Insights Archives - Page 6 of 9

July 31, 2023July 31, 2023

Contrarian investing: Why it pays to be different

Investing in the stock market requires a strategic approach and a thorough understanding of market trends and dynamics. One popular adage that resonates with investors worldwide is “Buy low, sell high.” This notion encapsulates the essence of investing in underperforming sectors.

Investing in underperforming sectors is often referred to as the contrarian approach. It involves taking a position opposite to prevailing market sentiment, which is usually bearish during times of sector underperformance. Contrarian investors believe that markets are not always efficient and tend to overreact to short-term events, leading to undervaluation of certain sectors or stocks.

Advantages of Investing in Underperforming Sectors

Lower Entry Price: Investing in underperforming sectors allows investors to purchase stocks at lower prices. When the sector eventually rebounds, these investments can yield significant returns.
Potential for High Returns: As underperforming sectors recover, stock prices have the potential to surge, providing investors with attractive gains.
Reduced Downside Risk: While any investment carries inherent risks, buying into underperforming sectors at low prices can mitigate potential losses since stock prices are already discounted.
Diversification Benefits: Adding underperforming sectors to an investment portfolio can enhance diversification, reducing overall portfolio risk.
Long-Term Growth Opportunities: Industries experiencing temporary setbacks may have long-term growth prospects that investors can capitalize on.

Examples of successful contrarian investments in the Indian equity market:

IT Sector (2001-07):

During the dot-com bubble burst in the early 2000s, the Indian IT sector faced significant underperformance. However, contrarian investors who recognized the long-term potential of the industry were rewarded handsomely as the sector rebounded and experienced remarkable growth in subsequent years.

During 2000-01, IT sector corrected by 85% – providing a reasonable valuation to invest.

A SIP in ICICI Prudential Technology Fund (from 2001-2007) delivered an annual return of 44%.

Banking Sector (2008-10):

In the wake of the global financial crises, India’s banking sector faced considerable challenges. However, those who adopted a contrarian approach and invested in fundamentally strong banks witnessed substantial gains as the sector rebounded amidst economic recovery.

During 2007-08, banking sector corrected by 60% – providing a reasonable valuation to invest.

A SIP in Nippon India Banking Fund (from 2008-2010) delivered an annual return of 50%.

Auto Sector (2019-2023):

The Indian auto sector faced a slowdown during 2019-20 due to various factors, including economic slowdown, liquidity crunch, and changes in regulations. Many leading automobile companies’ stock prices experienced a significant decline. However, investors who recognized the sector’s importance in the Indian economy and its potential for recovery made strategic investments. As the economy gradually improved and consumer demand picked up, the auto sector started to rebound, leading to substantial gains for those who invested during the downturn.

During 2018-20, auto sector corrected by 60% – providing a reasonable valuation to invest.

A SIP in UTI Transportation Fund (from 2019-2023) delivered an annual return of 23.25%.

Pharmaceuticals Sector (2017-2021):

In 2017 & early 2018, the Indian pharmaceutical sector was under pressure due to increased scrutiny by regulatory agencies, pricing pressures in international markets, and increased competition. As a result, several pharma stocks witnessed a bearish trend, creating an opportunity for contrarian investors. Investors who had confidence in the long-term growth prospects of the Indian pharmaceutical industry and chose fundamentally strong companies with robust pipelines benefited from the sector’s eventual recovery.

During 2016-20, pharma sector corrected by 45% – providing a reasonable valuation to invest.

A SIP in DSP Healthcare Fund (from 2019-2021) delivered an annual return of 46%.

Smallcap funds:

Contrarian investing can be applied to funds based on market capitalization as well (Large, Mid and Small). Smallcaps performed very poorly from 2018-2020, correcting by 50-80% in some cases. In mid 2020, we recommended to invest in UTI Smallcap Fund to take the benefit of cheap valuation of smallcaps. Today, the portfolios highlight the return of the contrarian call we made.

While the contrarian approach can be rewarding, it is essential to acknowledge its inherent risks:

Market Timing: Identifying the right time to invest in an underperforming sector can be challenging, as market sentiment can be unpredictable.
Fundamental Analysis: Investors must conduct thorough fundamental analysis to ensure they invest in fundamentally strong companies within the underperforming sector.
Patience and Long-Term View: Contrarian investments may take time to materialize (usually 2-4 years), requiring patience and a long-term investment horizon.

Conclusion

Investing in underperforming sectors can be a prudent strategy for those willing to adopt a contrarian approach. By purchasing undervalued stocks during periods of underperformance (preferably through SIP), investors position themselves to benefit from potential future growth when the sector eventually rebounds. However, successful implementation of this strategy necessitates careful research, sound fundamental analysis, and a long-term perspective.

June 21, 2023June 21, 2023

Investing in the US markets

In the last twelve years, US technology index – NASDAQ 100 has delivered 544% – almost double of Sensex (220%). Even better, if one would have invested from India, the investor would have earned a return of approx. 1,000% just because of dollar appreciation from INR 45 per dollar to INR 83 per dollar. Hence, international exposure to US stocks can not be avoided in the portfolio.

Here are the key benefits of investing in US markets (NASDAQ 100) from India:

1. Access to 100 of the largest non financial companies:

Following 10 companies by market capitalization have a weightage of 50% in NASDAQ 100:

2. Hedge against INR depreciation:

As evident from the chart below, an investor earned around 5X returns over Sensex in the last 12 years just by investing in ETFs of NASDAQ 100 from India.

3. Global exposure:

NASDAQ-100 Index comprises of companies with overseas business & generates the bulk of their revenue from different countries.

It comprises of large multinational companies with focus on disruption.

4. High-growth & innovative large cap companies

NASDAQ-100 companies on an average spend 3.5x more than S&P 500 index companies for R&D. 62 companies in NASDAQ 100 in near past have filed patents across 34 key areas of disruptive technology.

5. Exposure to “new economy” sectors

NASDAQ 100 is market capitalization weighted index comprised of 100 most innovative and rapidly expanding non-financial Companies. US economy growth is shifting from capital intensive, traditional industries to the new economic sectors such as healthcare, technology and consumer. Last 10 years sales growth across industry in US large and Midcaps can be seen in Real Estate, healthcare and technology.

6. Sector and geographical diversification

However, there are certain points one should consider before investing in the US markets:

Volatility: US markets are more volatile than Indian markets;
Taxes: W.e.f. 01/04/2023, Indian government will tax foreign funds, foreign ETFs and foreign stocks at per the slab rate of investors (without the lower tax of 10% as applicable for Indian equities);
Currency exchange rates can be unfavorable at times;
Higher interest rates may affect the growth of companies listed in US which may be evident in lower stock returns.
Since these companies generate most of their revenues across the world, a recession may affect the stock returns in near term.

However, for the long run, we remain bullish on companies listed on NASDAQ 100. An investor with aggressive risk appetite or suitable investment objective (foreign children education or world tour etc.) may consider investing in the US markets. For more information, kindly connect with your respective relationship manager.

June 13, 2023June 13, 2023

Sleeping Elephant Is Rising

As per Maddison (2020) estimates, India’s share in the global GDP was 24% in 1700. By 1820, this number fell to 16% and by the time of independence, the number had fallen to 5%. In 250 odd years, India went from contributing a quarter of global GDP to less than 5%.

As India completed 75 years of independence, we witnessed much change. The Indian economy now stands as among the largest and fastest growing in the world, truly breaking free from the shackles of colonialism. The changes are not just been effected at a micro level. The big picture has not been lost in this quest as well:

The Insolvency & Bankruptcy Code, 2016: Not only was starting a business in India a mammoth task, but shutting one down was perhaps an even bigger one. The introduction of IBC brought the much needed clarity in the bankruptcy law.
Goods and Service Tax, 2017: considered as the most landmark reform of independent India. Prior to GST, a litany of indirect taxes exited – each requiring separate registration and filing norms. Indirect taxes varied across states and hampered interstate movement of goods. GST revenues have been above the Rs.1.4 lac crore for 12th continuous month.
Real Estate Regulatory Authority (RERA): not only protected the rights of homebuyers but also promoted the development of private enterprise by maintaining their solvency and creditworthiness.
Direct taxes: Year 2017 saw a lowered personal income tax rate, and in 2019, corporate taxes were reduced to 22% to counter underreporting of income and the black economy. The introduction of taxpayers charter, efforts to reduce litigation and use of technology have moved the system away from one of enforcement to facilitation.
Ease of doing business: When Modi government took over, India was ranked 142 in the rankings published by the World Bank. Close to 1500 old legislations were identified and scrapped. In 2020, India’s rank improved to 64 – a 79 position improvement in just 5 years.
Foreign Direct Investment: Foreign Investment Promotion Board (‘FIPB’) was abolished in 2017. Several sectors that required approval prior to investment were moved to the automatic route. For rest, individual ministries became approval authorities. India received the highest-ever FDI inflows of $ 84.8 bn in FY 22.
The process of registration of patents and trademarks was completely revamped and a large number of additional examiners were recruited. Compared to 2015-16, number of patents filed increased from 12,000 to 28,000 and the number of trademarks increased from 65,000 to 2.5 lacs in 2020-21.
Production Linked Incentives (PLI) schemes were introduced to boost size and scale in manufacturing. Focus shifted from providing support towards target linked output rather than input. Total production from PLI schemes is estimated to be $500 billion over the next few years. PLI schemes have potential to generate approx. 60L jobs in next few years.
Definition of MSME was revised. Micro enterprise defininition raised investment threshold to Rs. 1 crore (from Rs. 25 lacs) and adds turnover of less than Rs. 5 crore as an additional criteria. Investment threshold of Small & medium firms have been doubled.
Four labour codes – Code on Wages, 2020; the Industrial Relations Code, 2020; the Code on Social Security, 2020; and the Occupational Safety, Health & Working Conditions Code, 2020 – subsumed 29 central labour laws.

Infrastructure:
India has spent $14 trillion on infrastructure in the 75 years since independence. 50% of that (or $7 trillion) was spent in the last 9 years.
The pace of building National Highways increased from 12KM per day in 2014-15 to 37 KM per day in 2020-21.
Sector specific programmes such as Bharatmala (highways), sagarmala (ports), UDAN (air travel) were announced.
Close to 55% bank accounts opened in the world during 2015-18 were opened in India leveraging the simplified KYC norms.
National Payments Corporation of India – Unified Payments Interface (UPI) processed 6.8 billion transactions amounting to Rs. 51 billion in 2022.
112 backward districts are being transformed under Aspirational Districts Programme (ADP).
In 2016, Startup India was launched. A bundle of laws were eased and income tax exemption was granted. Since then, 65,000 startups have been recognized. India’s startup ecosystem is third largest in the world.

India’s growth story will be led by the private sector, with the government playing the role of enabler and a facilitator.

A growth rate of 6% during 2022-47 will see Indian economy reach $16,4 trillion by 2047, a growth rate of 8% in this period will see economy reach a size of $20.6 trillion and a 10% will take economy to $32.6 trillion.

Source: Made in India by Amitabh Kant

June 13, 2023June 13, 2023

Financial Lessons From Shrimad Bhagwat Geeta

Bhagavad Gita is the divine discourse spoken by the Supreme Lord Krishna himself and is the most popular and well known of all the sacred scriptures.

Mahatma Gandhi once said “When doubts haunt me, when disappointments stare me in the face, and I see not one ray of hope on the horizon, I turn to Bhagavad Gita and find a verse to comfort me; and I immediately begin to smile in the midst of overwhelming sorrow. Those who meditate on the Gita will derive fresh joy and new meanings from it every day.”

It is an unquestionable fact that schools and colleges gives us knowledge but Bhagavad Gita gives us wisdom and even the greatest people on this planet seek wisdom in tough situations.

Hence, in the subsequent paragraphs, we have shared key principles from Bhagavad Gita that may benefit you in the investment journey:

1. Control your emotions: The Bhagavad Gita teaches us that it is important to control our emotions, including fear, greed, and anger, when making investment decisions. Emotional decisions can lead to irrational choices that may negatively impact our portfolio.
2. Focus on long-term goals: The Gita emphasizes the importance of focusing on the long-term, rather than short-term gains. Similarly, when investing, it is important to have a long-term investment horizon and focus on achieving your financial goals.
3. Practice detachment: The Bhagavad Gita teaches us to practice detachment from the outcome of our actions. In investing, this means we should not become too attached to any particular stock or investment, and be prepared to sell it if necessary.
4. Embrace uncertainty: The Gita teaches us that the only thing that is certain is uncertainty. Similarly, in investing, it is important to acknowledge that there will always be risks and uncertainties associated with investing.
5. Be patient: The Bhagavad Gita emphasizes the importance of patience and perseverance. Similarly, when investing, it is important to be patient and avoid making impulsive decisions based on short-term fluctuations in the market.
6. Focus on the process: The Gita teaches us to focus on the process rather than the outcome. In investing, this means focusing on a sound investment strategy and sticking to it, rather than trying to chase after quick gains.
7. Seek knowledge: The Bhagavad Gita emphasizes the importance of seeking knowledge and wisdom. Similarly, in investing, it is important to educate ourselves and seek out information and insights that can help us make better investment decisions.

May 21, 2023May 21, 2023

Peter Lynch’s 25 Golden Rules for Investing

Peter Lynch is widely regarded as one of the greatest investors of all time. He is known for his successful track record as the manager of the Fidelity Magellan Fund, which he ran from 1977 to 1990.

During his tenure, Lynch grew the fund from $18 million to over $14 billion, achieving an average annual return of 29.2%, which is more than double the return of the S&P 500 index during the same period. His success was due to his investment philosophy of finding undervalued companies with strong growth prospects, and his ability to identify emerging trends before they became widely recognized.

Overall, Peter Lynch is remembered as a legendary investor who achieved exceptional results by sticking to his investment principles and taking a long-term perspective on the companies he invested in.

Rule 1: Investing is fun and exciting, but dangerous if you don’t do any work.

Rule 2: Your investor’s edge is not something you get from Wall Street experts. It’s something you already have. You can outperform the experts if you use your edge by investing in companies or industries you already understand.

Rule 3: Over the past 3 decades, the stock market has come to be dominated by a herd of professional investors. Contrary to popular belief, this makes it easier for the amateur investor. You can beat the market by ignoring the herd.

Rule 4: Behind every stock is a company. Find out what it’s doing.

Rule 5: Often, there is no correlation between the success of a company’s operations and the success of its stock over a few months or even a few years. In the long term, there is a 100% correlation between the success of the company and the success of its stock. This disparity is the key to making money; it pays to be patient, and to own successful companies.

Rule 6: You have to know what you own, and why you own it. “This baby is a cinch to goup” doesn’t count.

Rule 7: Long shots almost always miss the mark.

Rule 8: Owning stocks is like having children — don’t get involved with more than you can handle. The part-time stock picker probably has time to follow 8-12 companies, and to buy and sell shares as conditions warrant. There don’t have to be more than 5 companies in the portfolio at any one time.

Rule 9: If you can’t find any companies that you think are attractive, put your money in the bank until you discover some.

Rule 10: Never invest in a company without understanding its finances. The biggest losses in stocks come from companies with poor balance sheets. Always look at the balance sheet to see if a company is solvent before you risk your money on it.

Rule 11: Avoid hot stocks in hot industries. Great companies in cold, non- growth industries are consistent big winners.

Rule 12: With small companies, you are better off to wait until they turn a profit before you invest.

Rule 13: If you are thinking of investing in a troubled industry, buy the companies with staying power. Also, wait for the industry to show signs of revival. Buggy whips and radio tubes were troubled industries that never came back.

Rule 14: If you invest $1000 in a stock, all you can lose is $1000, but you stand to gain $10,000 or even $50,000 overtime if you are patient. The average person can concentrate on a few good companies, while the fund manager is forced to diversify. By owning too many stocks, you lose this advantage of concentration. It only takes a handful of big winners to make a lifetime of investing worthwhile.

Rule 15: In every industry and every region of the country, the observant amateur can find great growth companies long before the professionals have discovered them.

Rule 16: A stock market decline is as routine as a January blizzard in Colorado. If you are prepared, it can’t hurt you. A decline is a great opportunity to pick up the bargains left behind by investors who are fleeing the storm in panic.

Rule 17: Everyone has the brain power to make money in stocks. Not everyone has the stomach. If you are susceptible to selling everything in a panic, you ought to avoid stocks and stock mutual funds altogether.

Rule 18: There is always something to worry about. Avoid weekend thinking and ignore the latest dire predictions of the newscasters. Sell a stock because the company’s fundamentals deteriorate, not because the sky is falling.

Rule 19: Nobody can predict interest rates, the future direction of the economy, or the stock market, Dismiss all such forecasts and concentrate on what’s actually happening to the companies in which you have invested.

Rule 20: If you study 10 companies, you will find 1 for which the story is better than expected. If you study 50, you’ll find 5. There are always pleasant surprises to be found in the stock market — companies whose achievements are being overlooked on Wall Street.

Rule 21: If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.

Rule 22: Time is on your side when you own shares of superior companies. You can afford to be patient — even if you missed Wal-Mart in the first five years, it was a great stock to own in the next five years. Time is against you when you own options.

Rule 23: If you have the stomach for stocks, but neither the time nor the inclination to do the homework, invest in equity mutual funds. Here, it’s a good idea to diversify. You should own a few different kinds of funds, with managers who pursue different styles of investing: growth, value small companies, large companies etc. Investing the six of the same kind of fund is not diversification.

Rule 24: Among the major stock markets of the world, the U.S. market ranks 8th in total return over the past decade. You can take advantage of the faster- growing economies by investing some portion of your assets in an overseas fund with a good record.

Rule 25: In the long run, a portfolio of well-chosen stocks and/or equity mutual funds will always outperform a portfolio of bonds or a money-market account.

In the long run, a portfolio of poorly chosen stocks won’t outperform the money left under the mattress.

April 8, 2023April 8, 2023

5 powers that will make money for you while you rest

1. Power of compounding

Albert Einstein once said “Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn’t, pays it”.

What is compounding?

Compounding is the ability of an investment to generate earnings that are reinvested to generate even more earnings over time.

Compounding is a powerful force because as the investment grows, the amount of interest or returns generated also grows, and over time, the growth can become significant. The longer the investment is left to compound, the greater the potential for growth becomes.

Compounding can be used to build wealth over the long term, as even small investments can grow into substantial sums of money over time. A Rs. 2000 SIP in one of the oldest midcap fund, Nippon India Growth Fund, since inception would have created a corpus of Rs. 2.5 crore (investment Rs. 6.5 lacs only)

It’s the most time consuming to achieve the first crore. Subsequently, power of compounding works in investors favor to reach subsequent crores.

2.Power of starting early

As evident from the below picture, even though Savita is making 74% less investment during her journey, yet she is able to create a 113% higher corpus than Kavita just by starting early.

Cost of delaying is very high in the investment journey:

3.Power of patience

We all know that equity markets do not give a linear return like a fixed deposit. Volatility is the price an investor has to pay to get that ‘extra return’.

Black swan events like COVID or 9/11 or Russia Ukraine war can have an immediate impact on the markets. However, investors who have patiently held their investments, have created huge wealth for themselves.

Equity Markets witness 10-20% temporary declines almost every year. Despite an intra year decline of more than 10% almost every year, 3 out of 4 years ended with positive returns!

Despite several intermittent crises, Indian Equities have gone up over the long run mirroring earnings growth

4.Power of diversification:

Diversification is the practice of spreading your investments across different asset classes, sectors, and geographies. It helps reduce risk by ensuring that a single event or market downturn doesn’t wipe out your entire portfolio.

No asset class is able to consistently give linear returns. Therefore, it is important to diversify portfolio across various asset classes:

Within equity as well, it is prudent to diversify as no category works every year:

5.Power of discipline:

Discipline is essential to avoid emotional decision-making, such as panic selling during market downturns or chasing after hot stocks. It involves sticking to a long-term investment strategy, maintaining a well-diversified portfolio, and avoiding impulsive investment decisions.

Do you know the major difference between a successful and unsuccessful investor? Successful investors are disciplined! Their investment decisions are not driven by greed, fear, and emotions. They know how to react when the market turns volatile.

April 8, 2023April 8, 2023

Chat GPT (Artificial-Intelligence Chatbot) Answers Common Financial Queries

What is Chat GPT?

ChatGPT is a powerful artificial-intelligence chatbot developed by OpenAI and launched in November 2022. It garnered attention for its detailed responses and articulate answers across many domains of knowledge. It is capable of understanding human speech and producing in-depth writing that is easily understood by humans. Microsoft has planned a $10 billion investment in ChatGPT.

It can be accessed at https://chat.openai.com

We asked ChatGPT ten common financial queries and here’s what ChatGPT said:

Q.1 Why equity generates higher return in the long run?

ChatGPT’s response: Equity investments can generate higher returns in the long run due to several reasons:

Ownership in the company: When an investor buys a stock, they are effectively buying a share of ownership in the underlying company. This means that as the company grows and becomes more profitable, the value of the stock can increase, leading to higher returns for the investor.
Dividends: Many companies pay out a portion of their profits in the form of dividends to shareholders. Over the long run, reinvesting these dividends can result in significant gains for investors, especially if the dividends are reinvested in additional shares of the company’s stock.
Economic growth: Equity investments are often tied to economic growth, as a growing economy can lead to increased company profits and higher stock prices. Over the long run, as economies grow and expand, equity investments can benefit from this growth and generate higher returns.
Compounding returns: Equity investments have the potential to generate compounding returns, which means that returns earned on an investment are reinvested back into the investment, leading to exponential growth over time. This can result in significant gains for investors over the long run.

It’s important to note that equity investments also carry higher risks, as stock prices can be volatile and can fluctuate significantly in the short term. However, over the long run, equity investments can generate higher returns than other asset classes such as bonds or cash equivalents, making them a potentially valuable addition to a well-diversified investment portfolio.

Q.2 Why should one invest in equity in India

ChatGPT’s response: There are several reasons why investing in equity in India can be a good choice for some investors:

Growth potential: India is one of the fastest-growing economies in the world, with a large and growing middle class, increasing urbanization, and a young population. This can create opportunities for companies to grow and generate higher returns for investors.
Diversification: Investing in Indian equities can provide diversification benefits for a global portfolio, as the Indian stock market has a different composition of companies and industries than other markets.
Demographic dividend: India has a large and young population, which is expected to drive consumption and economic growth in the coming years. This can benefit companies in sectors such as consumer goods, healthcare, and education, among others.
Structural reforms: The Indian government has implemented several structural reforms in recent years, such as the Goods and Services Tax (GST), bankruptcy code, and foreign direct investment (FDI) liberalization, among others. These reforms can improve the ease of doing business and create a more favorable investment climate for companies.
Access to emerging markets: India is geographically well-positioned to access other emerging markets in Asia and Africa, which can create opportunities for companies to expand their operations and generate higher returns.

It’s important to note that investing in Indian equities also carries risks, including political and regulatory risks, currency fluctuations, and market volatility. It’s important to consider one’s own risk tolerance and investment goals before making any investment decisions, and to seek the advice of a professional financial advisor.

Q.3 What should be reasonable expectation when investing in the Indian equity markets

ChatGPT’s response: When investing in Indian equity markets, it’s important to have reasonable expectations about potential returns and risks. Here are some factors to consider when setting expectations:

Historical returns: Over the long run, Indian equity markets have generated attractive returns for investors, with the BSE Sensex and NSE Nifty indices averaging annualized returns of around 12-15% over the past few decades. However, it’s important to note that past performance is not a guarantee of future returns.
Market volatility: Indian equity markets can be volatile and subject to short-term fluctuations due to various factors such as economic growth, geopolitical events, and global market trends. As such, investors should be prepared for short-term market volatility and be willing to take a long-term view when investing in Indian equities.
Diversification: It’s important to diversify investments across different sectors and asset classes to manage risks and potentially enhance returns. This can help reduce the impact of market volatility and specific risks associated with individual stocks or sectors.
Investment horizon: The investment horizon is a key factor in determining potential returns. Equity investments are generally considered suitable for long-term investors who have a time horizon of 5-10 years or more. Investors should have a realistic investment horizon and not expect to generate significant returns in the short term.

Overall, it’s reasonable to expect that investing in Indian equity markets can potentially generate attractive returns over the long run, but investors should also be prepared for short-term volatility and manage risks through diversification and a long-term investment horizon. It’s important for investors to do their own research, consult with a financial advisor, and make informed investment decisions based on their financial goals and risk tolerance.

Q.4 Whether to speculate or invest?

ChatGPT’s response: Speculation and investing are two different approaches to the financial markets, and each has its own benefits and risks.

Speculation involves making bets on the short-term price movements of securities or other assets, with the goal of profiting from price fluctuations. Speculators often use leverage and take on higher levels of risk in the hopes of earning high returns quickly. However, speculation can also lead to significant losses if the market moves against the speculator’s position.

Investing, on the other hand, involves buying and holding securities or other assets for the long-term, with the goal of generating returns through a combination of income and capital appreciation. Investors typically focus on the underlying fundamentals of the assets they invest in, such as earnings, dividends, and growth prospects, and aim to build diversified portfolios that can weather short-term market volatility.

While speculation can generate higher returns in the short-term, investing is generally considered to be a more prudent approach over the long-term. By focusing on the underlying value of assets and holding them for the long-term, investors can potentially generate steady, reliable returns while avoiding the risks associated with short-term speculation.

Ultimately, whether to speculate or invest depends on an individual’s risk tolerance, investment goals, and time horizon. It is important to carefully consider the risks and benefits of each approach and seek the advice of a professional financial advisor before making any investment decisions.

Q.5 Direct equity or mutual fund for a retail investor

ChatGPT’s response: Whether to invest in direct equity or mutual funds depends on an individual’s investment goals, risk tolerance, and level of investment expertise.

Direct equity investing involves buying individual stocks and managing one’s own portfolio. This approach requires a high level of investment expertise, as it involves researching individual companies, analyzing financial statements, and making informed decisions about when to buy and sell stocks. Direct equity investing can potentially generate higher returns than mutual funds, but it also carries higher risks and requires a significant amount of time and effort.

Mutual funds, on the other hand, are professionally managed investment vehicles that pool money from multiple investors to invest in a diversified portfolio of stocks, bonds, or other securities. This approach provides investors with instant diversification and access to a wide range of securities without requiring individual research or management. Mutual funds also offer various investment.

For retail investors with limited investment expertise or time, mutual funds may be a more suitable option as they offer instant diversification and professional management. However, for those with a higher level of investment expertise and a willingness to actively manage their own portfolio, direct equity investing may be a viable option.

Regardless of the investment approach chosen, it is important for investors to carefully consider their investment goals, risk tolerance, and investment time horizon, and seek the advice of a professional financial advisor before making any investment decisions.

Q.6 How can I create wealth through mutual funds?

ChatGPT’s response: Creating wealth through mutual funds can be achieved by following these steps:

Determine your financial goals: Identify your financial goals and the investment horizon for each goal. This will help you select mutual funds that align with your investment objectives.
Choose the right mutual funds: Look for mutual funds that have a track record of generating attractive returns over the long run. Consider factors such as fund performance, expense ratio, investment style, and risk level when selecting mutual funds.
Invest regularly through systematic investment plans (SIPs): Investing regularly through SIPs can help you take advantage of the power of compounding and potentially generate attractive returns over the long run. Set up a SIP to invest a fixed amount in mutual funds at regular intervals.
Rebalance your portfolio periodically: Rebalancing your mutual fund portfolio involves adjusting your investments to maintain your desired asset allocation. This can help you manage risk and potentially enhance returns over the long run.
Stay invested for the long term: Mutual funds are suitable for long-term investing, and investors should have a long-term investment horizon of at least five years or more. Avoid making frequent changes to your mutual fund portfolio based on short-term market trends.
Review your portfolio regularly: Review your mutual fund portfolio periodically to ensure that it remains aligned with your financial goals and risk tolerance. Make adjustments as needed to stay on track.

By following these steps, you can potentially create wealth through mutual funds over the long run. However, it’s important to remember that mutual fund investments are subject to market risks, and past performance is not a guarantee of future returns. It’s important to do your own research, seek the guidance of a financial advisor, and make informed investment decisions based on your financial goals and risk tolerance.

Q.7 Why systematic investment plan (SIP) is a good investment option

ChatGPT’s response: Systematic Investment Plan (SIP) is a good investment option for several reasons:

Disciplined approach to investing: SIP allows investors to invest a fixed amount of money at regular intervals (monthly, quarterly, etc.), which promotes a disciplined approach to investing. By investing a fixed amount regularly, investors can avoid the temptation to time the market and invest based on short-term market fluctuations.
Rupee cost averaging: SIP involves investing a fixed amount at regular intervals, regardless of whether the market is up or down. This can result in rupee cost averaging, where investors end up buying more shares when prices are low and fewer shares when prices are high. Over time, this can result in lower average purchase costs and higher returns.
Potential for higher returns: SIPs can potentially generate higher returns over the long term, as equity investments can generate higher returns than other asset classes such as bonds or cash equivalents. Additionally, the power of compounding can help generate significant gains over time.
Convenience and flexibility: SIPs are convenient and flexible, as investors can choose the amount they want to invest and the frequency of their investments based on their financial goals and investment objectives. Additionally, SIPs are available for a wide range of investment products, including mutual funds, stocks, and exchange-traded funds (ETFs).

Overall, SIP is a good investment option for investors looking to start investing in the stock market with a disciplined approach and without timing the market. It is important for investors to carefully consider their investment goals, risk tolerance, and investment time horizon, and seek the advice of a professional financial advisor before making any investment decisions.

Q.8 Value of a financial advice in investing

ChatGPT’s response: Financial advice can be invaluable when it comes to investing, especially for individuals who are new to investing or lack the time or expertise to make informed investment decisions on their own. Here are some of the benefits of seeking financial advice:

Expertise and knowledge: Financial advisors have the expertise and knowledge to analyze market trends, evaluate investment products, and make informed investment decisions. They can help investors identify investment opportunities and provide guidance on creating a well-diversified investment portfolio that aligns with their financial goals and risk tolerance.
Risk management: Financial advisors can help investors manage risk by recommending investment products that are appropriate for their risk tolerance and investment objectives. They can also help investors rebalance their portfolios periodically to ensure that their investments remain aligned with their goals and risk tolerance.
Financial planning: Financial advisors can help investors with financial planning, including retirement planning, tax planning, and estate planning. They can provide guidance on saving and investing for specific financial goals and help investors make informed decisions about managing their wealth.
Behavioral coaching: Financial advisors can provide behavioral coaching to help investors avoid common investing mistakes, such as reacting to short-term market fluctuations or making impulsive investment decisions. They can help investors stay disciplined and focused on their long-term investment objectives.

Overall, financial advice can provide investors with the expertise, knowledge, and guidance they need to make informed investment decisions and achieve their financial goals. It is important to seek out a reputable financial advisor who is qualified and licensed to provide investment advice and who has a fiduciary duty to act in their clients’ best interests.

Q.9 Why many investors lose money in equities

ChatGPT’s response: There are several reasons why investors may lose money in equities:

Lack of knowledge and research: Many investors may lack the knowledge and research needed to make informed investment decisions. They may invest in stocks based on rumors, tips, or short-term market trends without understanding the underlying fundamentals of the companies they are investing in.
Emotional investing: Emotional investing can lead to poor investment decisions, such as buying high and selling low, or reacting to short-term market fluctuations. This can result in investors buying and selling stocks at the wrong time and missing out on long-term investment opportunities.
Lack of diversification: Investing in only a few stocks or sectors can lead to concentrated risk, where a decline in the performance of one stock or sector can significantly impact the overall portfolio. Diversification across different sectors and asset classes can help manage risk and potentially enhance returns.
Market volatility: Equity markets can be volatile and subject to short-term fluctuations due to various factors such as economic growth, geopolitical events, and global market trends. Investors who are not prepared for short-term market volatility may panic and sell their investments during market downturns, locking in losses.
Timing the market: Timing the market involves trying to buy and sell stocks based on short-term market trends. This is extremely difficult to do successfully, and investors who try to time the market may end up buying stocks at high prices and selling at low prices, resulting in losses.

Overall, investors may lose money in equities due to a variety of factors related to lack of knowledge, research, emotional investing, lack of diversification, and market volatility. To avoid these pitfalls, it’s important for investors to do their own research, diversify their investments, have a long-term investment horizon, and seek the guidance of a financial advisor.

Q.10 Make a stock portfolio for me to beat nifty 50

ChatGPT’s response: I’m sorry, as an AI language model, I am not authorized to create personalized investment recommendations or portfolios. Building an investment portfolio is a complex and personalized process that requires a thorough understanding of your financial goals, risk tolerance, investment horizon, and other personal circumstances.

It is always recommended to seek the guidance of a financial advisor who can evaluate your personal financial situation, assess your investment goals and risk tolerance, and recommend a customized investment portfolio that is tailored to your needs.

Additionally, beating the Nifty 50 index over the long-term is not easy and requires a lot of research, analysis, and risk-taking. While some investors have been able to beat the index, many others have failed to do so. Therefore, it’s important to approach investing with a long-term perspective, diversify your portfolio across different asset classes, and avoid taking excessive risks that could jeopardize your financial goals.

March 25, 2023March 30, 2023

2023: End of a golden era of tax-free investment products

One of the most important criteria while deciding the feasibility of an investment is its tax impact. In a country of 140 crore population, 70% own a mobile phone, 40% are employed but only 5.7% pay taxes on income. Further, a small subsection of Indians (specially the salaried class) pays a large portion of all personal income tax. In contrast, in the U.S., about 45 per cent of the population pays taxes.

Without any doubt, the 8-crore tax paying Indian community always preferred to invest their savings in tax free investment products. However, the things have changed in the last decade – the government has introduced a host of tax laws to tax/ withdraw tax exemption from most of the tax-free products that were available in the Indian financial market:

Dividends:

Before 01/04/2020, dividends from shares, mutual funds and ULIPs were tax free in the hands of recipients. However, dividends received during the financial year 2020-21 and onwards are taxable in the hands of the recipients as per normal slab rate.
Employees provident fund:

Effective 01/04/2022, any interest on an employee’s contribution to EPF/VPF upto INR 2.5 lakhs per year is tax-free and any interest earned on a contribution over and above INR 2.5 lakhs is taxable in the hands of the employees under ‘income from other sources’ at normal slab rates.
Equity/Equity mutual funds:
Section 112A of the Income Tax Act was introduced in order to levy long term capital gains tax on equity share transfer, equity-oriented funds and business trust units. The tax rate of 10% is applicable on investments in aforesaid products w.e.f. 01/04/2018 subject to a tax-free limit of INR 1 lakh.
Real estate:

Budget 2023 has put a limit on tax deduction on capital gains through reinvestment in residential house property at Rs 10 cr. Limit on the roll over benefit claimed under section 54 and section 54F of the Income Tax Act will adversely impact the HNIs.
Debt/Gold/International mutual funds:

In another major move by the government, w.e.f. 01/04/2023, investments in debt mutual funds (<35% equity), gold ETFs/ mutual funds, and mutual funds investing in international securities will be chargeable to tax at normal rate without the benefit of indexation. As of now, they enjoy the benefit of indexation and lower tax rate of 20%.

How it is going to impact a common man?

Suppose an investor buys a debt mutual fund for INR 100 and sells for INR 120 after 3 years. If invested before 31/03/2023, indexed cost would have been INR 115 and tax would have been payable on INR 5, that too, 20%. Only, INR 1 went to the government in tax. After 01/04/23, the whole gain of INR 20 will be taxable at slab rate (30%+ in most cases) and therefore, INR 6 will go to the government in tax.

Corporates and HNIs will be adversely impacted by the change in this law.
Insurance:

Unit Linked Insurance Plan: Budget 2021 had proposed to remove the tax-exempt status on the proceeds of ULIPs if the annual premium exceeded INR 2.5 lakh.

Traditional policies: Budget 2023, in another significant move, proposed to remove the tax-exempt status on the proceeds of traditional insurance plans if the annual premium exceeded INR 5 lakh. However, the change in provision is applicable w.e.f. 01/04/2023 and is not going to impact the policies issued before 01/04/2023.
Cryptocurrencies:

Profits from sale, swap or spend of any crypto assets are taxed at a rate of 30%. Also, Section 115BBH prohibits offsetting crypto losses against crypto gains, or any other gains or income for that matter.
Market Linked Debentures:

In a major blow to HNIs, the budget 2023 announced taxation changes to market-linked debentures (MLDs), eliminating the tax advantage enjoyed by these investments. Previously, MLDs were a popular investment choice among high net-worth investors due to the favorable tax treatment of only 10% if held for over 12 months. Now, the tax will be based on investors income tax bracket, which can be as high as 35%.

Going forward, the investors have limited options that will be totally tax free:
1. Public Provident Fund: The tenure of PPF is 15 years. But the maximum annual contribution is restricted to INR 1.5 lakh.
2. Sukanya Samriddhi Yojana: The Sukanya Samriddhi Yojana is a government savings scheme created with the intention to benefit girl child under the initiative called “Beti Bachao – Beti Padhao”
  
  The maximum tenure of the scheme is 21 years and maximum annual contribution is INR 1.5 lakh.
3. Tax Free Bonds: NHAI, PFC, REC, IRFC, HUDCO and NABARD bonds are traded in open market but the yields are sub-par (5-6%) viz-a-viz 7.5% on a 10-year government bond.

We strongly believe that India is still an underpenetrated financial market. Complicated as well as unfavorable tax laws will hamper the growth of financial sector in India.

Further, the debt market, which was majorly dependent on debt mutual funds and insurance/pensions funds for market operations will find a tough time in the near future.

Retail investors (directly and through mutual fund investments) have played a significant role in protecting the stock market from aggressive FII selling in the last three years. If not compensated, their interests should have been considered while changing the tax laws.

What may be on cards?

Gold declaration scheme: Gold, along with crude and electronics, is one of the major reasons for forex outflow. Electronics are being manufactured locally through the PLI scheme. India is now a net exporter of mobile phones. To curb high crude imports, EV and hydrogen-based infrastructure is being set up. Another INR 30,000 crore was set aside in Budget for energy transition. To promote digital gold investments, government introduced Sovereign Gold Bonds.
Exit tax on Indians surrendering their citizenship on the lines of the US exit tax: India has lost close to $233B because of 9.3 lac Indians surrendering their citizenship between 2017-21.
ULIP inter scheme switches

March 23, 2023March 23, 2023

Inflation vs. Growth – Biggest challenge faced by global central banks

Sixteenth largest bank in the United States of America, Silicon Valley Bank, collapsed last week. It catered to technology startups and venture capital community.

The primary reason for the failure can be attributed to the poor risk management policies of the company. The bank suffered a loss of $15billion by holding a portfolio of bonds yielding 1.6% (current yield 5%).

We are living in times when the global economies are doing well but the central banks around the world are raising interest rates at a record pace to control the inflation.

Why is inflation so important for central banks that they are willing to trade off the growth? Before proceeding further, two universally important relationship needs to be recalled:

Demand/supply and inflation

As evident from the graph above, prices of any product increases when the demand increases or/and the supply falls (& vice versa).

Interest rates and bond value

Market price of a bond reduces when there is an increase in the interest yields by the government (& vice versa). However, face value and interest payout of the bond remain the same throughout the tenure of the bond.

2001-2008: How it all started

Post dot com burst, interest rates (federal rates) in the United States went down from 6% to 1%. Everyone started borrowing heavily and a large chunk of low interest loans went towards sub prime mortgages (home loans to low credit score borrowers).

As inflation started to move upward, Central Bank of the United States raised interest rates, which went as high as 5% in 2008. Many borrowers could not afford to repay home loan EMIs and therefore, defaulted. As a result of a high number of defaults, 465 banks, including Lehman Brothers and Merrill Lynch failed, starting the Global Financial Crisis.

To save the economy, the Central Bank acted swiftly and reduced interest rates to a record low of <1% within a few months.

2009-2020: Cheap $

Interest rates in United States were kept below 1% for the next 12 years. As a result, the national debt in US increased from $10trillion in 2008 to $31trillion in 2020 (68% of GDP in 2008 to 123% of GDP in 2022). This low cost money was invested across the world, in real estate, startups, shares, bonds etc. Low interest rates have following effects:

Businesses are willing to take more risks triggering expansion. Profitability increases because of low cost of loans;
Accelerates growth of the economy – Government prints money at low interest;
Consumers prefer to buy on credit;
Increases asset values (discounting future cash flows at lower rates)

2021-Present: The new normal?

During COVID, the United States provided $1.9trillion in financial aid to Americans. This accelerated the demand for products when the global supply chain was disrupted resulting in record high inflation (prices of goods rise when demand increases or/and supply falls).

However, in late 2021, the US government was of the view that inflation is transitory (Inflation that moves above a steady rate for a short period and then reverts back to normal).

Russia-Ukraine war reduced the supply of oil, grain and gas to developed nations- further accelerating the prices. As a result, Inflation in US touched a 40 year high of >9%. The stance of the government changed suddenly and it carried out steepest rate hikes in the history of America. [Interest rate hikes curb the demand for goods/loans which in turn controls the prices (inflation)].

However, labour market in US is very strong as extremely aggressive subsidy regime has made America attractive again for manufacturing. Unemployment rate is at 50 year low and only 3.5% of Americans, willing to work, are unemployed. This makes situation even more difficult for the central bank as demand for goods does not fall as per expectation.

Indian markets:

As interest rates are hiked in United States, the dollar appreciates with respect to other currencies (INR fell from 74 to 84 in last one year).

To protect INR from sliding further, the Reserve Bank of India also hiked the interest rates in India (Interest rate parity theory);
Foreign investors withdrew money from emerging markets as investing became costly because of higher interest rates & falling currencies (However, there was no major impact on Indian equities as huge inflows from mutual funds, LIC and Employees provident fund provided cushion).

As I write this memo, foreign investors are sitting on $400B of cash, which will be eventually invested across geographies (Just to give you an idea – foreign investors just withdrew $5B from Indian equities – a lot of money will be moving back once the global situation stabilises).

Way ahead: No one knows with certainty

Scenario 1: Fed hikes interest rates by another 1-1.5% -> inflation cools down -> fed starts rate cuts later this year/early next year

Everyone is expecting as well as wanting this as no one wants to bear the consequences of high interest rates. Even if Fed gives an idea about rate cuts, a bull rally in equities may not be ruled out.

Scenario 2: Fed aggresively hikes interest rates going forward:

Recession can not be avoided. Money will move from equities to short term bonds. However, Fed will step in (like they did in 2008) and cut interest rates to normalise the situation. But this will take some more time.

Either ways, rate cuts are bound to happen.

Portfolio strategy:

Debt, as an asset class, has become attractive again. Indian 10 year bond is yielding around 7.4%. It is prudent to lockin the interest rates before they slide.

Equity: As valuations moderate, we continue to remain bullish on the Indian equities, considering the fact that India is the fastest growing major economy in the world. Historically, equities have always rewarded the patient.

Gold: Allocation should be increased considering the recent price correction.

Real estate: as an investment should be avoided considering the fact that interest rates are high. There will be slowdown in demand.

However, your personal portfolio should be aligned as per your goals and risk appetite. Please get in touch with your wealth manager in case of any query.

March 4, 2023March 4, 2023

Ten key takeaways from the annual letter of the greatest investor in history

Warren Buffet is the chairman & CEO of Berkshire Hathaway. He turned an ailing textile mill into a financial conglomerate.

Also known as the Oracle of Omaha, his networth is $108 billion making him the fifth wealthiest person on this planet.

Since 1965 he has generated an absolute return of 37,87,464% (viz-a-viz 24,708% for S&P500) – outperforming the index by 10% on an annual basis. Today one share of Berkshire Hathaway trades around $ 4,61,705 (a whopping Rs. 4 crore) – up from $19 in 1965.

In 11 out of 58 years (19%), stock of Berkshire Hathaway has given negative returns. Still it has managed to generate an annual return of 19.8% in the last 58 years. Every equity investor should accept the fact that volatility will be a part of journey.

Buffet published his annual letter to shareholders on February 25, 2023. Here are the key takeaways from the letter:

1. Buy businesses not stocks

Our goal in both forms of ownership is to make meaningful investments in businesses with both long-lasting favorable economic characteristics and trustworthy managers. Please note particularly that we own publicly-traded stocks based on our expectations about their long-term business performance, not because we view them as vehicles for adroit purchases and sales. That point is crucial: Charlie and I are not stock-pickers; we are business-pickers.

2. Be an investor in world of gamblers

The world is full of foolish gamblers, and they will not do as well as the patient investor.

3. Ignore short term forecasts

Charlie and I plead ignorance and firmly believe that near-term economic and market forecasts are worse than useless.

4. Markets are not efficient

“Efficient” markets exist only in textbooks. In truth, marketable stocks and bonds are baffling, their behavior usually understandable only in retrospect.

5. Think long term

The cash dividend we received from Coke in 1994 was $75 million. By 2022, the dividend had increased to $704 million. Berkshire’s purchases of Amex were essentially completed in 1995 and, coincidentally, also cost $1.3 billion. Annual dividends received from this investment have grown from $41 million to $302 million.

Don’t focus on the froth of the market. We seek out good long-term investments & stubbornly hold them for a long time!

6. Invest in equities for wealth creation

Assume, for a moment, I had made a similarly-sized investment mistake in the 1990s, one that flat-lined and simply retained its $1.3 billion value in 2022. (An example would be a high-grade 30-year bond.) That disappointing investment would now represent an insignificant 0.3% of Berkshire’s net worth and would be delivering to us an unchanged $80 million or so of annual income.

<Buffet compared 30-year bond returns with the investments in Coke and Amex>:

7. Be ready to accept failures:

Over the years, I have made many mistakes…… Along the way, other businesses in which I have invested have died, their products unwanted by the public. The lesson for investors: The weeds wither away in significance as the flowers bloom.

Over time, it takes just a few winners to work wonders.

8. Avoid leverage

There is no such thing as a 100% sure thing when investing. Thus, the use of leverage is dangerous.

9. Importance of diversification

As for the future, Berkshire will always hold a boatload of cash and U.S. Treasury bills along with a wide array of businesses.

10. Be grateful

We owe the country no less: America’s dynamism has made a huge contribution to whatever success Berkshire has achieved – a contribution Berkshire will always need. We count on the American Tailwind and, though it has been becalmed from time to time, its propelling force has always returned.

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Ten key takeaways from the annual letter of the greatest investor in history

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