Aditya Birla Sun Life Focused Equity Fund a 3 Star Rated fund, a leading fund in its category has given a 4.76% return in the last 1 year (2018 – 19). In the same period Nifty reported a 14.93% gain and Sensex reported a 17.3% gain. Aditya Birla fund did relatively well because in the same period Equity Mid Cap reported (-) 3 % and Equity Small Cap (-) 11.5%. (https://www.livemint.com/market/stock-market-news/sensex-ends-fy19-with-the-biggest-gain-in-4-fiscal-years-1553879533118.html)
This is not a 12 Month trend but a 24 Month phenomena. If you started investing in March 2017 and your Investment Advisor assured you of an Alpha (A gain over the Index Returns) – well you are in trouble. In this period the Sensex moved from 29,000 – 39,000 a whopping 30% + but the best of MF’s you have invested in may have given you returns of less than 10%.
In effect in the last 24 Months you would have made better returns if you had stayed invested with your neighbourhood Bank FD Or with a good Liquid Fund – some of which have given annualised returns of 8%+
You wonder how this is possible when the Country is supposedly growing at 7% GDP. A 15% annual Index Gain and a 7% GDP growth indicates an economy that is burning hot. But the reality seems to be different. IT Companies are reporting 3 – 4% growth and holding on to their stock prices with buybacks, Airline are melting, Real Estate is sluggish for the last 7 years, and Telecom companies have merged and reported losses and Job losses. Banking Industry is reeling in NPA’s the Pharma industry has lost its sparkle and the booming Automobile industry has started showing low to negative growth. The liquidity crisis is severe and the rate of loans on the street is very different from what the RBI rates are. And Swiggy, Ola & Uber seem to be the only people hiring. Yes inflation is low – but one wonders if this inflation or deflation driven by low consumer spending.
If every large industry that constitutes the economy is limping, there is a job challenge and liquidity is stretched – one wonders how the economy and the stock market is booming.
Which answers the 1st Point on why the Index is gaining but the MF’s you invested in are lagging. A handful of stocks have done extremely well. Reliance, HDFC Bank, TCS, Havell, Bandhan Bank …. you can pick the stocks with your fingers. But sadly most investors picked the wrong stocks and are seeing their portfolios steeply negative. Ask your friends who invested in Stocks and PMS schemes and they will tell you how they have burnt their fingers in the last 24 months. So if the fundamentals are not strong you have to question what is driving the index higher and higher over the last few months – is it really the Modi factor or is it Black Money coming in thru the P Note route to fund the 10B USD Grand Indian elections?
So where do you go from here.
Your investment manager will tell you about India being a great 10 year story and how the stock market has given 15% + returns over the last 25 years. Big bull Rakesh Jhunjhunwala will talk about India being in the midst of the greatest bull run ever. All this is true and works well if you don’t want your money back for the next 10 – 15 years. But if you have invested in the stock market hoping to pay for your daughters education in the US a few years away or for buying a house 2 years down the line and are expecting to skim away 15 – 20% of the profits from your MF every year – then beware you may be in for a rude shock.
Let’s look at the Nifty P/E
A P/E below 14 indicates – Extremely Oversold and above 22 Extremely Overbought.This link will give you an indication of how the Nifty P/E has fared over the years. (https://nifty-pe-ratio.com). We are today at a historically high P/E of 29 – and that is cause for concern
Remember 2008 when the Lehman Brother Crisis hit the globe. 2008 was an incredible year for the Indian markets, after scaling the 21,000 peak in January 2008, the markets were at 8,000 in Oct 2008. The Sensex P/E in Jan 2008 was also 28. See the correlation – all that goes up has to come down. It’s been a great 10 + years since 2008 as liquidity has flown thru global markets like a river in flood.
Losing faith in the system
Track the best of analyst reports over the last two years and you will see the extremely poor quality of research in India. Let’s take the example of South India Bank – 2 years back the stock was at Rs 18. leading Analysts talked about the Bank being on a fast track growth and the target price was given as Rs 45 over 12 – 18 months. Some even spoke of a 100+ price. In the midst of the euphoria the stock did go up steeply and touched 34 and then it collapsed to Rs 12.5 and is now settling down at 16 – 17 Rupees. You will see this trend again and again for numerous stocks and it leaves you with a feeling – are these stocks being manipulated and is the common investor being taken for a ride.
There is no skin in the teeth.
ILFS was rated AAA by Care, ICRA, Crisil in March 2018. A few months later the company went bankrupt. A Bluechip like ICICI bank is under scanner for nepotism. ZEE, DHFL and many more are reporting inability to pay back loans. Banks gave away Billions in loans that were defaulted. And Kotak is defaulting on its FMP – just to recollect the word FMP means Fixed Maturity Plan. When a Bank like Kotak delays your FMP you better get worried. All this makes you question the role of the Board of Directors, Auditors, Management and the Regulator.
Your Financial investment partner also has no skin in the teeth. Irrespective of you making or losing money they continue to make their commissions on your holdings. You can’t blame them – they run a company that is measured on quarterly growth and if they start getting pessimistic then that’s the end of their company. Given the state of confusion they may pitch for complex products like A Structured Product where the returns are linked to the Index over 2 – 3 year. Some may even make handsome returns on it. But if you delve deep into the product you will realise that a small part of them are invested in Futures & Options while a large chunk is lent to Small & Medium Business at very high rates. That Debt can be very risky. Also remember the basic rule – Never invest in a product which you don’t understand.
Well now that I have got you worried let’s come back to the basic question – How do I make 8% steady returns over the next 2 years? We are now in a situation where we should be worried about Return of your Capital Vs Returns on your Capital.
There are no easy answers – but these pointers may help you make your right decision
- Nifty P/E at a historic high of 29 is a Red Flag – it’s time to Go slow on market investments.
- Unless you are a whiz kid – stay away from investing in individual stocks. The Daily TIPS and Research Reports cause more harm than help.
- Debt Funds thanks to rate reductions have given good yields over the last 1 year. Given the severe liquidity crisis one can expect a few more rate cuts that will ensure Debt Funds yields of 7 – 9%.
- A Good Bank FD gives you 7% and is not Tax friendly – but it does give you a lot of peace of mind
- If the market crashes and you have liquidity – invest 25% of your portfolio in Index Funds – like they say you can never beat the Index.
03 comments on “The Challenge of making 8% + Returns in an increasingly volatile and unpredictable market”
Hi VAK, I too closely study topics related to markets, I found your analysis very relevant. My take is most of the small time investors are overlooking company’s ethics which is a fair parameter while making investor decision, yes this parameter is also taken to task by some of the reputed boards. I wish to read some interesting analysis from you in this topic – Ethics. looking forward. Thank you.
It is very rare to see divergence between Nifty 50 and Nifty Next 50. 2018 was such an exceptional year. That explains most of the well written points in this blog!
Hi VAK, Very nicely written. It is true but question still remains open. The situation has not changed in last two years and it will not change in coming year. if you would have invested in PMS (you have already covered mutual funds) kind of funds that have shown 15-20% of return in past and thinking that smart investment manager is behind that then you are proven wrong. None of the PMS has made money in past 2 years and I do not think that it can make over your principle in coming year. So in net 3 years PMS investors might loose money or make 1-2%. when you raise this concern to your wealth manager then they attribute to market, Global slow down. If long term is 10-15 years then one fundamental question to ask whether do we have another 15 years (esp who has hit 50 mark). even you have then what you will do with the money as most of your essential requirements like travel, college study for your children, housing needs will be over. Might be good idea to re-think on strategy rather than blindly following wealth managers.