BSE SENSEX grew 50 x in 30 years .Why most missed 500-28K Journey

Sensex, the country's most recognized stock market index alongside the Nifty, completes thirty
 years of existence this year and exchange BSE will obviously want to do
 much to highlight the successful returns the barometer has posted over
the years.

Frequently for the common man, the Sensex, and by extension, stock
markets, are either something to be dabbled in after they have been in
the news thanks to strong recent performances, or -- fresh from yet
another bust -- a gambler's den.

But even as the market has gyrated up and down session after session,
entered into phases of exuberance and pessimism, it has steadily
trundled upward over the long term.

Since 1986, when the Sensex was first published, it stood at roughly 550
 (with a base value of 100 dating back to 1979). Today, it stands at
roughly 28,000, implying a gain of 50 times over 30 years. In compounded
 terms, that is a return of 14 percent, not including roughly 2 percent
dividend .

Those with good financial sense or a CAGR calculator would know those
returns almost always beat or match any investment in Indians' favourite
 asset classes: property or gold.

Still, despite producing vastly superior returns, investments into
equity remain the preferred choice of a few. As of last year, just 2
percent of India's household savings was invested in equity. Foreign
investors owned 70 percent of the shares floating in the market. Efforts
 by the EPF office to allocate some more of its multi-billion-dollar
worth corpus in stocks is met with resistance.

Why investors (mostly) don't make great returns from stocks

By their very nature, making direct purchases of stocks is a tough act.
Still, investors tend to equate the ease with which they can purchase
shares to the ease they hope they will have in making strong returns.

The biggest mistake they make is failing to understand the difference
between speculation and investing.

So stock purchases are made because they have risen a lot or fallen a
lot, because an expert recommended it on TV or because they got a 'tip'
from someone who sounds knowledgeable about the markets but isn't.

A thumb rule -- if you do not understand a business well enough to
forecast its long-term earnings potential, you should not buy its stock
-- would likely filter out a majority of individual investors. Jim
Rogers has a simpler rule. If you haven't read a company's annual
report, don't buy it.

If you don't truly understand a company well, you simply will not make
money in it, except by chance. As Rakesh Jhunjhunwala says when asked
for stock recommendations, "you cannot make money from borrowed wisdom".

Then there is another breed of investors that thinks it is easy to move
in and out of markets or stocks using charts, gut feeling or a
combination of the two.

When asked why they wouldn't want to buy the index and do nothing for
years, they believe they can do better -- without realizing that it is
simply incredibly difficult to beat the market's long-term's return
(about 15 percent), over, well, the long term.

A stock broker once told me that if I invested with him, I could look at
 making 40 percent returns in a year. It was lost upon him that 40
percent annual returns consistently produced over 40 years would turn
him, if he started with Rs 1 lakh, into a Forbes billionnaire.


Finally, there is a genuine confusion about what comprises the long
term. The holding period for the average mutual fund investor was under 2
 years , according to a report last year. For active stock investors, it
 is likely less, possibly in months.

Part of the reason why holding periods are less is because flows into
the stock market tends to be bunched up. Inflows are most when the
markets are at a high and when it could be an inappropriate time to buy.
 Investors flee equities after they've faced a loss, thanks to the
inopportune time of their entry.

The fact that many investors do not have the emotional strength to
stomach strong moves in the stock market flies in the face of long-term
data that suggests that as holding period for a market benchmark such as
 Sensex increases, not only does the possibility of a loss goes down,
the chances of beating inflation steadily rise. (The table below details
 the Sensex value at the start of every year since 1979 and outlines
returns for one year, three years, five years and so on hence.)

So even if you invested in Sensex in 1992 at the height of the Harshad
Mehta scam, when the market had gone up six times in three years but
chose to stay on for 15 years instead of exiting immediately with a
loss, you'd still have come out with a 7.7 percent return, enough to
beat inflation.

Put simply, if investors were as patient with the stock market as they
are with a typical property investment, they are likely better off
investing in the stock market.

How do Mutual Funds Managers pick Stocks ?

Mutual fund managers are like gardeners who use different techniques to
ensure that the money entrusted to them by the investors, grow and
blossom well. Investors may not know what such techniques are, but may
be keen to get an overview of the methods applied to manage mutual
funds.

Let us take a look at two popular investment methods adopted by mutual
fund managers - the top down investing method and the bottom up stock
picking method. Basically these terms are associated with equity
portfolio management and more specifically they are methods applied for
picking up stocks from the market in a bid to maximize returns on
investments.

What is a top down approach?

Mutual fund managers are assigned the job of investing money in the best
 available equity shares. In doing so, they choose to carry out research
 on the available investment prospects in the market.

What do the mutual fund managers following top-down approach, do?

Mutual fund managers start by studying the global and domestic macro
economic scenario before committing their funds. In simple terms this
means that they analyze how the world economy is shaping up and what it
could look like in the near and distant future. Top down managers also
look at the various other factors, which might have an impact on the
economy and this can include the political scenario, government policies
 and general global trends.

Once this macro level analysis has been done, the mutual fund manager
moves to more specific issues. He concentrates on analyzing the
different sectors within the economy and zeros-in on those specific
sectors that are likely to perform well under the prevailing economic
conditions.

How top-down actually works

Here is an example to explain this strategy. If the fund manager feels
that interest rates are likely to come down in the near future then they
 may seek those sectors that are most likely to benefit from this event.
 Automobile and real estate sectors are definitely going to benefit from
 lower interest rates and thus the fund manager could go on to commit
say 15% of his funds to each of these sectors.

Once it has been decided that 30% of the funds are to be invested in the
 two specific sectors – automobile and real estate, the fund manager
will move to the next stage of the top down approach. Then the fund
manager turns his attention to companies. The manager picks three or
four companies in each sector and analyses the fundamentals and merits
and relative valuations of each company individually.

The essence of top-down approach

In essence a top down approach is about analyzing the economy, followed
by the industry and then the company. The dictum that the top down
manager follows is that a company will do well only if the economic
factors are conducive to the growth and prosperity of the industry or
sector in which it operates.

Industries, which are cyclical in nature benefit from the top down
approach as macroeconomic factors have a bearing on the companies within
 these industries.

What is a bottom up approach?

Unlike the top down approach, the bottom up approach is just the
reverse.

Bottom up approach asks the fund manager to start with company and move
up to the industry prospects and ultimately to the economic forecasts.

Here the focus is more pronounced on the fundamentals of the company,
their ability to cope under diverse economic conditions and the
potential to build upon their growth prospects. It is wrong to assume
that the bottom up manager ignores the macro economic factors; rather it
 is his approach that differs while analyzing the market.

Once the company has been selected, the fund manager will do a scenario
analysis to determine how the company will fare under different economic
 conditions like interest rate change, change in tax laws, change in
price of raw material, etc.

The bottom up stock picker zeros in on a particular company that appears
 to have good potential irrespective of the sector it belongs. The fund
manager’s base criteria for adding the stock of a particular company to
his portfolio is the merits of the individual stock and his faith on its
 prospects.

Top Down or Bottom Up?

Let us look at the salient features of the top-down and bottom-up
approach:

Top down will deliver by picking on the right sectors
Bottom up will yield positive results by picking stocks of the right
companies.
Both will yield profit to the investors form the investments made.

Relative approach to each strategy

The bottom up research is more in-depth in nature and fund managers need
 to perform extensive studies of individual companies to find out the
best ones. This strategy is adopted by those fund managers who have
substantial access to on-ground research resources so that the study is
worthwhile and the correct decision can be arrived at.

Global investors like the FIIs’ usually prefer the top down approach.
This helps them to get their country specific allocations in place and
then they can concentrate on specific sectors within the countries that
they want to invest in.

Besides the FIIs’, fund managers who look to cash in on momentum choose
the top down strategy for their investment decisions. Some economists
feel that the top down approach is high risk-high return strategy as
compared to bottom up strategy that is a more cautious approach.

Conclusion

The actual working of the fund manager is based on a judicious mix of
top down and bottom up approach. The fund manager’s decision to go in
for bottom up strategy usually happens when he has sufficient research
resources to back his study.

Why fear is good when it comes to investing

Run Forrest run! is the famous line from the movie- Forrest Gump where he’s told to run away
from trouble and not to be brave. Survival is not of the fittest, but of
 the ones who adapt to change. So, while facing your fears may generally
 be a good idea, in investing, fear isn’t all that bad. Accepting it and
 learning from it is better than just facing it. Embrace your fear and
channelize it to make it work for you. How do you do that?

1.    Fear of the unknown: We are generally scared of things we don’t
know or don’t understand. Do some research before you venture out in the
 world of investing. A map/ guide is useful when you don’t know how to
get to where you’re going. Determine your destination (time horizon) and
 choose a map(do it yourself) or a guide(an advisor) you can trust. Do
all your checks before you choose either of these and also see how
comfortable you are when you approach this. A little discomfort when you
 start a journey is ok as long as you are confident and this settles in
sometime. A word of caution here, take small steps, invest small
amounts, see your experience and then trust some more and invest some
more. You could also dabble in different asset classes via mutual funds
for fairly small amounts and evaluate the experience.

2.    Fear of losing capital: Since the pain of losing a rupee is much
more than gaining one, we tend to focus our energy on avoiding losses
rather than making profits. Nothing wrong with this approach, but this
limits the growth of our investment portfolio since we want our money to
 work harder for us. There are ways to achieve capital protection whilst
 not compromising on growth. Asset allocation and investing according to
 one’s time horizon are two good ways to address this concern.

3.    Fear of volatility: Whilst we like predictability, it comes at a
cost. In your portfolio, ensure there is a mix of stable and growth
assets in a proportion which lets you do two things: Meet your goals and
 lets you sleep peacefully at night. Easier said than done though.

4.    Fear of missing out: When the talk at social gatherings is around
investments- exotic or otherwise and people brag about how they have
bagged an investment which doubled or tripled their invested amount, you
 tend to feel left out because either you are not invested or just not
interested. People more often than not exaggerate their wins and
conveniently avoid mentioning their own losses. So, don’t fall prey to
that and take these conversations with a pinch (or a bucket, according
to your taste) of salt. The normal reaction that follows such
conversations is to search for that particular stock/ option/ asset
class and invest in it. And more often than not, this tends to be a bad
decision because you’re chasing something for its past performance and
not evaluating it based on its future prospects. So, tell yourself this
that while your portfolio may be boring, it is doing its job- it lets
you be interesting and enjoy life.

For generations, we have been investing in FDs and RDs, it made sense
for our previous generations when the options were limited and
information wasn’t as readily available as it is today. Their
expectations from life and from their money were also limited. Today,
with our aspirations, lifestyle and expectations, investments in FDs
simply won’t help us reach where we want to get to. We need better and
smarter solutions for our investments and you should invest some time to
 evaluate who/ how this can be done.

Identifying and working with your fears is the first step to becoming a
smarter, better investor.

While Investing Focus on your Goals than Chasing Returns .

There was one hilarious commercial some time back from an automobile
company which played on the Indian psyche of putting overwhelming
emphasis on the mileage over everything else. “Kitna  deti  hai?”, was
the question that the curious onlooker had asked of an incredulous
protagonist – one was explaining about Rockets, another a luxury Yatch
& yet another about a new generation battle tank!

But, I was not surprised; for I face the same questions from those I
deal with.
Focus on the basics :   What are we trying to achieve in life? Are we
trying to get maximum returns to the exclusion of everything else? If
so, will it solve all the problems?

Most people focus on returns and chase products that offer the best
returns at any point. There is indeed an insistent belief that high
returns are something that we need to constantly strive for, to get
ahead in life.  Hence, we tend to pick up the products which are “hot”
or trending, at any given point.

The predominant majority get it wrong as they join the bandwagon pretty
late – whether it is a stock market rally or a gold / real estate surge.
 In doing so, they typically tend to get in when the rally is well
underway. In such a situation, they tend to purchase at inflated prices
which will cap their upsides or worse still, set them up for potential
downsides when the rally blows over.

Let me take an example. Suppose, Ramesh has bought real estate in 2012
when the markets were doing reasonably well. However, the markets have
turned turtle and are offering low to negative returns since.  If Ramesh
 has bought property, just to ride the wave, a lot of things would have
gone horribly wrong.

Firstly, the objective of fantastic return has not been met. Secondly,
Ramesh has taken some loans which he is servicing and paying a high
interest for an asset, which is not appreciating.   He has not
considered any other parameter while investing – like liquidity,
concentration risk, risk inherent in this asset, tenure, returns etc.
This has been a blind investment into what is essentially an illiquid
product. Ramesh wants to sell & exit – but cannot, as there are no
buyers! He is now badly stuck.  Many would be able to identify with
this.

People get into such transactions based on early successes. They tend to
 feel invincible, if the first few transactions go well. Bets go up
steadily with each transaction – which is where the problem is.
Eventually when the cycle turns, they are left holding their lemons. A
string of successes in the beginning is, however, a wrong teacher!

People advertise their successes while quietly burying their failures in
 investment.  When some talk passionately about their successes, there
are many who get taken in – and the cycle of people trooping in to feed a
 frenzy,  gets underway.

While moving from product to product chasing returns, we fail to
consider important parameters which are equally important – like
liquidity, risk-reward, suitability, tenure etc. Such dalliances hardly
help in progressing towards smooth achievement of the goals.

Focus on goals :  What is important in life is to achieve the
significant goals one may have.  In fact, achieving our goals in the
time frames that we want is what is of paramount importance.

The typical high priority goals are – retirement, children’s education,
acquiring a home etc.  Each goal will have a certain time horizon.
Investments will have to be done so that we may be able to meet the
goals. Hence, the investment should be such that it is consistent with
the need to achieve the goal.

For instance, if Ramesh wants to plan for child’s education, it might be
 a decade away. For this goal, his investments can be in comparatively
aggressive assets like equities.  In this case, near term liquidity is
not a concern area, tenure of the investment can be long & regular
income is not necessary.

Once we decide on the instrument which has the potential for good
returns, we can stay invested and not liquidate it to chase the next
rainbow which appears on the horizon. Many of the assets have their
cycles & those who stay invested for long, get to weather the cycles
 better; also, with longer tenure, the inherent risk reduces & the
return potential improves. Market timing becomes less and less
important, if the tenure is long.

Strategic & Tactical asset allocation :  Normally, client’s assets
are allocated based on their goals, how long the client has till
retirement, their risk tolerance levels & other considerations like
liquidity, risk-reward of the asset, requirement of regular returns
& their frequency etc.

Once the assets have been allocated as per such considerations, it
should be allowed to work. For that, the assets should be allowed to
remain invested for long to show desired results. That is the strategic
asset allocation.

Based on the movements in the markets & based on opportunistic
considerations, one may want to bring in some new assets which are doing
 well then & make certain changes to the portfolio. But these
changes should be such that they tinker around the edges & not
change the core allocation. This is a tactical asset allocation to
potentially take advantage of the unfolding opportunities.  A change in
the portfolio constitution of 10-15% can be fine when it comes to
tactical allocation. If it goes beyond that, it will change the
strategic asset allocation that has been suggested, which is not
desirable.

In summary :  Goal achievement is what is really important.  Hence, it
is important to keep the focus on the life goals, more than what
investment returns one gets at any point. One should invest in a
disciplined manner following the strategic asset allocation suggestions,
 which is what ensures goal achievement. It is not necessary to get all
excited about assets which are doing well at some intermediate point;
it’s more important to stay focused on the goal and stick to a plan than
 running like a hare in all directions. Reviews (of both the plan &
the portfolio ) are to be done regularly, to make any changes in the
allocations.

High returns are wrongly seen as what helps one achieve goals. Also, it
helps to understand that in a diversified portfolio, all components
would not be doing well, always. But, a properly constructed portfolio
would have various components and they need to be kept intact. Worrying
about some component that is not performing is another common fallacy.
What should be seen is whether the portfolio as such is performing well.
 Disciplined investments & sticking to the suggested allocation /
portfolio is what actually helps achieve one’s goals.

We need to wean ourselves away from our near obsession with returns – in
 our best interests. Kitna deti hai fixation can be very costly indeed!

There was one hilarious commercial some time back from an automobile company which played on the Indian psyche of putting overwhelming emphasis on the mileage over everything else. “Kitna deti hai?”, was the question that the curious onlooker had asked of an incredulous protagonist – one was explaining about Rockets, another a luxury Yatch & yet another about a new generation battle tank! But, I was not surprised; for I face the same questions from those I deal with. Focus on the basics : What are we trying to achieve in life? Are we trying to get maximum returns to the exclusion of everything else? If so, will it solve all the problems? Most people focus on returns and chase products that offer the best returns at any point. There is indeed an insistent belief that high returns are something that we need to constantly strive for, to get ahead in life. Hence, we tend to pick up the products which are “hot” or trending, at any given point. The predominant majority get it wrong as they join the bandwagon pretty late – whether it is a stock market rally or a gold / real estate surge. In doing so, they typically tend to get in when the rally is well underway. In such a situation, they tend to purchase at inflated prices which will cap their upsides or worse still, set them up for potential downsides when the rally blows over. Let me take an example. Suppose, Ramesh has bought real estate in 2012 when the markets were doing reasonably well. However, the markets have turned turtle and are offering low to negative returns since. If Ramesh has bought property, just to ride the wave, a lot of things would have gone horribly wrong. Firstly, the objective of fantastic return has not been met. Secondly, Ramesh has taken some loans which he is servicing and paying a high interest for an asset, which is not appreciating. He has not considered any other parameter while investing – like liquidity, concentration risk, risk inherent in this asset, tenure, returns etc. This has been a blind investment into what is essentially an illiquid product. Ramesh wants to sell & exit – but cannot, as there are no buyers! He is now badly stuck. Many would be able to identify with this. People get into such transactions based on early successes. They tend to feel invincible, if the first few transactions go well. Bets go up steadily with each transaction – which is where the problem is. Eventually when the cycle turns, they are left holding their lemons. A string of successes in the beginning is, however, a wrong teacher! People advertise their successes while quietly burying their failures in investment. When some talk passionately about their successes, there are many who get taken in – and the cycle of people trooping in to feed a frenzy, gets underway. While moving from product to product chasing returns, we fail to consider important parameters which are equally important – like liquidity, risk-reward, suitability, tenure etc. Such dalliances hardly help in progressing towards smooth achievement of the goals. Focus on goals : What is important in life is to achieve the significant goals one may have. In fact, achieving our goals in the time frames that we want is what is of paramount importance. The typical high priority goals are – retirement, children’s education, acquiring a home etc. Each goal will have a certain time horizon. Investments will have to be done so that we may be able to meet the goals. Hence, the investment should be such that it is consistent with the need to achieve the goal. For instance, if Ramesh wants to plan for child’s education, it might be a decade away. For this goal, his investments can be in comparatively aggressive assets like equities. In this case, near term liquidity is not a concern area, tenure of the investment can be long & regular income is not necessary. Once we decide on the instrument which has the potential for good returns, we can stay invested and not liquidate it to chase the next rainbow which appears on the horizon. Many of the assets have their cycles & those who stay invested for long, get to weather the cycles better; also, with longer tenure, the inherent risk reduces & the return potential improves. Market timing becomes less and less important, if the tenure is long. Strategic & Tactical asset allocation : Normally, client’s assets are allocated based on their goals, how long the client has till retirement, their risk tolerance levels & other considerations like liquidity, risk-reward of the asset, requirement of regular returns & their frequency etc. Once the assets have been allocated as per such considerations, it should be allowed to work. For that, the assets should be allowed to remain invested for long to show desired results. That is the strategic asset allocation. Based on the movements in the markets & based on opportunistic considerations, one may want to bring in some new assets which are doing well then & make certain changes to the portfolio. But these changes should be such that they tinker around the edges & not change the core allocation. This is a tactical asset allocation to potentially take advantage of the unfolding opportunities. A change in the portfolio constitution of 10-15% can be fine when it comes to tactical allocation. If it goes beyond that, it will change the strategic asset allocation that has been suggested, which is not desirable. In summary : Goal achievement is what is really important. Hence, it is important to keep the focus on the life goals, more than what investment returns one gets at any point. One should invest in a disciplined manner following the strategic asset allocation suggestions, which is what ensures goal achievement. It is not necessary to get all excited about assets which are doing well at some intermediate point; it’s more important to stay focused on the goal and stick to a plan than running like a hare in all directions. Reviews (of both the plan & the portfolio ) are to be done regularly, to make any changes in the allocations. High returns are wrongly seen as what helps one achieve goals. Also, it helps to understand that in a diversified portfolio, all components would not be doing well, always. But, a properly constructed portfolio would have various components and they need to be kept intact. Worrying about some component that is not performing is another common fallacy. What should be seen is whether the portfolio as such is performing well. Disciplined investments & sticking to the suggested allocation / portfolio is what actually helps achieve one’s goals. We need to wean ourselves away from our near obsession with returns – in our best interests. Kitna deti hai fixation can be very costly indeed!

Grow your money, instead of keeping it idle

As a young working professional, chances are you already have a savings account, and if you’ve switched jobs, you probably have much more. According to the RBI report in 2015, a colossal amount of money to the tune of Rs.26 trillion were lying in saving deposits. With an expanding salaried class, the number will only go up further.

One of the major advantages of a savings account is liquidity. People usually keep money in their savings account because it allows them to withdraw amounts at any time. Also, they receive interest on the deposit between 4-6% per annum depending on the bank which is slightly better than keeping it under the mattress.


Therein lies the problem. With the consumer price index at 5.77% in June 2016, your money has not grown, at best it has been on par. At worst, the value of your hard earned buck has lost its sheen.

You require a savings plan with decent interest rates to beat inflation and also liquidity so that in the event of unplanned expenses you do have the option of withdrawing your money. A scheme where you can get daily or weekly dividends which can ideally be reinvested to get higher returns. These can be explored in an open ended scheme with investments in debt funds and money market instruments which have a relatively lower risk.


For those who neither have the time nor the expertise to deal with the myriad of Mutual Fund schemes, Liquid  Funds (An Open-ended Income Scheme) could be a smart option with a minimum initial subscription amount of Rs.₹1000 and has zero entry or exit load. The scheme invests in low-risk Debt Market Securities and Money Market Securities. Now, debt schemes which are held long-term (more than three years) are taxed at around 20% with indexation. If you withdraw your investment within three years, you will be taxed according to the tax slab you fall under. But there is another option. Birla Sun Life Cash Manager allows you to opt for daily or weekly dividends. These dividends are exempt from tax in the hands of the investors.

In India, many people opt for fixed deposits instead, which can be attractive with solid interest rates at 7-7.5% and zero risks. Why zero risk? Because all fixed deposits up to 1 lakh rupees are insured by the Deposit Insurance and Credit Guarantee Corporation (DICGC), a subsidiary of the RBI. And if the central bank is unable to secure this, then you have bigger things to worry about.


However, as the name suggests fixed deposits have a fixed tenure and aren’t liquid enough. Sure you can withdraw the amount before term, but prematurely withdrawing your money could lead to lower interest rate and
in some cases a penalty. Not to mention you are taxed on the returns which can be high for those falling in the 20% and above tax bracket. However, Fixed Deposits give guaranteed rate of return.

Whether you are planning for a particular financial goal or looking to build wealth, the maxim is to live by is to “grow your money”.
 
Note-: Past Performance may or may not be sustained in future.  Investment in schemes of  mutual fund carry higher risk, does not guarantee any returns and any investment decision needs to be taken only after consulting the Tax Consultant or Financial Advisor. . In view of individual nature of tax consequences, each investor is advised to consult his/ her own professional tax advisor.