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SIPs Don’t Guarantee Anything

wealthymatters Equity can also underperform other asset classes in the long term, depending on your time of entry and exit.

Equity cult members believe that equity will provide ‘fabulous’ returns if you avoid timing and invest regularly through systematic investment plans (SIPs). But, if we analyse what the Sensex returns would have been after doing monthly SIPs on the Sensex for 10 years, this is not the case.

The  chart to the left is annualised returns (CAGR) on 10-yr SIPs on the Sensex. For example, the first data point of 34.55% on 31-8-1994 means the CAGR of 10-yr SIPs (i.e. SIPs from 1984-94) and the last data point of 13.37% on 31-8-2014 means the CAGR of SIPs from 2004-14.Dividend yield on the Sensex is ignored because retail investors will be buying Sensex using index funds and the small dividend yield will be negated by the expense ratio charged by these funds.

As seen from this graph, there are times in the past 20 years (i.e. mostly between the bear markets of 2001 and 2003) when equity investors have actually lost money even after doing SIP on the Sensex for full 10 years.

This is not to say that equity is a bad asset class or SIPs are not beneficial but that SIPs only reduce volatility and no in way guarantee fabulous returns from equities in the long term.

Also see in how many years equities have not been able to give 10yr CAGRs of 10%.So now you know what to do when banks have FDs offering 10% or more over 10years.Same goes for bonds, especially of the quasi government variety.


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wealthymattersYesterday, TCS, India’s largest software exporter, celebrated 10 years of listing on the stock exchange. It was on August 25, 2004, when TCS made its trading debut on Dalal Street at a 27% premium to its issue price. And, there has been no looking back for the stock, churning a compounded annual return of 27% for a decade.

The market capitalisation of the company has risen from Rs47,232 crore to a mammoth Rs4.94 lakh crore in 10 years of listing -the highest among all Indian listed companies.

Investors who stayed put in the stock in the period would have made over three times the average annual compounded returns from fixed deposits. For instance, an investor, who would have put Rs1 lakh in the TCS initial public offer (IPO) at Rs850 a piece, would be sitting on Rs12.52 lakh on Monday . TCS is currently trading at Rs2,521 after two bonus issues -one in July 2006 and other in June 2009. The company has also paid handsome dividends.

In contrast, if the investor had put Rs1 lakh in a fixed deposit with 9% interest in 2004, he would have made Rs2.37 lakh by now without considering taxes. Read more of this post

Good Ole Debt!

wealthymattersThese days,equity investors are laughing their way to the bank because Sensex has generated 44% returns during the past one year. While the benchmark index has generated this return, there are several stocks that have risen by more than 100% during the same period.So, it’s natural for investors to get carried away when Dalal Street is on a roll, and the Sensex is making a habit of hitting record highs almost every other day. Suddenly, retail investors are flocking back to the market if inflows into equity schemes and the number of demat accounts opened recently are any indication.But here lies the catch: retail investors who are entering the ring now may not get the kind of returns from equities as seen in the recent past.

In some instances, it also doesn’t make much sense being a long-term investor in equities. A look at the Sensex returns chart in the past 20 years could be a bit disappointing even for a hard-core investor. The Sensex closed at 4,588 in August 1994 and despite being at a lifetime high of 26,420 now, it has only generated a mediocre annualised return of 9.15% during this 20-year holding period. Several debt products, like the Public Provident Fund (PPF), have generated better annualised returns of 10.46% in this period. Read more of this post

The Home Loan Deposit

wealthymattersThe Reserve Bank of India (RBI) has decided to encourage banks and individuals to be actively involved in home loan deposits, a savings product that will help showcase the repaying ability of customers seeking to borrow money to buy a house.

The RBI feels that there is a felt need for financial innovation with respect to loan products and one such product could be savings-induced home loan or a home loan deposit.

The willing customer will be induced to generate a savings balance by way of monthly or periodic deposits. This will enable the creation of a track record for repayment of future home loan products. Once a customer reaches a threshold balance, financial institutions will consider sanctioning a housing loan. The balance in the product would act as a collateral or margin. The amount deposited every month would act as the basis of assessing repayment capacity of customers for calculating their monthly repayments.

Such a product will aid the Indian government’s efforts to promote affordable housing. The government has already laid out a plan to create 100 smart cities with the aim of “housing for all by 2020“ while reducing interest rates on home loans. This product may help lower interest rates as well, with better appraisal of potential borrowers.

The Ten Baggers Of Dalal Street

10 Baggers of Dalal StreetEven the subdued markets of the last five years have produced multibaggers.


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