Why the Passive funds will overtake Active funds Unnoticeably

                           Why the Passive funds will overtake Active funds Unnoticeably

There is a concept of efficient markets in international finance and Capital Markets.

This refers to the  true and transparent valuation of all the companies and the same data being available to everyone who is interested, in real-time across the world.

 In the market there are a lot of stories and rumours and perceptions regarding various policies of the government and the corporate world. In the developing economies like India due to the various Nexus between the corrupt government officials and the corporate world this information is not circulated and rather the Mis information is stored widely.

If you will notice the developed economies do not have many  public sector units like India in fact their Federal Bank which is the central bank like our own RBI is also privately-owned .

This results in fewer people having access to internal happenings of a particular company and even if they have such information, the controls are so strict that no-one would consider indulging in insider trading.

In a developing economy due to absence of sufficient and deterrent penalties even if such practices are uncovered the punishment is largely like a slap on the wrist.

In developed economies like US, the relevant public vigilance body has sufficient incentive to keep snooping upon people with grave misconduct and the penalties are severely and sufficient deterrent. Best example of this is Rajat Gupta the founder of ISB Hyderabad and A very respected name in the US corporate circles and his Srilankan accomplice.

In India so far even if sach malpractices are discovered the penalty is largely monetary as was in the case of HDFC MF front desk trading.

 Because of this information being available to some select people and the fund managers, they tend to leverage this information and hence the active funds which they manage, perform or try to outperform the broader market and the index funds which are dependent on it.

However things are changing and SEBI has become a toothed tiger and has started observing and handing out penalties and in the same fashion RBI is also becoming sufficiently aware.

Recently the prize for reporting (whistle blower) successful insider trading has been raised from 1 CR to 10 CR.

All these small steps will lead to  the information being reported on the portals regularly as is presently being done by every company to the stock exchanges and SEBI.

 PSU companies like IRCTC are reporting even the running and stopping of trains to SEBI and the exchanges.

I distinctly remember as late as 2018, the heads of most of the mutual fund companies and also Dhirendra Kumar of value research used to say that active and will still rule the roost for a decade whereas I was very sceptical of their stand.

 In 2007 when gold bees NFO was introduced, I knew that the change had arrived.

Few of the AMCs who introduced the etf and other passive funds did it in imperceptible way that few noticed the arrival.

Now you can see the steady rise not only in the AUM of index and ETFs but also the trades volume.

Passive funds did take the market by surprise after March last year but me not continue to do so in the shorter term.

And now slowly you will not only have asset funds for equity but also debt securities.

About 10% of the employees provident Fund money is channelled into SBI Nifty ETF.

Even though Nifty BeES is an older ETF, because of the above reason it's AUM is smaller but traded volume is much higher.

Strategies: even with the short history of passive funds now you have various mutations and combinations to think of e.g. whether to go for Nifty and junior Nifty separately or just invest in nifty 100.

All should you invest in nifty equal weight.

Should you invest in NV20 or in Nifty low volume.

Soon the choice will become even more.

With the clear choice of the investor to directly invest because of technology , the process will be simpler too.

So please be vigilant. Something which is simple can also lead to mistakes.

Do your own research; take in the articles that you read as information and not knowledge. Knowledge will be what you will do and achieve on your own.

Since the field is new the advisors will know as much or as less any of you.

God speed thee.

For Finance group ( FINWORLD@SEA ) now on Telegram

For Finance group now on Telegram

Despite all of us being familiar with finance and market requirements there is often need to to repeat oneself for the benefit of those who come later in the day.

Whenever person joins our group we try to introduce him to the basic tenets and options available for Investments. Our focus is not to be a billionaire overnight, Rather to gain experience and wealth slowly and steadily.

Our focus is not to become the know all of the finance world rather to be able to distinguish between the rights and wrong of investment so that the unscrupulous elements in the society do not try to get the better of us and fool us.

During our journey of investment our focus should be to ultimately  become independent financially and not be dependent upon the employer for the unscrupulous companies in the market over whom we have no control.

 I would like to advise all those who have joined later in the day please do not be swayed by empty promises and distant mirages.True wealth grows in an organic way in keeping with the economy of the country.

The basic rules of economics dictate this, that you cannot outperform the economy of a country consistently.

Hence I would like to ask newcomers on the group to please first read the books that I have shared above and visit my blog holisticrajeeve.blogspot.com and also the Facebook page Kaushik's FINWORLD.

Since the book was written quite a few years ago a lot has happened in the financial world which calls for upgradation of our strategy  and priorities.

In view of this I would like to to enumerate the following:

1. Please take a simple clean Vanilla and cheapest term plan early  in life.

2. Take a floater health insurance for yourself and the family irrespective of what the company covers you for. The family may mean your parents before and after your marriage also.

3. Target to keep 8-10% per year in your fcnr or nre fds. However at no stage you need to let it go beyond 50 lacs INR.

4. Open the PPF for spouse and children. Sukanya for daughter below 10.

5. Insure your house against natural causes, fire and theft.

6. Having done the above please distribute your monthly salary between 3 to 4 AMC or asset management companies which is an acronym for mutual fund companies.

Deposit this money  in liquid funds of those companies and plan a STP or systematic transfer plan into  4 or 5 equity funds.

7. Your equity funds can be suggested as follows:

- 1 index fund investing in in nifty or Sensex plan.

- one junior Nifty index fund which is also called next Nifty.

- one multicap fund which at the moment can be PPF flexicap fund or any other suitable one.

- 1 fund investing in the international market like PGIm Global opportunity or most N100 , or S&P500 or PGIM emerging markets fund etc.

- as a personal choice I would also like that you invest in one small cap fund which will be very volatile and aggressive but will give a boost to your portfolio.

Keep your investment ongoing permanently and without any break.

Do not be distracted by the market going up down or sideways. The STP  will ensure that your money is invested round the year 52 weeks.

- all the expenses should be met from the remaining money of your salary after the above investment has taken place.

- for buying or making a house do not hesitate to take a loan from a proper institution. By virtue of any calculations the outgo in form of interest will always be lower than the return on your Investments.

- if you will follow the above path it will only be a matter of time before you will achieve your goal and that is is the financial independence.

One final point I wish to reiterate ...

Very often we asked the question of how much would be sufficient for a retired life. For this I had come up with the figure which many found a little daunting. Truly enough a 30 year old may find it difficult to raise 4 cr before retirement and hence may feel discouraged.

Hence I have a separate parameter to enable everybody the flexibility of age as and when one can retire.

So as per my my experience with self and other colleagues if for three years your CAGR on your portfolio is more than annual expenditure then you can assume that you have sufficient funds to last you till you find another stream of income. However if your responsibilities and goals like children's education and marriage are over then certainly you are financially independent and can pursue what you wish in life.

Amen!!!

REGARDING NEW POSTS AND ARTICLES BY ME

 REGARDING NEW POSTS AND ARTICLES BY ME

My interaction with my fellow Mariners takes place through various social media channels apart from the official Telegram group called FINWORLD@SEA .

Some times I have to repeat myself because lot of Mariners while on ship, exit from the group because of expensive data charges.

So in order to provide them with a singe point of reference where they can check for guidance before asking further questions , I would be posting all those posts on this blog. 

So this just to inform you that you can always come back here to check if you have missed anything.

I would avoid posting any copyright material.

In case you have a question you can reach out to me on Whatsapp (9808640497) or Telegram .

CASE STUDY FOR GOLD AS PERSONAL INVESTMENT

 

CASE STUDY FOR GOLD AS PERSONAL INVESTMENT

Much has been said about gold and case has been made often regarding investment into it and against it in equal measure.

There have been qualitative and quantitative case studies done and articles written.

Recently a friend of mine suggested some opposition to my suggestion of buying gold as a bullion for personal saving or investment. As per him it is a very unpatriotic action as it leads to a stress on the GDP. When I suggested that this was more as a suggestion for our local group of friends who are there with a common goal of investment for retirement planning he very sensibly pointed out that if each of those members suggests the same thing to further 20 people. This point of his was also very valid.

But something that we forget while planning for ourselves and our family is that personal finance is all about personal and it happens within the ambit of national laws regarding wealth   acquisition accumulation  and taxation. At no point  any citizen can or should try to circumvent those laws.

However same is not applicable for the government. It can change its laws every year during budget and even 12 times during the year or as often as it likes.

It can even change the law of making the laws to  suit itself.

For example if at the end of the month you have to pay more bills then the salary which you earn , your bank balance will show red and if you do not have any other monitory asset you can be declared  bankrupt etc. It's not that difficult with the government. It's budget is first designed to spend and then to collect the money towards those spendings.

If after 1 year it is found and as it is found every year that they have not collected enough money for those expenditures they can take that money from RBI LIC different PSU companies or even from the nationalized banks as dividend. It can further raise your taxes ,duties ,tolls surcharges. And if even then it cannot make up for the losses... Then it can print more currency. It can also sell off its gold holdings with the RBI. And all this will be within the law.

Not so much for you. You not only have to take care of your own expenses but also those of the government. Somehow you cannot print your notes either !!!

With all these events there can be some extraordinary events like economic liberalization and devaluation of the Indian currency in 1991 or the demonetisation of 2016 or the Kargil war or the Covid lock down or the present Russian war... And all these will have a direct bearing on your financial situation and and personal well being.

And you can further add to these some changes in your personal and family life disasters like death illness or accident. In none of these events will the government step in to be in sympathy with you or give you the benefit of all the taxes that you have paid so far.

With so many changes that have happened already in the past 25 to 30 years and so many which can be further not imagined for the next few years... All you have to left to backup is your saving and investments in various asset classes.

Amongst all these asset classes equity no doubt rates  number one in the wealth creation. To counter the volatility of equity one invest in Bank fixed deposits and the fixed income funds. However this asset class also suffers a big disadvantage of firstly having a low sub inflation return and a heavy taxation on top of it hence delivering a big whammy.

And though most of these asset classes keep changing their form every few years and even as the fact that none of the world's currencies are more than even 100 years old in the present form ,the only asset class which has been standard for just a few thousands of years and not changed this form and has been universally accepted is- Gold.

It is the only form of a naturally occurring commodity which is recognised and respected across the world and in every nook and cranny of the world.

Even though gold has given a fairly high return across a substantial and equivalent number of years as other asset classes of fixed type it stands much superior to them for the purpose of portability acceptance and bartered for any range of goods or services.

There was a report of the working group to study the issues related to gold imports and gold loans in February 2013  by the RBI. And even before  addressing the issue of controlling the gold imports almost 9 years ago from today the paper starts with the following...

" Any attempt to moderate the demand for gold is an arduous and complex task.

The nature of demand for gold in India is not strictly comparable with that of demand for Golden many other countries as over 1.3 billion population of India would invariably continue to create demand for gold imports due to cultural religious economic and social reasons.

AWARENESS ABOUT GOLD AS A LUCRATIVE INVESTMENT AND STORE OF WEALTH IS GROWING AND HENCE IT IS DIFFICULT TO BREAK THE LURE FOR GOLD FROM BOTH THE INVESTORS AND JEWELLERY CONSUMERS. DEMAND FOR GOLD IN INDIA IS AUTONOMOUS AND MAY NOT BE AVAILABLE FOR REDUCTION THROUGH POLICY INTERVENTION.

SEVERAL STUDIES HAVE EMPIRICALLY VALIDATED THAT GOLD CAN BE REGARDED AS A LONG RUN INFLATION HEDGE. ABSENCE OF ANY CLOSE SUBSTITUTE TO GOLD AS AN INVESTMENT ASSET WITH THE HIGH LIQUIDITY GOLD CAN OFFER IS ONE MAJOR REASON WHY GOLD HAS BECOME A MUCH PREFERRED ASSET.

This is what the 400 page report starts with. It accepts that gold can you regarding as a long run inflation ahead and there is no substitute to go doesn't investment with high liquidity. IT ALSO VERY SHEEPISHLY ADMITS THAT 1.3 BILLION INDIANS ARE RIGHT AND BETTER ECONOMISTS THAN THE ENTIRE WORLD BANK, IMF ,US AND THE DEVELOPED COUNTRIES COMBINED AND PUT TOGETHER

It is only after this study by the RBI that it started releasing licences for nbfcs offering gold loans. These gold loans proved to be good for both the investor and the lender as it provides a secured loan for the nb fc and the possibility of immediately liquidating for the gold holder.

WHY PHYSICAL GOLD IS BETTER THAN ITS CORRESPONDING PAPER FORM:

APART FROM THE GOLD ETF THERE HAVE BEEN MANY ATTEMPTS AT LURING THE PEOPLE TO BUY GOLD IN E OR ELECTRONIC FORM AND KEEP THEM SECURE WHETHER DEPOSITORY.

Once such used to be the MCX which used to offer e-silver and E gold. This gold had the option of being converted to bullion at the time of delivery if required by the customer or investor.

After few years of operation the exchange itself was shut down by the government on account of violations of some laws.

In 2015 government introduced to simultaneous plans  for monetization of gold to which did not find many takers. Second was the sovereign gold bonds which were offered with some paltry rate of interest and also tax benefit if the gold bonds were kept up to maturity. The takers to these are also in minority as compared to the buyers of physical gold. The reason of which can be attributed to either the cultural and mental makeup of possessing gold in physical form or its reluctance at trusting the government. The third reason may of course is that the transaction has to be conducted in cash or equivalent.

Various personal, National and international disasters have proven that it is only gold which could keep the people survival and  afloat 

During such Times one should not try to become an economist or patriotic nationalist. It is one's duty to make ones wealth grow through legitimate and proper means utilising the financial freedom which the government offers in terms of taxation. The gold which you possess may give you less returns but it does not carry the annual taxation of a fixed deposit or the capital gains in case you're offering the gold for equivalent good or services.

The trend of the world governments is to convert everyone's assets and monetize them not only into paper but electronic formats. I personally feel (even as a proponent of equity investor) that this over dependence on digital format of wealth can prove to be disastrous in case of a element attacking a common format or  a depository.

In simple language it means that if all your money ,mutual funds, stocks, fds ,debt funds, PPF ,NPS etc are centralised in one place then it does not take too much time to evaporate in case of natural or artificial attack on the mode of electronic holding.

In short all I suggest  is that do not try to align your own interest with those of the government, they run parallel or even divergent as far as you go as a high networth individual.

With leaving some food for thought on the proverbial table I rest my case.

ARE MY INVESTMENTS SAFE

 

ARE MY INVESTMENTS SAFE

QUERY...

Sir, I have been investing in Mutual Fund both equity n debt for last 4 yrs. However, I was looking for some parallel or secondary mode of income as backup for my MFs in case of some eventuality 15-20 yrs down the line. While searching I came across this HDFC Sanchay Plus plan. With interest rates falling year after year, I presumed IRR of 6.25-6.5% is a good deal.

How should I diversify further w/o getting lured into buying something not good?

Rajeeve Kaushik, [25-11-2021 08:56]

[In reply to XXXXX XXXXXX ]

It is very important to be aware of one's finances and also future projection. This always lays down the foundation of one's planning. The questions which you are facing also occurred to me almost 3 decades ago. However net wasn't around, options were limited, equity options were restricted despite my awareness as the capital market was opaque- 1991 liberalization had just started with adverse publicity like we hear nowadays for demonetization and ITax rates were astronomical. But bank interest rates were 12% so was ppf , NRNR deposits hadn't kicked in yet with their interest rates at up to 18% p.a.(YES 18%).

My search and research yielded a word called Mutual Funds ( which hadn't made their inroads in India before 1995), UTI's US64 was a answer which in 2000 yielded into the biggest scam despite being a government company... and... THIS IS YOUR CONCERN!!!

Your concern is actually not of returns but that of consolidation of your gains.

You feel what if something happens to the MF industry and your capital vanishes.

This is where ASSET ALLOCATION comes in. In common parlance we classify assets as Equity, Debt, Gold, Real-Estate , REIT , Art, etc . But in my view we can classify them into sub-options as well- These are PPF, NPS, Bank FDs, Direct stocks, Physical gold, Gold ETFs, E- gold as well.

While choosing options one must not only look at legality and return of options but also the cost of the plan.

The plan that you have mentioned could fall into the category Pension Plan , ULIP etc etc but anyone who gives you assured returns(in print) it cannot be more than 5-6% and sad part is that you will have to pay tax on that.

Now assuming you will need 2 lacs pm in your retirement , please calculate how much you will need to invest to get 6% return which equals 24 lacs. Then again the expenses will not be static but your income will be- which will leave you with a shortfall within 5 years. I HAVEN'T YET CALCULATED THE TAXES ON YOUR FIXED INCOME RETURNS.

So now you need a avenue from where the returns should be high even if not assured and in

keeping with inflation and also be TAX EFFICIENT.

This where your judgement will come in hand at distributing your salary between NRE FD, FCNR, Equity MFs , Debt MFs, PPF, NPS, Gold ( I don't stand with Real estate except the house that you need for residing- NOTHING ELSE).

AS for your concern about safety of your capital as you can see even the government's sanctioned currency wasn't safe. Even those who had crores in the bank and legal -couldn't get their money for sometime And I gave you the example of UTI scam in the beginning. After that UTI itself was split by the GOVT so that it couldn't be sued etc. SO vigilance is important . And the only tool toward that is Awareness and not fear.

Now SEBI is much more tighter than ever before and MF industry is the most regulated in the world.

With coming of Passive funds the idea of fluctuation of fund performance is also gone.

It took me whole lifetime to learn that the people who were rich in 60's and 70's were not those who had large real estates but whose forefathers had invested in shares in 1880's.

I have myself seen a share certificate of a company in Dehradun issued at face value of 50 paisa per share - for 10000 shares. I narrowly missed buying the paper for it's antique value since company was long closed.

When the owner of the certificate was contacted I was informed that it was sold to someone very influential for Rs.5000 a share!!! This was because the company still owned the largest land bank in Dehradun since 1800's

Now you do the math!!!

The formalization of shareholding and partnership is a gift from the west but we Indians haven't yet recognized it.

So now junk that mindset of 60's and 70's we aren't living in 12% bank interest times but our requirement is still of minimum 12% return so search for them. However during your search just remember ONE thing....

KEEP IT STRAIGHT & SIMPLE.

This group will not make you a millionaire overnight ... but it will help you keep on the path to be a MULTI MILLIONAIRE... and that is a certainty.

The group has been constructed in the great spirit of Mutual Knowledge (MK instead of MF) which should be free to take and return; something like a partnership library without membership but where you have to add a book in return for 100 that you read. It is not dependent on me or anyone person... as I and others pass away, there will many who will emerge to keep others motivated.

So now over to all of you...

A Lesson from daily life about staying in the game!!!

 A Lesson from daily life about staying in the game!!!

I'm presently in Ranthambore Wildlife Sanctuary.

We've been here for 2 days and visited the sanctuary multiple Times to site the the fabled tigers.

Despite spending 5 visits we could not sight any stripes.

This last evening we finally booked our last visit to make one more attempt and randomly opted for one zone. However again we did not sight anything and were returning quite crestfallen.

And as we exited the gate of the century sanctuary we spotted this beautiful beast casually coming out of the overgrown bushes.

It did its routine of stretching and bending and turning and walking around on the road in full view of the the vehicles who cared to wait.

After blessing us with his company for 20 odd minutes it again moved away into the dark which had come over by now.

It is same about life and it is same about the market. Just when you will finish every iota of the patience that you had and would about to quit- the market will jump and give you the most spectacular returns covering for all the years of non performance.

Only thing that you will not know is the length of the patience that is required..

It is for such Times that the elders have advised that always invest in small steps continuously and consistently till you have copious supply of funds when it supply ceases...

And you need the money... Then you start withdrawing consistently and continuously in small steps. Almighty has given your profession when any big ticket purchases in the middle can be adequately met by your salary itself.

So help you God.

KEEP EVOLVING

 Though few of us try to advise on queries from members, it is based upon our experience.

It is possible that during the process and in time they discover some other observations .

They should try to share them on this group for the benefit of others because likes everything in life... Field of personal finance also keeps changing...

E.g. earlier e used to treat new deposits and accounts as sacrosanct and interest in them.

But now there are so many restrictions wrt NRE accounts that it doesn't make any sense in operating through it --so adopt NRO instead.

30 years ago NRIs were given all the liberty, but now the status is more of a leadstone than a milestone.

So adopt strategies which multiply your wealth rather than stick to that tax free status.

In modern India the word TAX is not something to be scared of so do not restrict your imagination by the fear of paying taxes of otherwise it can lead you to a proper path of adding to your wealth.