18 January, 2017

Should you be investing in shares directly than through MF?

Image result for MF vs stocks confusionHere is a cost benefit analysis of investing in stocks directly and through mutual funds.

There would be widely varying reactions when we bring in the subject of equity. Some swear by it & can’t even begin to think of an alternative to that. Some are totally averse to equity & consider investing in equity – gambling. 

There are a whole lot of them in the middle who do not care. These people will invest in what is the flavor of the season & keep switching from one instrument to the other, based on what is doing well or what has caught the fancy of the market at that point. Only a small portion of the investors really understand investment philosophy, diversification needs, risk–reward equation, tenure, liquidity, taxation etc. These are the investors who are either savvy themselves or have advisors who are taking care of their investments on a professional basis.

Let us come to a point that seems to hold people in a thrall – Investing directly in equity is much better than investing through mutual funds. Let’s examine this premise. 

Equity investments are done directly in company shares. Equity investments are usually done by the investor himself/ herself. Most times the inputs come from their broker. They also take inputs from TV shows, papers & magazines, friends & colleagues and sundry others. Very few have subscribed to professional services or have someone knowledgeable to advice them. Mostly such investments are based on whether the stock in question is going to do well in the next 1/3/6/12 months. Many such investments are churned on a regular basis, to “realize the upsides”. Such investments are random, the logic for investment is questionable, the horizon short term & there is no diversification of any sort. There is no overarching plan with such investments – the only focus is to maximize their money – nothing else.

Sometimes investors also invest based on marquee names. For instance, they may buy stocks of Infosys, ICICI Bank, Sun Pharma etc. - here buying bluechips is an investment strategy. Such investors may keep buying such shares over time. Again, there is no strategy involved at all. One just keeps accumulating shares whenever they can and hope that they would multiply several times and make them wealthy.

Equity investment is not as easy as people tend to think – especially if they want to create long-term wealth. There are successful individual investors for sure in equity – but that number is small. Also, even out of these successful investors only some of them achieved their success through a properly thought out strategy. Others have been just lucky to have invested in some good stocks which have compensated for other bad choices & lack of a coherent investment strategy.

Mutual funds are investment vehicles tailored at those who do not want to invest their money themselves and want to take the help of a professional fund manager. The money collected for a particular scheme from many investors are invested as per the mandate of the scheme.

In this case, the investment calls are taken by the fund manager & his team. The investor himself/ herself need not get involved in deciding the underlying investments. The investors just need to clearly understand the mandate of the scheme before putting in the money – that’s all.

It is the duty of the fund manager & his team to regularly monitor the investments made – in fact, that is the only job they have. The fund manager has the knowledge , skills & experience to sift out the companies from the universe of stocks, analyse them, understand the sectoral fundamentals, tie it up with the country’s economy & the potential for the company / sector, look at external factors including global growth & geopolitical situation. Their team also has access to privileged information much more & earlier than a regular investor; they have access to the management & do have discussions directly with the top brass, to get a perspective of where the company is headed; apart from these, they have access to real time information feeds & software tools. 

Since there is also a mandate for the scheme they have to stick to, they would follow a well thought out process through which they will select the candidates. Usually, the portfolios of MF schemes are well diversified across sectors and companies, which an individual investor would find hard put to achieve. Even for a small investment an investor is getting access to the same level of diversification as the scheme! 

All these ensure that the quality of the calls taken is good and the portfolio offers a reasonably good return. The risk inherent in the portfolio is lower due to careful selection & diversification. Since the fund manager is a professional, emotions do not come in the way of the investment calls (like it normally does for investors, who get wedded to certain stocks).

Hence, the MF investor need not have to worry about their investments. They just need to check their MF portfolio maybe on a half yearly or annual basis to see if the funds are still being managed well. If there is any need for change, they can cash out & reinvest in an appropriate fund. Liquidity is assured in a MF, unlike in the case of equity – which is again a positive.

There is a cost attached to MF investing; but that would be well worth it, especially if the investor does not have the knowledge, skills & the time to do it himself. Also, investors tend to choose just a few bluechips, again and again. These would anyway be a part of many MF portfolios & there is no need to invest directly, especially where bluechips are involved. As far as the smaller company investments are concerned, the fund managers would be in a much better position to judge & take calls. Most investors burn their fingers especially with smaller stocks – they end up with penny stocks, which prove to be a lag on their investments.

For most people, MF investments are appropriate and would help them get decent returns. MFs do make it easy for investors to participate in equity markets. Only for the few who have the time, knowledge, discipline & skills in analysis would direct equity investments work. They however need to keep tabs on the companies, markets, sectors, economy & global trends & factors. That’s a tall order for most. Direct equity is for a select few. All the rest would be better served by MFs. 

Article first appeared on Money Control:
Should you be investing in shares directly than through MF?



Author  -   Suresh Sadagopan  | Founder | www.ladder7.co.in


#SureshSadgopan #FinancialPlanner #FinancialAdvisor #Fiduciary #LifePlanning #FeeOnly #HolisticAdvice #Ladder7





16 January, 2017

Real Estate – The Real story

Picture Credit - www.Pixabay.com

Everyone likes property. It’s tangible; it’s easy to relate to & understand; we have been buying property since the simians evolved into humans – the early properties might have been caves and dugouts!
From times immemorial, properties have been one of the treasured assets. Wars were fought to acquire territory. The only other two things for which wars were fought were women & wealth!  
Cut to the present, the war begins on servicing the EMI – for decades on end. Those who finish the loan fast display masochistic tendencies and take another loan!
The lure of property goes back to antiquity – but it’s tug is undiminished. In fact millions of people believe that property is the only one that can give great returns.  We all hear about something bought in 1960 for Rs.40,000, now going for Rs.15 Crores…  where everything is a profit, that looks stunning, eye-popping!
Fooled by absolute numbers - Rs.15 Crores is a fabulous amount of money. It has multiplied by 375 times!  It almost looks like God has picked that one person for special, A Grade treatment.
But to get to that Rs.15 Crores, one should have held on to the property for 57 years –which may happen with property and not in many other assets. But even if this has happened, the compounded annual returns are just under 11%!  Now, that does not look so appealing, does it? It no longer appears that God has showered his munificence singularly on that investor. Stock markets have offered a compounded 16%+ annual returns in the last 36 years.
We don’t count the costs… - There are so many costs in holding properties. The most important cost is the interest one would be paying. Suppose, one is buying a home today for Rs.1 Crore & one is paying Rs.25 Lakhs upfront & balance is taken as a loan for a 20 year period at 9% interest. the total repayment as EMI ( principal + interest ) would be Rs.1.62 Crores. The total cost of the home is hence Rs.1.87 Crores.
During the tenure, there are many other costs. Invariably there are repairs and improvement costs, which could run to tens of lakhs of Rupees, which we need to factor in. There are also society maintenance & property taxes, which we need to factor in as well. If all these costs are factored in, the returns may drop much lower, to single digits.
We don’t factor the efforts involved - There is not much bother in a financial asset – be it a FD, NCD, Bond, Mutual Fund or anything else. You just hold the asset & get regular returns, as per the asset type - which gets directly credited to the bank. In property, rents have to be collected, property maintained, society charges paid, interface with brokers, deal with tenants & in rare cases even be involved in litigation. Also, there are periods of vacancy that depress the returns, which needs to be factored in. Property atrophies if kept under lock & key, unlike financial assets. Hence, if property is acquired for investment purposes, one needs to consider all these as well.
Taxation on Sale - Properties when liquidated are subject to long-term capital gains tax ( after three years ). Hence, it is not that the entire proceeds are available. One needs to pay the tax and then take home the balance. In this Rs.15 Crore example, almost the entire amount will be long-term capital gain and will be taxed at 20% ( would come to Rs.3 Crores! ). To avoid this one can invest the entire Long-term capital gain amount ( which in this case is the full proceeds ) into another property. That beats the purpose of an investment in the first place, as if one has to reinvest, one cannot realize the cash value.
The albatross around the neck - Properties are high value transactions, which needs long-term servicing of loans. It is hence prudent to take loans to the extent that one can service comfortably. Many people take loans in a way that both husband & wife need to work necessarily, if they have to be able to service loans.
In such cases, it puts huge pressure & leaves no leeway for one person to drop out to raise a family or for health reasons. If there is a job loss, again there is a problem. Some have bought multiple properties & are servicing multiple loans, which builds a pressure cooker situation. 
Under-construction property can pose huge problems for people. On one hand, they may be paying rent & they may also be servicing an EMI on the property they have booked, which makes it a double whammy. Now, if the property keeps getting delayed, they would simply be paying unnecessary extra interest, on their borrowed amount. If there are multiple properties, the problems compound manifold. Some properties are stuck in litigation and takes a long time to complete. Some are stuck in limbo forever and the money is as good as gone.
Property a bane for those on the move -  Today, most upwardly mobile people would be willing to go where their career takes them. That means, they may be in Mumbai now, may move to Bangalore a couple of years down the line, or relocate to Delhi in future if their career parachutes them there. If they buy property in one city, there is a good chance that they may move to another city & stay on rent, while servicing loans of the property they have bought earlier. We have seen too many people like these. The best option for these people is to live on rent, which is available cheap in India ( read next point ).
Returns on investments – Property does not offer great returns – especially residential property – which may offer 2-3% gross returns on the current property value. After taking into account the property taxes, society charges, brokers fees, repairs, wealth tax etc., the returns are just 1-2%. Commercial properties may offer between 6-8% gross returns. But again, after accounting for all expenses, the returns may be more like 4-5%. The important error which people make is that they calculate returns on their cost & not on current price ( which is the opportunity cost ).

If you cannot sell a property, it is a FD yielding 2% returns

The menace of cash - Property transactions are prone to cash dealings. Many people who are salaried are forced to convert their tax paid money into cash for property transactions. Property is the biggest sink for black money & slush money.
While it is illegitimate & unethical to deal thus, there are more practical problems people would need to grapple with. When selling a property, there is invariably some cash which one gets. A normal person has no means to even know if the cash they get is in legitimate notes or spurious ones. If they are spurious & it is reported, a person can be arrested & questioned about the source. That will mean a lot of trouble.
Concentration Risk - Investing a couple of crores in a property is a huge concentration risk. If the area does not develop as envisaged, the property prices would not go up as anticipated. This would affect the entire investment. Had it been a financial asset, the investments can be distributed and hence one can attain diversification of the investments. If some components do not do well, it will not mar the returns from the entire portfolio.
Epilogue - Since 2011-12, the properties have not been doing well. They have been giving poor returns ( Bangalore ) in a lot of places and even negative returns in some cities ( Hyderabad ). In the past two years, property prices have come down almost across the board, all over the country. Most people who want to sell are not able to find buyers. Builders are offering various sops, which ineffect offers discounts from 5% to 20%. Apart from this, there have been actual drop in property values across properties in various locations throughout the country. Due to the base effect, property prices are expected to offer average returns ( single digits ) in the foreseeable future ( say a 10 year period ).
However, this is a great time for actual consumers who would like to buy property for self-consumption. There is a case of investing in property after investigating all aspects properly! Those wanting to invest in property should invest to diversify their wealth, not in quest of super normal returns, seeking their Eldorado! 

Article first posted on:
Linkedin : Real Estate – The Real story
Author  -   Suresh Sadagopan  | Founder | www.ladder7.co.in


#SureshSadgopan #FinancialPlanner #FinancialAdvisor #Fiduciary #LifePlanning #FeeOnly #HolisticAdvice #Ladder7