I had written sometime back that interest rates are headed lower and so far that trajectory has held. With recent demonetization, the biggest impact will be on interest rates and don’t be surprised if 1 year FD fetches you only 5.5 to 6% from the current 7%.
With lots of deposits coming into the system and Govt. able to reduce its fiscal deficit, there will be a lot of downward pressure on the interest rates. With inflation around 4%, the real rate of interest in the economy should be around 5.5%. So if you are a saver, who believes in FD- you are on for a shock in the coming times as your post tax returns will fall to 3-4%.( which implies that it will take you 15-20 years to double your money!)
At the same time, lower interest rates will be good for the economy and might start a permanent bull market in equities. So it might be prudent to take a bit of risk to enhance your returns by investing in equity market.
Not taking any risk might turn out to be the biggest risk! So make volatility your friend and take the plunge.
Mutual Fund Investing- How investing in direct plans can enhance your returns?
If you go to any mutual fund website- you will see the same MF listed under “Regular Plan” and “Direct Plan”. So you have a ICICI Pru Discovery Fund- Direct Plan and ICICI Pru Discovery- Regular plan. So what exactly is the difference between the two plans and which one should you invest in?
- If you look at their equity portfolios, both regular plans and direct plans have essentially the same stocks.
- The only difference is between their “expense ratio” which is like a fund management fee that the mutual fund charges from its investors. This ranges from 0.5 to 3% for many equity funds.
- Direct plans are funds that you buy directly from the mutual fund company without the intervention of any MF distributor/agent whereas regular plans are the plans where a part of your investments goes as “commissions” to the MF agent/bank/broker.
- Direct plans have lower expense ratios as compared to regular plans, thereby enhancing your returns by 0.5-1.5% in many cases. Take an example of ICICI Pru Discovery Fund that we talked about. The expense ratio of direct plan is 0.88% whereas that of regular plan is 2.16%- a difference of about 1.25% per annum. As a result direct plan has a 1 year return of about 1% whereas regular plan has a 1 year return of -0.25%. This is the money going into the pocket of your agent/advisor.
- So if you are DIY investor who knows which funds to buy, then you should definitely buy direct plans . If you are KYC compliant, you can buy directly from MF websites. If you first time investor, get yourself KYC complaint first .
We always recommend that you hire an investment advisor and pay him separately for portfolio management rather than paying unnecessary commissions on regular MF plans. Buying regular plans encourages MF agents to churn your portfolio more frequently as their incentive comes from extra commissions!
If you have any questions regarding MF investments, feel free to contact us. We construct efficient portfolios based on direct MF plans and diversify using asset allocation techniques rather than buying and selling 25 different schemes in the portfolio.
Are you an investor or a trader?
Most of the people who put their money in the market, do not know if they are long term investors in the market or if they are short term traders. There are couple of differences between traders and investors that one should understand before putting any money into the stock market (via equities or mutual funds).
Traits of Investors
- Investors invest based on company fundamentals and have a deep knowledge about company fundamentals like its business model, its growth potential, quality of the business and the management etc.
- Investors are usually contrary by nature- they buy value when others are selling in panic. They don’t believe in timing the market.
- Most of the good investors run concentrated portfolios and don’t have more than 20-30 stocks in their portfolios. This allows them to do deep research into few names rather than buy the complete market.
- Most of the investors hold the stock for a long period of time-usually more than 2-3 years. They are willing to suffer massive drawdowns (upto 50% of their capital) during bear market phases. As a matter of fact, they might add to their positions during downturns.
- Their market edge lies in picking good stocks and holding them for really long term. So imagine holding an infosys for 15-20 years and taking all those 2008 type corrections in your stride!
- The risk with fundamental investing is holding on to “wrong stocks” for long period of time. In the current scenario imagine the difference between holding PSU banks for last 5-7 years and holding private sector banks like Yes Bank/IndusInd Bank for 5-7 years
Traits of Traders
- A stock trader usually trades based on price action and rides the market trends. His holding time can be few hours to few months.
- A Trader is essentually a market timer and tries to time the market in various time frames. He usually uses technical analysis tools/charts as well as macro factors to take his trades. Many successful traders employ mathematical algorithms to make buy and sell decisions.
- A trader is not akin to using levearge to enhance his/her returns during trending markets.He main objective is to ride the upside/downside momentum in stocks.
- A trader practices strong risk managment and is quick to get put of losing positions. He is a master student of probability and is alsways listeing to the market sentiment.
- A trader is always looking for risk adjusted returns and is always looking to limit his drawdown during bear markets. Some traders might even go short during bear phases to profit from the same!
- His biggest strength is his ability to cut his losses which gives him an edge over the investing crowd!
So are you a trader or an investor? Many times we enetr a market for short term gains but when we see a loss we turn into an investor and then end up owning dead stocks for long periods of time.On the other times- we say we are a long term investors but don’t have the patience to keep our good stocks for really long periods of time.
So it is important to undersatnd your goals and objectives before you put any money into the market. And remember- no strategy will work all the time in the market.