for future which is safety of your family , which is of supreme importance . Dont ignore it … Take appropriate cover .

Game of Trading , Risk Management Part 1

Posted on by Jagoinvestor

Lets play a game, the name of the game is “Game of Trading”. I am stock market and you are investor. You have got 2 chances of investing you money, One time I will give you 200% return and other time I will give you -80%, or in reverse order, so it can either be

200%, -80%

OR

-80%, 200%

You have to decide in advance that how much percentage of your total capital you will invest each time (invest capital) and how much you will keep safe money (safe capital), you have to decide for both the times in the start only.

Lets analyse different cases.

Case A : You choose invest capital as 100% first time and 20% for next chance

Case A.1 : Return was -80% first time and 200% next time.


Case A.2 : Return was 200% first time and -80% next time .


Case B : You choose invest capital as 20% first time and 100% for next chance

Case B.1 : Return was -80% first time and 200% next time.

Case B.2 : Return was 200% first time and -80% next time.

You can see that at last A.1 = B.2 and A.2 = B.1 , so it means that order of your invest capital ratio does not affect your result , it both the cases it can either become 28 or 252 (depending on the return order) …

What should you do?

100% and 20% choice will always loose in long run, if you play this game over and over again for long run, Understand that in this game, you can make it “high risk high return” Game or “Extremely no risk, low return game”, And your choice of your invest percentage will decide which game is it.

Characteristic of “High return High risk game” : Its possible to make great money in short term, but in long run you will loose.

Characteristic of “Low risk, low return game” : You will Not make great return in short term, but with compounding effect, you are bound to be a winner in long run.

Let see if we can choose a ratio (invest percentage) can give us some profit irrespective of the return order.

Lets choose 25% invest capital :

Case A.1 : Return was -80% first time and 200% next time.


Case A.2 : Return was 200% first time and -80% next time.

You can see that in any case your 100 becomes 120, which is 20% return.

What if you choose 80% invest capital : In that case at last you will have 93.6 (calculate yourself). So what should be the best percentage capital to deploy each time in this game.

I tried to make an Equation, with all variables

p = profit times (2 or 200/100)
l = loss times ( -.8 or -80%/100 )
C = Capital at the start
T = Trade factor (.25 means, 25% of the capital will be invested at any time)

We want to find optimum T, given any p and l (assuming that the trade will be done 2 times)

So, If you calculate the total capital after the 2 trades (do the math), you will get

Total capital = C (1 + pT) * (1 + lT)

So our original capital is getting multiplied by (1+pT)*(1+lT), and we have to maximize this number.

lets say I = (1+pT) * (1+lT)
I = 1 + plT^2 + pT + lT

If we do some differentiation here with respect to T (people who don’t know differentiation, just leave it), and put dI/dT = 0

2plT + p + l = 0
T = – (p + l) / 2pl

So the best valeuof T is -(p+l)/2pl ..

For our earlier example , p = 2 , l = -.8

we get – (2 – .8)/ (2 * 2 * -.8) = .375

Which means, 37.5% of capital will be invested everytime, and with that our capital will become 122.5 and that is the max you can make without risk.

What if return = 200% and -90% , in that case p = 2 , l = -.9 , so T = 2 – .9 / 2 * 2 * .9 = 1.1/3.6 = 11/36, means investing capital will be 30.555% always and that will give us max return.

What is the point i am trying to make?

In any given situation of making money, there may be a big risk of loosing it, we should always use these kind of tools and always be safe. Don’t try to be very bold in stock markets.

People who make killing in the start often get killed somewhere on the way and people who make respectable and sufficient money with satisfaction become winner over long term.

Summary

When you do Investment or do trading, you should never put all your capital into it, one bad trade or investment and you will be ruined forever, better to risk only that much capital which can not take out of of the game, but just hurts a bit.

Take small and risk-less profits if possible, Investing and trading is all game of probabilities. Use math’s and logic to take smart decisions like discussed in this article.

“There are old investors and there are bold investors, but not both”.

Check out this blog for Risk Management Part 2.

 

The Straw That Broke the Camel’s Back

Posted on by Jagoinvestor

One of my friend is fond of shares and options trading , from a capital of Rs.50,000 , he grew it to Rs 2,00,000 , whereas I am almost at the same place from where I had started because I do some thing called “Risk Management” … Every time I take a trade or invest in anything . This is how I go about it .

– Either I don’t take the trade
– Or I take the trade, but work on risk management, I hedge it using PUTS or invest less in that.

Because of these two things I either miss big profits or make very small profits. managing risk involves cost and that’s the cost you have to pay for trying to be “safe”.

Last week we both purchased some thing which gave him 50% return, but gave me just 7-8% return over my investment. The reason was that I also hedged my position and tried to be “smart”, which my friend didn’t Acknowledge.

There are many incidents like this, because of which I always lag behind him when it comes to performance, and I am always ahead of him in being safe which never helped until now.

Jan 7 2008 :

10:30 AM :

Markets were a bit up and things looked good , He bought Satyam’s Calls with almost all of his capital, He has good intuition of which options may work and which may not, but I tried to convince him that buying a PUT on a lower strike price will save him in case he is wrong.

But to my expectation, he was “sure” that it would work, He put SL at 175 just to show me because of the fact that he knew it wont be touched at least today.

11:30-12:00 PM :

Satyam Fiasco news came in and within no time Share was down 30-40%, No surprise that even SL was not entertained … because prices never stopped .. everyone was just in a rush … With in some time Share plunged to 60-70, My friends calls were worthless and It doesn’t look that it will now move up from this point.

In short He is dead … He is out of this game now … He has 20,000 cash and all 1,70,000 or 1,80,000 he had put in calls are not even worth 4,000 – 5,000.

Price of Satyam 120 PA Jan 29

11:00 AM : Rs.1
2:30 PM : Rs.90

Return : 9,000% in 3 hrs.

What is the point I’m trying to make?

Everybody likes to make big profits and we should but not at the cost of risk of blowing up all our capital. Its not just related to Share markets or options. It also applies to Debt market, Mutual funds.

Do everything you can do to minimize or avoid the risk. Its very true that returns comes with risk. I am not saying “not to take risks”, i am talking about “managing risk”.

“Managing Risk” is the biggest measure you should take if you are in this field.

In some of the next posts we will try to see what are the different kind of “risk management” techniques and its importance.

Tax Exemptions Rules , Who is included and who is not

Posted on by Jagoinvestor

Following is a chart showing the list of people for whom you can claim deductions for tax exemption. For example, if you pay the LIC Insurance premium, you can claim if the got premium paid for.

  • Yourself
  • Spouse
  • Children

For further details … see this table … Click to enlarge it.

To know about the tax slab and an example for calculating tax .. see : http://finance-and-investing.blogspot.com/2008/04/tax-information-for-2008.html

How to choose Mutual Funds for tax saving purpose

Posted on by Jagoinvestor

95% of the salaried people are rushing to invest in tax saving (India). 5% of smart people have already done it (like me). The biggest rush I know must be still for LIC policies and PPF because very fewer people in India invest in Mutual funds still.

How to choose mutual funds

In my earlier posts, I have told which two mutual funds are the best candidate for investing now. They are SBI Magnum tax gain and Sundaram BNP Paribas Taxsaver

Both of these mutual funds are long term consistent performers and come from very respected and best AMC’s in India. Both of these have always been one of the best in the category.

But time changes, situation changes :), We can analyze some numbers and see what are the future prospects for these two mutual funds in comparison to each other. We will see on what basis we can conclude that. Please read the following conversation with my friend. It should give you some idea about how to choose mutual funds and why one could be possible is better than others.

Robert: Hey Manish, need some suggestion from you.

Manish: Hi Robert, what’s up … how is life these days?

Manish: How is a job going on?

Robert: Nothing yaar, I am just busy with my tax savings, have to submit the documents ASAP, so need to invest now, I am thinking of investing in an ELSS, Any suggestions?

Manish: Hmm… See, There are two good funds I think you can invest in, SBI Magnum tax gain and Sundaram BNP Paribas Taxsaver. These are the 5 star rated funds from valueresearchonline.com. You can consider those. But if you only want to invest in one ELSS, I would say go with Sundaram.

Robert: Hmm. Can you give me how you did this analysis and why are you saying that Sundaram looks better than SBI at this moment? I thought if a mutual fund has been long term consistent performer and our time horizon is more than 3-5 years, We can invest in any good funds.

Manish: That is true, I am not saying that SBI is bad and Sundaram is the best, we are trying to see why Sundaram is a better choice for now. We will see the numbers and some charts, and we can look that Sundaram is doing much better than SBI for quite some time.

That gives us a good estimation of which one is good for investing now. So, this requires some long-duration talk, I will have to tell you the details, are you ready?

Robert: ok

Manish: So, Let me first tell you that Since Inception returns for SBI has been 16.67% and for Sundaram its 19.35%, Which is highly respectful .. Let us also look at the following chart of NAV of both mutual funds for last 3 years.

Green: Sundaram
Red: SBI
Blue: Sensex

Manish: You can see that in the last 3 years, Sundaram has outperformed SBI Magnum and also was less volatile than SBI, when it comes to being consistent with Sensex. Also, we must see the last year charts of these two in isolation.

Manish: You can see that Sundaram has taken over SBI around Jun 2008 and has performed better than SBI. You must keep in mind that NAV and index values have been rebased to 100, for comparison purposes only.

Robert: Hmm.. that is fine, I understood that we have some charts which try to prove the point, But there must be other numbers also which favors Sundaram over SBI.

Manish: Yes, let me tell you some things which you can use for comparison purposes.

1. Sharpe Ratio:

Generally, people judge mutual funds performance by the returns only, whereas the better parameter is Return with respect to the risk taken. The Sharpe Ratio of a fund measures whether the returns that a fund delivered were commensurate with the kind of volatility it exhibited.

This ratio looks at both, returns and risk, and delivers a single measure that is proportional to the risk-adjusted returns.

So, the Sharpe ratio is noting but risk-adjusted returns, So the higher Sharpe Ratio is better. Currently, in the Mutual fund’s industry, Sundaram Tax saver and Canera Rebecco mutual funds have the highest Sharpe ratio of 15. SBI has 0.0.

2. Alpha Ratio:

This is a very important ratio in mutual funds. Alpha is a measure of an investment’s performance on a risk-adjusted basis. It takes the volatility (price risk) of a security or fund portfolio and compares its risk-adjusted performance to a benchmark index.

The excess return of the investment relative to the return of the benchmark index is its alpha.

Simply stated, alpha is often considered to represent the value that a portfolio manager adds or subtracts from a fund portfolio’s return. A positive alpha of 1 means the fund has outperformed its benchmark index by 1%.

Correspondingly, a similar negative alpha would indicate an under-performance of 1%. For investors, the more positive an alpha is, the better it is.

Alpha for Sundaram: 3.35
Alpha for SBI Magnum: -1.18 !! (Bad)

3. R-Squared:

R-Squared is a statistical measure that represents the percentage of a fund portfolio’s or security’s movements that can be explained by movements in a benchmark index.

Higher the R-squared Value, closer the mutual fund to the index, what it means is that it will behave like Index funds up to that percentage, which means what if a mutual fund has r-square value of 100, its nothing but an index fund, then why to buy the mutual fund and pay high managing fees, A mutual fund should have a balance in R-square it should not be more than 90 and less than 80.

A mutual fund with less than 80 R-square shows that they have more tendency to be volatile and be close to the index benchmark. forbes.com says: Mutual fund investors should avoid actively managed funds with high R-squared ratios, which are generally criticized by analysts as being “closet” index funds.

In these cases, why pay the higher fees for so-called “professional management” when you can get the same or better results from an index fund.

R-squared for,
SBI Magnum: 94
Sundaram: 87

Read more about the ratios at :

https://www.investopedia.com/articles/mutualfund/112002.asp

Robert: Great !! those ratios are really important parameters while judging the mutual funds. Btw, I understood these things. Any thing regarding holdings?

Manish: Definitely, Ratios are important, but we should also look at simple things like its holdings in different types of companies. See below –

Sundaram Portfolio

[su_table responsive=”yes”]

           Market Capitalization              % of Portfolio
            Giant               56.17
            Large               17.10
            Mid               24.88
            Small               1.85
            Tiny                    —

[/su_table]

SBI Magnum

[su_table responsive=”yes”]

           Market Capitalization              % of Portfolio
            Giant               46.07
            Large               21.48
            Mid               25.52
            Small               6.91
            Tiny               0.01

[/su_table]

If you compare the investments by Sundaram, it has a high concentration in Giant companies and has avoided investments in Small and Tiny Companies, which helps in avoiding Risk (also returns can be affected, but more important is managing risk).

Also in the future when Markets improve and start rising, front line stocks (big companies) will be the first to move up.

Robert: Any other small things to consider?

Manish: Other things you should see are

Expense Ratio (lower the better) : Sundaram : 2,.24 , SBI : 2.5
Market Turnover
PE Ratio: Lesser is better
PB Ratio: Lesser is better, SBI is better in this Market Capitalization There are many other,

Robert: That is fine, but I can see that SBI is ranked 1st when you consider 5 yrs return and Sundaram is 2nd, I saw it on Value research online site.

Manish: True, But did you see its 3 yr Rank also? Its 5th !! and did you see 1 yr rank: its 12th for SBI Where as Sundaram is 2nd in 5 yrs, 1st in 3 yrs and 2nd in 1 yrs return category, which gives an indication that Sundaram is taking over as one of the best funds available over SBI slowly.

Robert: Hmm.. that makes sense, Great !! I would really consider these points, this helped a lot. Manish: My Pleasure !! But please understand that there is no guarantee that Sundaram will outperform SBI next year or from now on. There is just a high possibility for it, because of our analysis.

Question: Guys (and gals) … Do you know who is Robert and Manish 🙂 Ans: Both are Me … :), I just created this talk to present the article and learning in a different way and to make it practical and enjoyable .. I hope you all liked it.

Note: Please note that the views and analysis are personal, there may be some error, if someone finds any please, let me know. I will correct it. But I am sure there is no mistake or error in data.

Source: valueresearchonline.com and forbes.com

Financial Resolutions for 2009

Posted on by Jagoinvestor

Hi Friends, Happy New Year to all of you. As this new year is coming, Let us discuss some things, they are:

1. Financial Resolutions for 2009
2. The outlook of Asset Classes in 2009 and onwards.

Financial resolution

Financial Resolutions for 2009

Let us all make sure that we will do better than the previous year and make some changes.

#1. Adopt the attitude of Expenses = Salary – Savings instead of Savings = Salary – Expenses

#2. Learn more and more about investing to at least up to a level, where I can take my decisions without any help of others and also be able to help someone else.

#3. Learn all the basic taxation rules and investing rules.

#4. Not take decisions whose Risk/reward ratio does not suit me, even if there is no risk in some investment, its return should at least match your goals.

Person 1: Person not investing his money in any thing (just putting it in the bank) and having a desire of getting a 15% return and risk appetite of the same.

Person 2: Another person investing in Equity for a return of 50% in a year, but he actually requires and can be fine with a 15% return.

Both the people here are wrong and are not doing correctly. They must invest in a way that satisfies both there return/risk ratio.

#5. Will not get trapped in useless products just because someone else thinks so, we will do our own analysis, take suggestions from reliable sources and people with knowledge and only then invest our hard-earned money.

Outlook and suggestions for Asset classes in 2009

Let us see some asset classes and let’s have a quick view of it.

#1. Mutual Funds: The situation now is little under control, with a downward bias for the first quarter, but things should be good by the year-end and then we can see a good rally there after. Better to invest though SIP only.

#2. Direct Equity (shares): Make sure you buy shares only if you have long term view and do not want to speculate for short term .. You can buy some very good shares now and hold it for the next 5-20 yrs, and I am sure they will return fortune. The best time after 2003 is NOW !! But better buy on dips …

If you want to invest 100, make sure you break it in 3-4 parts and invest on dips … its like following SIP on our own. Metals (safe) and Real estate (little risky for short term) can be a good bet for long term investments.

#3. Real Estate: No comments … There are still chances of further correction … But people who do not want to buy it for investment can still invest if it suits there requirement and budget.

#4. Bank FD’s: People looking for short term investments like 6 months – 1.5 yrs can put their money in FD’s… The interest rates offered are good and with inflation coming down, it will be a fair investment.

#5. Derivatives (Futures and Options): There are many people who are now trying these instruments, do not understand the risk associated, Please understand very clearly that these are Atom bombs in the Finance field … You can either kill yourself with it or make a Killing out of it …

If you want to do it .. better learn about it .. prepare heavily and only then enter .. Else defeat is almost certain. Some of the biggest financial companies have gone bankrupt over night because of derivatives.

See:

The use of derivatives can result in large losses due to the use of leverage, or borrowing. Derivatives allow investors to earn large returns from small movements in the underlying asset’s price. However, investors could lose large amounts if the price of the underlying moves against them significantly.

There have been several instances of massive losses in derivative markets, such as:

  • The need to recapitalize insurer American International Group (AIG) with $85 billion of debt provided by the US federal government[4]. An AIG subsidiary had lost more than $18 billion over the preceding three quarters on Credit Default Swaps (CDS) it had written.[5] It was reported that the recapitalization was necessary because further losses were foreseeable over the next few quarters.
  • The loss of $7.2 Billion by Société Générale in January 2008 through misuse of futures contracts.
  • The loss of US$6.4 billion in the failed fund Amaranth Advisors, which was long natural gas in September 2006 when the price plummeted.
  • The loss of US$4.6 billion in the failed fund Long-Term Capital Management in 1998.
  • The bankruptcy of Orange County, CA in 1994, the largest municipal bankruptcy in U.S. history. On December 6, 1994, Orange County declared Chapter 9 bankruptcy, from which it emerged in June 1995. The county lost about $1.6 billion through derivatives trading. Orange County was neither bankrupt nor insolvent at the time; however, because of the strategy, the county employed it was unable to generate the cash flows needed to maintain services. Orange County is a good example of what happens when derivatives are used incorrectly and positions liquidated in an unplanned manner; had they not liquidated they would not have lost any money as their positions rebounded.[citation needed] Potentially problematic use of interest-rate derivatives by US municipalities has continued in recent years. See, for example:[6]
  • The Nick Leeson affair in 1994

Also See: https://en.wikipedia.org/wiki/List_of_trading_losses

#6. Gold: Gold has lost its shine a bit now and can not be considered the best investment you can make … Still a small part can be in a portfolio, but not more than 5%.

#7. Debt Mutual Funds: People can invest in these debt funds also if their investment horizon is less than 1 yrs (invest for short term goals).

#8. Insurance: Any one who has still not taken insurance and still finds that he/she needs to take it .. please take is ASAP. There should not be any delay in taking Life Insurance ever.

Some Notes on Inflation:

Inflation may go down below 0% in 2009, because of speedy fall in commodity and crude prices.

Source: https://www.zeenews.com/nation/2008-12-28/494368news.html

Economy and Job Losses:

India may see some effect of job losses and slow down in 2009 … Corporate results are expected to be devastating in the first and second quarters of 2009 at least … But still, India is among the top growing economies in the world. So we must not concentrate on the short term. India’s future is Great and unquestionable.

Summary: 2009 will be a good year, it is an excellent year and we will not do mistakes if we have done in 2008 and before. we will learn more and use our money in a better way from now onwards.