Skip to main content

Stocks beat other investments in long term

Invest In Tax Saving Mutual Funds Online

Call 0 94 8300 8300 (India)

 

Returns may be lumpy and volatile. But longer the hold, higher the returns and lower the risks


Stock market returns beat other investments in the long term, but the returns are lumpy and volatile. It can take years for equity investments to pay. There are always long periods of drawdown. There is no way to determine the magnitude or duration of a trend in either direction.

How can somebody who is not a dedicated market- watcher cut down the risks and boost returns at the same time? The answer appears to be simple, but its difficult to implement psychologically:

1) Buy a diversified basket of stocks such as a market index.

2) Hold investments for a long time.

3) Use valuation- based filters to weight market exposure.

To implement this strategy requires patience and faith, rather than vast IQ. The investor must believe that the losses incurred during the inevitable downturns will be less than the gains during uptrends. It is psychologically hard to maintain this attitude in the middle of a long bear market.

Now for some statistics, which validate the advice above. In June 1991, the Sensex was at 1,300 when the New Economic Policy was announced by Finance Minister Manmohan Singh. In March 2013, the Sensex is at about 19,000. That is a CAGR of roughly 13 per cent across almost 22 years and it beats even the artificially- hiked provident fund return by a massive margin.

This 22- year span saw many alternating bull and bear markets. There was a spurt in prices between June 1991- March 1992. The next bull- market was from April 1993 till September 1994. There was a third big bull market in 1999- 2000 and the biggest bull market in Indian history started in May 2003 and continued till January 2008. There have been two more bullish periods since, between March 2009- November 2010 and between January 2012- to the current date.

Of course there were corrections within both the bull and bear markets. The bull runs accounted collectively for about 130 months out of the 261 months that have passed since June 1992. Roughly half the time, the market range- traded, or logged losses.

Several of the bearish periods have seen drawdowns of between 40- 65 per cent.

The 13 per cent CAGR mentioned above is a point- to- point theoretical benchmark. It would be realistic only if somebody had bought once in June 1991 and held until March 2013. A rolling return profile offer more realistic insights into actual risks and rewards.

We may assume, for example, that an investor buys every month and sells each position a year later. That is, he buys in January 2012 and sells in Jan 2013. This is equivalent to a strategy where the investor buys and holds for one year.

Between June 1991- March 2013, the average rolling return comes to about 15 per cent per annum for these one- year rolling " trades". There are 97 losing one- year trades, versus 153 winning one- year trades. The investor saw a positive payoff roughly three times for every two losses.

Similarly, a two- year rolling strategy yields an average annualised average return of 15 per cent. But there are only 82 losing trades to 156 winning trades. A three- year roller yields 16.5 per cent, with 177 wins to 49 losses. A four- year roller yields 17 per cent with 169 gains to 46 losses. A five year roller yields 18.5 per cent with 170 gains to 33 losses.

The trend is clear. The longer the hold, higher the returns and lower the risks. This can be directly compared to recurring deposit schemes. The differential in favour of equity is huge.

Valuation filters help an investor further reduce risks. For example, the average monthly PE of the Sensex is 21, with a median of 18.7 and a standard deviation of 8.3. The median shows that the Sensex traded below 18.7 half the time. There are more high- valuation months ( 37 months were above PE 29 -29 is one standard deviation above average) versus low valuation months ( 17 months were below PE13 - one standard deviation below average).

If an investor buys more when the PE is below 18 and less when the index is above PE30, his returns are further boosted. The number of losing trades also reduces if there are no buys above PE37. Dividend yield has also been ignored above. It adds about 1.4 per cent annually. That is significant, especially if re- invested and compounded.

The statistics indicate that an investor doesnt need to be smart or knowledgeable, so long as hes disciplined and patient. Buy a diversified basket or an index fund for the longterm and use a basic valuation filter. The return: risk ratio will automatically get better without much required in the way of judgement or portfolio monitoring.

Happy Investing!!

We can help. Call 0 94 8300 8300 (India)

Leave your comment with mail ID and we will answer them

OR

You can write back to us at PrajnaCapital [at] Gmail [dot] Com

---------------------------------------------

Invest in Tax Saving Mutual Funds ( ELSS Mutual Funds ) to upto Rs 1 lakh and Save tax under Section 80C.

Invest Tax Saving Mutual Funds Online

Tax Saving Mutual Funds Online

These links can be used to Purchase Mutual Funds Online that are regular also (Investment, non-tax saving)

Download Tax Saving Mutual Fund Application Forms from all AMCs

Download Tax Saving Mutual Fund Applications

These Application Forms can be used for buying regular mutual funds also

Some of the best Tax Saving Mutual Funds available ( ELSS Mutual Funds )

  1. ICICI Prudential Tax PlanInvest Online
  2. HDFC TaxSaverInvest Online
  3. DSP BlackRock Tax Saver FundInvest Online
  4. Reliance Tax Saver (ELSS) FundInvest Online
  5. Birla Sun Life Tax Relief '96 Invest Online
  6. IDFC Tax Advantage (ELSS) FundInvest Online
  7. SBI Magnum Tax Gain Scheme 1993Invest Online
  8. Sundaram Tax SaverInvest Online
  9. Edelweiss ELSS Invest Online

------------------

Best Performing Mutual Funds

    1. Largecap Funds Invest Online
      1. DSP BlackRock Top 100 Fund
      2. ICICI Prudential Focused Blue Chip Fund
      3. Birla Sun Life Front Line Equity Fund
    2. Large and Midcap Funds Invest Online
      1. ICICI Prudential Dynamic Plan
      2. HDFC Top 200 Fund
      3. UTI Dividend Yield Fund
    1. Mid and SmallCap Funds Invest Online
      1. Reliance Equity Opportunities Fund
      2. DSP BlackRock Small & Midcap Fund
      3. Sundaram Select Midcap
      4. IDFC Premier Equity Fund
    1. Small and MicroCap Funds Invest Online
      1. DSP BlackRock MicroCap Fund
    1. Sector Funds Invest Online
      1. Reliance Banking Fund
      2. Reliance Banking Fund
    1. Tax Saver Mutual Funds Invest Online
      1. ICICI Prudential Tax Plan
      2. HDFC Taxsaver
      3. DSP BlackRock Tax Saver Fund
      4. Reliance Tax Saver (ELSS) Fund
    2. Gold Mutual Funds Invest Online
      1. Relaince Gold Savings Fund
      2. ICICI Prudential Regular Gold Savings Fund
      3. HDFC Gold Fund

Popular posts from this blog

ULIP Review: ProGrowth Super II

  If you are interested in a death cover that's just big enough, HDFC SL ProGrowth Super II is something worth a try. The beauty is it has something for everybody — you name the risk profile, the category is right up there. But do a SWOT analysis of the basket, and the gloss fades     HDFC SL ProGrowth Super II is a type-II unit-linked insurance plan ( ULIP ). Launched in September 2010, this is a small ticket-size scheme with multiple rider options and adequate death cover. It offers five investment options (funds) — one in each category of large-cap equity, mid-cap equity, balanced, debt and money market fund. COST STRUCTURE: ProGrowth Super II is reasonably priced, with the premium allocation charge lower than most others in the category. However, the scheme's mortality charge is almost 60% that of LIC mortality table for those investing early in life. This charge reduces with age. BENEFITS: Investors can choose a sum assured between 10-40 times the annualised premium...

Am you Required to E-file Tax Return?

Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Buy Gold Mutual Funds Leave a missed Call on 94 8300 8300   Am I Required to 'E-file' My Return? Yes, under the law you are required to e-file your return if your income for the year is Rs. 500,000 or more. Even if you are not required to e-file your return, it is advisable to do so for the following benefits: i) E-filing is environment friendly. ii) E-filing ensures certain validations before the return is filed. Therefore, e-returns are more accurate than the paper returns. iii) E-returns are processed faster than the paper returns. iv) E-filing can be done from the comfort of home/office and you do not have to stand in queue to e-file. v) E-returns can be accessed anytime from the tax department's e-filing portal. For further information contact Prajna Capit...

IDFC - Long term infrastructure bonds - Tranche 2

IDFC - Long term infrastructure bonds What are infrastructure bonds? In 2010, the government introduced a new section 80CCF under the Income Tax Act, 1961 (" Income Tax Act ") to provide for income tax deductions for subscription to long-term infrastructure bonds and pursuant to that the Central Board of Direct Taxes passed Notification No. 48/2010/F.No.149/84/2010-SO(TPL) dated July 9, 2010. These long term infrastructure bonds offer an additional window of tax deduction of investments up to Rs. 20,000 for the financial year 2010-11. This deduction is over and above the Rs 1 lakh deduction available under sections 80C, 80CCC and 80CCD read with section 80CCE of the Income Tax Act. Infrastructure bonds help in intermediating the retail investor's savings into infrastructure sector directly. Long term infrastructure Bonds by IDFC IDFC issued an earlier tranche of these long term infrastructure bonds on November 12, 2010. This is the second public issue of long-te...

Section 80CCD

Top SIP Funds Online   Income tax deduction under section 80CCD Under Income Tax, TaxPayers have the benefit of claiming several deductions. Out of the deduction avenues, Section 80CCD provides t axpayer deductions against investments made in specific sector s. Under Section 80CCD, an assessee is eligible to claim deductions against the contributions made to the National Pension Scheme or Atal Pension Yojana. Contributions made by an employer to National Pension Scheme are also eligible for deductions under the provisions of Section 80 CCD. In this article, we will take a look at the primary features of this section, the terms and conditions for claiming deductions, the eligibility to claim such deductions, and some of the commonly asked questions in this regard. There are two parts of Section 80CCD. Subsection 1 of this section refers to tax deductions for all assesses who are central government or state government employees, or self-employed or employed by any other employers. In...

Merger of Tata Indo-Global Infrastructure Fund with Tata Equity Opportunities Fund

Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Buy Gold Mutual Funds Leave a missed Call on 94 8300 8300 Merger of Tata Indo-Global Infrastructure Fund with Tata Equity Opportunities Fund Tata Mutual Fund has decided to merge Tata Indo-Global Infrastructure Fund with Tata Equity Opportunities Fund, with effect from January 16, 2015.   Investors of Tata Indo-Global Infrastructure Fund can redeem/ switch out units from December 13, 2014 to January 12, 2015 without paying any exit load. For further information contact Prajna Capital on 94 8300 8300 by leaving a missed call Leave a missed Call on 94 8300 8300 Leave your comment with mail ID and we will answer them OR You can write back to us at PrajnaCapital [at] Gmail [dot] Com --------------------------------------------- Invest Mutual Funds Online Invest Any Mutual Fund Online Download Mutual Fund Application Forms from all AMCs Download Mutual Any Fund A...
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now