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

Birla SunLife Manufacturing Equity Fund

The Make in India program was launched by Prime Minister Naredra Modi in September 2014 as part of a wider set of nation-building initiatives. It was devised to transform India into a global design and manufacturing hub. The primary motive of the campaign is to encourage multinational as well domestic companies to manufacture their products in India. This would create more job opportunities, bring high-quality standards and attract capital along with technological investment to bring more foreign direct investment (FDI) in the country.   Why India as the next manufacturing destination?   The rising demand in India along with the multinational's desire to diversify their production to include low-cost plants in countries other than China, can help India's manufacturing sector to grow and create millions of jobs. In the words of our Honourable Prime Minister- Mr. Narendra Modi, India offers the 3 'Ds' for business to thrive— democracy,...
Read more

Total Returns Index brings out real Equity Funds Performers

From February, equity mutual funds have to change their benchmarks to account for dividend payments. Until now, funds used price-based benchmarks alone. TRI or total return indices assume that dividend payouts are reinvested back into the index. What this does is lift the overall index returns, because dividends get compounded. For example, the Sensex TRI index will consider dividend payouts of its constituent companies while the Nifty50 TRI index will consider dividends of its constituents. Using TRI indices as benchmarks comes on the argument that an equity funds earn dividends on the stocks in its portfolio, which they use to buy more stocks. Therefore, using an index that also considers dividend reinvestment would be a more appropriate benchmark. Shrinking outperformance With a stiffer benchmark, it is obvious that the margin by which an equity fund outperforms the benchmark would shrink. Rolling one-year returns from 2013 onwards, the average margin by which largecap funds out...
Read more

Stock Review: Havells

HAVELLS India's stock performance has been muted in the past three months, in line with the weak broader market. But, given the turnaround in its overseas subsidiary and the launch of new products in its consumer durable business, the company's stock may undergo a re-rating.    Havells is India's leading consumer electrical goods company, with consolidated sales of . 5,527 crore in the past four quarters. Its wholly-owned subsidiary Sylvania, which makes lighting and fixtures, has established brands in European, Latin American and Asian markets. Sylvania repre sented nearly half of the company's consolidated revenues in the first half of FY11.    Sylvania's poor financials hit Havells' consolidated performance in FY10. But, this has changed in the cur rent fiscal. Havells has reduced fixed costs of Sylvania by exiting from unprofitable businesses and outsourcing manufacturing to low-cost locations such as India and China. In the September 2010 quarter, Sylv...
Read more

Kisan Vikas Patra - KVP

  Kisan Vikas Patra (KVP) First launched in 1988, the Kisan Vikas Patra (KVP) is one of the premier and popular saving scheme offering from the Indian Postal Department. This product has had a very chequered history- initially successful, deemed a product that could be misused and thus terminated in 2011, followed by a triumphant return to prominence and popular consumption in 2014. The salient features of KVP are as follows- The grand USP- Money invested by the applicant doubles in 100 months (8 years, 4 months). KVPs are available in the following denominations- Rs.1000, Rs.5000, Rs.10,000 and Rs.50,000. The minimum purchase value for the KVP is Rs.1000. There is no maximum limit. KVPs are available at all departmental post offices across India. These certificates can be prematurely encashed after 2 ½ years from the point of issue. KVPs can be transferred from one individual to another and from one post office to another. ----------------------------------------------------- Inve...
Read more

Health for Wealth - How to buy Health Insurance ?

Tax Saving Mutual Funds Online Current open Infra Bond Application form   HEALTH insurance is a relatively new phenomenon in India. Hence, it is not on the top of the mind for most people to make a conscious commitment towards health insurance. However, it is imperative for each one of us to plan for better health for our families and ourselves. There's no better way than to start with making health your top priority this year. So, your health insurance resolution charter would look something like: ■ Invest in health for wealth: Timely investment in health insurance can help build a security net and hedge sudden dilution of another financial asset class in the event of a health emergency, making it imperative to opt for a comprehensive health insurance plan. ■ Buy a comprehensive health cover that fu lfills your health needs for life: Buy a personal health insurance cover even if you have an employee cover because 'employer provided' health insuranc...
Read more
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