Perspectives on Investing

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Perspectives on Investing
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WHAT REALLY MATTERS
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Some questions we will try to address today
What, when, how do I buy financial
products? What are the factors
that determine
Are market levels relevant?? What is
better buy and hold or trade?
returns? I always seem to buy when
the market has peaked, is there a better way?
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Are you Saving or are you Investing?
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Profession vs. Investments
PROFESSION
INVESTMENTS
INCOME
CREATION/
NURTURE/
ACCUMULATION
PRESERVATION
OF WEALTH
OF WEALTH
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Profession vs. Investments
PROFESSION
INVESTMENTS
INCOME
TRUST YOUR
YOU KNOW
ADVISOR TO
BEST
KNOW BEST
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Consider the rising cost of living!
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RISING COST OF LIVING
Planning a wedding today
Wedding at the Taj
Guests Price per plate Decoration
Other Expenses / Gifts, etc
500 Rs. 2,000 Rs.
10,00,000 Rs. 15,00,000
Rs. 35,00,000
Total Expenses
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RISING COST OF LIVING
Planning a wedding for your child in 20 years
Wedding at the Taj
Guests Price per plate Decoration
Other Expenses / Gifts, etc
500 Rs. 6,414 Rs. 32,07,135 Rs.
48,10,703
Total Expenses
Rs. 1,12,24,838
Assuming Inflation _at_ 6 for 20 years
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RISING COST OF LIVING
Household expenses are on the rise
Inflation will further shrink your buying power!
1 Liter Carton Milk
A Loaf of Bread
1 Kg Apples
Amount Rs. 25 Rs. 40 Rs. 72 Rs. 128
Year 2000 2010 2020 2030
Amount Rs. 10 Rs. 16 Rs. 29 Rs. 51
Year 2000 2010 2020 2030
Amount Rs. 25 Rs. 80 Rs. 143 Rs. 257
Year 2000 2010 2020 2030
Assuming Inflation _at_ 6 for years 2020 and 2030
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RISING COST OF LIVING
Yesterdays luxuries are becoming todays
necessities
Products previously thought as luxuries are the
norm today
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RISING COST OF LIVING
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Our life cycle Focused on meeting current needs
only
Can we ignore planning for the future?
Retirement Child 2s Marriage Child
1s Marriage House Child 2s
Incom
e
College
Child 2
Child 1s
College Child 1 Car Marriage
Working Life
0
Retired Life
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60
Birth and Education
75
Age
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Failing to plan today is as good as
planning to fail in the future!
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What typically drives us to invest?
?Greed / Fear? ?News, hot tips, gut
feeling? ?Macro-economic or global
scenario? ?Political environment? Shoul
d these be the main motivators to invest?
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Creating long term wealth What really matters?
?5 of the return Relative performance of
selected funds ?95 of the return Asset
Allocation Ability to handle emotional
financial stress Monitoring and tracking your
portfolio periodically
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Importance of Asset Allocation
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ASSET ALLOCATION
Asset Allocation
? Diversifies your investments across asset
classes like equities / stocks, bonds / debt,
cash, real estate, etc ? A common sense
investment strategy ? Tailored to your needs
and goals
FINANCIAL GOALS
ASSET ALLOCATION
RISK PROFILE
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ASSET ALLOCATION
Benefits of Asset Allocation
? May reduce overall risk ? May improve your
chances to earn more consistent returns over
time ? Helps keep you focused on your goals
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ASSET ALLOCATION
Asset Allocation Need based strategy
Capital Growth
Risk Medium to High Period 3 to 5
years Income Risk Medium to Low
Stocks Growth Funds Bonds Debentur
es
Period 1 to 3 years Income/Bond
Funds Company Fixed Deposits Capital
Preservation
Money Market Funds Short-term deposits /
Government Paper
Risk Low to Medium Period Less than 1 year
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ASSET ALLOCATION
Asset Allocation Age based strategy
Age Group 25-40 10.00
Age Group 41-50
15.00
Growth (Equity) Income (Bonds)
Growth (Equity) Income (Bonds)
15.00
35.00
Liquidity (Banks)
Liquidity (Banks) 50.00 Age Group Above
60 yrs
75.00 Age Group 51-60
20.00 35.00
25.00 25.00
Income (Bonds) Growth (Equity) Liquidity
(Banks)
Income (Bonds) Growth (Equity) Liquidity
(Banks)
45.00
50.00
The above are only hypothetical examples and are
not necessarily indicative of the strategies to
follow for the age groups
mentioned above
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ASSET ALLOCATION
Making asset allocation work
Periodic Rebalancing
Rebalancing helps investors enter equities at
lows and exit at highs without having to
time the market
EXAMPLE Equity Funds Income Funds
Profile objective based allocation 70 30
Bull Market fluctuation 80 20
Rebalance 70 30
EXAMPLE Equity Funds Income Funds
Profile objective based allocation 70 30
Bull Market fluctuation 80 20
Rebalance 70 30
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ASSET ALLOCATION
Making asset allocation work
Periodic Review Perio
dic review of objectives can ensure an investor
is not left at the vagaries of equity markets
when he needs his money
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Creating long-term wealth
What really matters?
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WHAT REALLY MATTERS
Where you invest
Equities can outperform other asset classes over
time Average inflation
figures for the past 5, 10 15 years were 5.29,
5.03 4.98 respectively As of 31 March,
2011. Compounded Annualized Growth Rate (CAGR),
Gold Data International Spot Gold Prices
Average of 10yr GOI yield to maturity, N.A. Not
Available. FD rate shown above is rate effective
from 14.02.2011 for deposits below Rs. 1 crore
as offered by State Bank of India (Source
www.sbi.co.in). Bank Fixed Deposits
are relatively safer as they are covered under
Deposit Insurance and Credit Guarantee
Corporation of India to the extent of Rs. 1 lakh
per account. GOI bond offers fixed and assured
returns. Source BSE, Newswire18. Past
performance may or may not be sustained in future.
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When you invest
Consider the case of Franklin India Bluechip Fund
(FIBCF) ? Over the 17 period December 01 1993
March 31 2011, spanning 4186 business days,
Franklin India Bluechip Fund grew at an
annualized rate of 25.67 p.a. ? If in the
process of timing, an investor had been out of
the market on the 10 best days, his returns
would be 4.89. ? Staying out on the 30 best
days, his returns would be 1.86. Past
performance may or may not be sustained in
future. Returns of FIBCF and benchmark (BSE
Sensex) 1 yr, 3 yr, 5 yr , since inception
FIBCF 12.77, 14.20, 14.38, 25.67 BSE
Sensex 10.94, 7.52, 11.50, 10.79.
Returns are compounded and annualized based
on 31 Mar 2011 Growth Plan NAV of
Rs. 219.1105. Inception Date 01 Dec 1993. The
scheme became open-ended in Jan 1997. Dividends
are assumed to be reinvested and bonus has been
adjusted. Load is not taken into consideration.
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WHAT REALLY MATTERS
When you invest
Take another example, the BSE Sensex For the
20 year period ended March 31 2011 if you had
?Stayed fully invested, your returns would
be ?Missed the 10 best days, your returns would
be ?Missed the 20 best days, your returns would
be ?Missed the 30 best days, your returns would
be ?Missed the 40 best days, your returns would
be
15.10 9.23 5.68 2.75 0.02
The example given above is purely
hypothetical and illustrative only since one
cannot invest directly in the BSE Sensex. Past
performance may or may not be
sustained in future.
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WHAT REALLY MATTERS
When you invest
Points to ponder ?Perfect market timing requires
one to get two things right the right
exit point and the right re-entry
point ?Getting even one of these wrong can
affect ones returns ?Mathematically, the
odds are heavily against one being able
to perfectly time the market ?The probability
of getting the timing right is 0.23 So
whats a better way to invest?
10 best days from 4186 as shown in the example
of FIBFC
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WHAT REALLY MATTERS
Not market timing but time in the market matters!
Consider the example of Franklin India Bluechip
Fund, a fund with a 17 year track record across
market cycles Assu
med Rs. 10000 invested at Inception in FIBCF and
BSE Sensex. Past performance may or may not be
sustained in future. Dividends are assumed to be
reinvested and Bonus is adjusted. Load is not
taken into consideration. Period Since Inception
(01 Dec 1993) to 31 March 2011
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Staying invested helps!
While equities may be volatile in the short-term,
over the long term, the probability of loss
decreases. Consider the example of
FIBCF Past performance may or
may not be sustained in future. Annualized
Compounded returns based on Growth Plan NAVs.
Period - Inception date to 31 March 2011 BSE
Sensex rolling returns for the same period
Maximum returns, Minimum returns, Average
returns, Possibility of making money, Possibility
of losing money 1 Year 110.38, -56.26,
14.93, 62.24, 37.76 3 Year 62.30, -18.52,
11.98, 71.90, 28.10 5 Year 47.22, -7.81,
12.91, 80.67, 19.33 10 Year 19.85, 0.92,
11.80, 100.00, 0.00. Sales load has not been
taken into consideration. Dividend/Bonus are
adjusted. Inception Date 01 December
1993. Over a 5 year horizon, investors have
made money!
Maximum Returns Minimum Returns Average Returns Possibility of Making Money Possibility of Losing Money
1 Year 199.42 -50.60 31.86 75.72 24.28
3 Year 79.75 -9.57 26.89 88.63 11.37
5 Year 56.08 9.66 28.81 100.00 0.00
10 Year 40.19 19.47 28.42 100.00 0.00
Maximum Returns Minimum Returns Average Returns Possibility of Making Money Possibility of Losing Money
1 Year 199.42 -50.60 31.86 75.72 24.28
3 Year 79.75 -9.57 26.89 88.63 11.37
5 Year 56.08 9.66 28.81 100.00 0.00
10 Year 40.19 19.47 28.42 100.00 0.00
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WHAT REALLY MATTERS
How you invest
Cycle of market emotions should not rule
you Has been one of my best
EXUBERANCE
investment decisions"
"Markets are on a roll" "Should be a temporary
correction"
EXCITEMENT
"I can withstand this, things should turn
around"
"I've finally recovered my principal. But should
I exit now?"
RELIEF
ANXIETY
"Should I have exited when I was making
money" "Once I recover my principal I'll
exit"
FEAR
"Will the market ever go up?" "How long
will this correction last?" HOPE PAN
IC There is often no relationship between
performance of a fund and an investors
performance
RELIEF
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WHAT REALLY MATTERS
When you start
Starting early can make a difference to your
wealth Gita, Age 30
Sita, Age 40
So what do you think is their
retirement corpus at age 60 assuming a
return of 10 annually on their
investments? 10,000 p.m 10,000 p.m
Rs. 76.56 lacs
Rs. 2.27 Crores
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WHAT REALLY MATTERS
What are the returns you earn
The returns you earn over time can make a
difference Rs.4.97 Crores Rs. 2.67
Crores Rs. 1.20 Crores
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Value at age 60 of Rs. 100,000 invested every
year at age 30 upto 58 at different rates of
returns
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SYSTEMATIC INVESTMENT PLAN
What is a Systematic Investment Plan (SIP)?
? The term systematic investing applies to the
process of investing regularly i.e. at fixed
intervals, say monthly or quarterly ? Why
invest systematically? Most of us get a
monthly remuneration or salary Most of us pay
monthly EMIs on a car, house, etc Isnt it
obvious we should also invest monthly?
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SYSTEMATIC INVESTMENT PLAN
Two basic principles on which SIP works
? Power of Compounding ? Rupee Cost Averaging
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SYSTEMATIC INVESTMENT PLAN
Rupee Cost Averaging at work
NAV 12.00 Units 83.3
NAV 10.0 Units 100
NAV 10.0 Units 100
1-May-10
1-Jan-10
1-Feb-10
1-Apr-10
1-Mar-10
NAV 8.0 Units 125 Average Price
per unit Rs. 10.00 Average Cost per unit
Rs. 9.79 Assume Rs. 1,000 invested per month
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SYSTEMATIC INVESTMENT PLAN
How SIP has worked
If you had invested Rs. 1,00,000 every month
through an SIP in FIBCF, it would have grown
to Past performance
may or may not be sustained in future. Annualized
and compounded returns based on 31 March 2011
Growth Plan NAV of 219.1105. Load is not taken
into consideration. Dividends assumed to
be reinvested and Bonus adjusted. The scheme
became open end in January 1997. Monthly
investment of equal amounts invested on the 1st
day of every month has been considered. Inception
Date 01 December 1993.
Rs. 1,00,000 per Month over FIBCF FIBCF BSE Sensex Rs. 1,00,000 per Month over BSE Sensex Rs. 1,00,000 per Month over
Rs. 1,00,000 per Month over Rs. CAGR Rs. CAGR
1 year (Rs. 12,00,000) 12,65,300 10.30 12,61,000 9.61
3 years (Rs. 36,00,000) 51,82,800 25.22 47,93,400 19.56
5 years (Rs. 60,00,000) 91,52,800 16.94 81,57,500 12.26
7 years (Rs. 84,00,000) 1,74,01,600 20.46 1,52,06,000 16.67
10 years (Rs. 1,20,00,000) 5,06,37,900 27.14 3,51,13,300 20.37
Since Jan 97 (Rs. 1,71,00,000) 15,84,36,200 27.83 6,09,01,600 16.32
Rs. 1,00,000 per Month over FIBCF FIBCF BSE Sensex BSE Sensex
Rs. 1,00,000 per Month over Rs. CAGR Rs. CAGR
1 year (Rs. 12,00,000) 12,65,300 10.30 12,61,000 9.61
3 years (Rs. 36,00,000) 51,82,800 25.22 47,93,400 19.56
5 years (Rs. 60,00,000) 91,52,800 16.94 81,57,500 12.26
7 years (Rs. 84,00,000) 1,74,01,600 20.46 1,52,06,000 16.67
10 years (Rs. 1,20,00,000) 5,06,37,900 27.14 3,51,13,300 20.37
Since Jan 97 (Rs. 1,71,00,000) 15,84,36,200 27.83 6,09,01,600 16.32
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To put it in perspective
?Where you invest Equities can outperform other
asset classes over time ?When you invest
Time in the market and not market timing
matters! ?How you invest Avoid market
emotions and market noise ?When you start
Starting early can help in the long-run ?What
are the returns you earn A small difference over
the long term can make the difference to your
overall corpus
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A word on risk
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We all view risks in our own way
There is a risk to investing There is a risk to
not investing, as well There is a risk to
investing in equities There is a risk to not
investing in equities, as well There is no
such thing as a risk-free investment It is
important that you are comfortable with the
risks associated with whatever investment avenue
you choose
Heres wishing you all success in investing!
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Thank You