Category: Personal Finance

FD vs. Mutual Fund/Stocks Returns – Here’s What You Need To Know

FD vs. Mutual Fund/Stocks Returns – Here's What You Need To Know

You may have come across a lot of articles and videos that says mutual funds are now better than FDs. Or rather mutual funds (or stocks) offer better returns than FDs.

Like:


Thanks to dropping interest rates. One-year bank FD rates are currently in the range of 5.25%-7.00%, but if you’re placed in highest tax bracket (of 30%), a paltry sum is earned. This further gets eroded when inflation is also accounted.

Since the net return is less than inflation, you will end up saving less than what your needs are i.e.: prices will always grow faster than your savings. So, the effective real rate of return (also known also as inflation-adjusted return) has clearly become unimpressive. That’s why everyone is pushing equity because it’s an inflation beater.

I created this post seeing the way Mutual Funds are now selling their funds. Perhaps that explains the reason why wealth in stocks is nearing FDs for the first time in India. Its reason is obvious too. Gold and FD rates are coming down. In FY 17, Indians invested 8 lac crores in stocks compared to 3.4 lac crores in FDs. Total wealth in equities are at 37.6 lac crores compared to 40.2 lac crores in FDs.

But what you need to know is. ZERO IS GREATER THAN MINUS. You will never lose your capital investing in FD.

FD: PROS

* Fixed rate of interest / Assured rate of return
* Risk-free
* Save taxes when you invest for 5 years — but returns are taxable
* Liquidity
* No costs invovled / Zero charges

CONS

* Taxable
* Low returns
* Inflation
* Lock-in

Stocks: PROS

* High returns high risk
* Liquidity
* Tax free dividend
* Inflation beater

Stocks: CONS

* High risk
* Monitor stocks and funds
* Entry/exit fees / Brokerages

Video / Malayalam

https://www.youtube.com/watch?v=CeOu_KrADL8

I hope you have learned a thing or two from my new video. If so, do share my video with your friends and family on your social media channels!

Happy Investing/Trading! 🙂

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Real Estate vs. Stock Market Returns: When Stock Market Beats Real Estate Returns

Real Estate vs. Stocks: When Stock Market Beats Real Estate

In the last post I said why I prefer stocks over real estate when it comes to investment. Today’s video is to compare real estate vs. stock market returns. Few months ago, when I visited a relative at his home in Trivandrum, he told me that he bought his property in 1981 for Rs. 10,000 per cent of land, and now it’s valued at Rs. 25 lakhs. So I was like WOW. 250x the investment. Out of curiosity, I calculated its CAGR (https://www.youtube.com/watch?v=Sk_em…) and I figured out that it comes to around 16%.

So how does it compare with stock market returns?

As you probably know, the base period of Sensex is 1978-79 and the base value is 100 index points. This is often indicated by the notation 1978-79=100. Sensex now trades at over 36,000. The CAGR of Sensex over the past 38 years is over 16%. Or 360 times the original investment (compared to 250x). That’s excluding dividend. If dividend is included then the returns could be in excess of 18% CAGR.

So what’s the point? Actually, many!

* Long term effect of equity is least understood in this country.

* When it comes to real estate people uses X times the investment to highlight its returns. Say, I bought a land for 1 lacs and sold it for 5 lacs. And I multiplied the money by 5 times. But when it comes to equity, the returns are expressed in CAGR/ (or Compounded Annual Growth Rate)

* I have also read that equity has outperformed one of the most expensive prime properties in the country.

* Samudra Mahal building was Mumbai’s most expensive building when it was completed in 1970. At that time, bookings had then commenced around Rs 700 per sq ft. And 3 years back (Jan 26, 2015) Infosys co-founder Nandan Nilekani paid about Rs 1.29 lakh per sq ft, or Rs 22.5 crore, for a sea-facing apartment in the marquee Samudra Mahal building at Worli.

* 129,000/700 = 184.285714286 : That is, 184 times in 45 years. Or a CAGR of 12.29%.

* What does that mean? Sensex has delivered superior returns than the most expensive prime property in the country.

* So remember one thing. When you think about equities think 15-20 years and not 5-10 years (as TV channel experts would say).

* A stock’s up trend or down trend could last up to 10 years. Means, a stock can move up or down continuously for 10 years before the cycle turns around. So when you enter a stock at the wrong cycle, you will have to wait two cycles for real returns. That makes 5-10 years short term.

* We buy a property and hold it easily for decades. People do not sell their homes and properties when the demand is low, right? They sell when they need cash. But we don’t do it with equities. When you do, you will agree with Albert Einstein that: “Compound interest is the eighth wonder of the world. He who understands it, earns it… he who doesn’t… pays it.”

* I compared the above performance with Sensex, but good quality stocks and mutual funds have delivered better returns than real estate itself.

Video / Malayalam

I hope you have learned a thing or two from my new video. If so, do share my video with your friends and family on your social media channels!

Happy Investing/Trading! 🙂

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Real Estate vs. Stock Market: Why I Prefer Stocks Over Real Estate

Real Estate vs. Stock Market: Why I Prefer Stocks Over Real Estate

You probably know that Real Estate and Gold are considered as two of the most safest investment options in India. It’s true to some extent. But I personally prefer stocks over real estate when it comes to investment. That said, it’s nice to own a beachside villa or resort or whatever just like we buy car, gadgets, etc. But definitely not as an investment.

Now let me tell you Why I Prefer Stocks Over Real Estate:

1. You need a huge amount of money to invest in real estate. But when it comes to stock market, you can start with whatever money you have.

2. Prime real estate properties are affordable only for the elite class. But you can buy the stocks of any companies with whatever money you have. Very handful of stocks trade above Rs. 10,000 per share. E.g. Bosch @ 18k, Page @ 28k, Eicher @ 28k, MRF @ 75k.

3. Real estate lacks liquidity. You can’t (or you don’t) usually buy a property today and sell it tomorrow that easily. On the flip-side, you can buy and sell stocks any time. Of course the risk factor is different for both. Don’t you hear this often: “Mutual fund investments are subject to market risks. Please read the offer document carefully before investing.” That’s it.

4. Also, you can’t partially sell your property that easily. But you can sell a part of your stocks or all of it when need arises.

5. Real estate involves taxes, government offices, documentation, commissions, etc. and that makes buying and selling a hassle. But it’s super easy to buy and sell stocks as there are no paperwork or legal hassles involved.

6. Transaction costs are huge for real estate (in fact, that’s why white money gets converted to black money) but it’s very low for stocks. It’s only 1% including buying and selling side.

7. Even after buying a property, there’s maintenance costs involved. Unless you rent out your property there’s no income. But when it comes to stocks, you actually make money annually as dividends.

8. It’s not possible (or at least not easy) to assess the real value of a property. But you can value a stock based on its earnings and earning potential.

On the flip side, real estate is not a bad option either as it’s got some unique advantages:

1. You can invest in bulk. Of course, you can invest bulk in stocks as well. But the risk-reward may not be favorable. Of course that risk is also there in real estate as well (What if you buy at peak, like housing bubble in U.S.) but not as much as in equity I guess.

2. There is no ticker to show the current market value of a property in real-time. So there are no mark to mark losses and sleepless nights. Actually, you will have some peace of mind that you own this or that property.

3. Unless there’s fraud or something like that there’s no risk of halving of price in a day. Meanwhile, stocks are so volatile that its price can go down to any levels. Best example is Satyam. I think it went down 90% in one day because of a fraud.

These are the reasons why I prefer stocks over real estate. Tell me which one YOU prefer and why.

Video / Malayalam

I hope you have learned a thing or two from my new video. If so, do share my video with your friends and family on your social media channels!

Happy Investing/Trading! 🙂

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What is Long Term in Stock Market? Hint: It’s NOT 5 or 10 years!

What is Long Term in Stock Market?

You hear that often from your friends and TV and web that stock market is for the long term. Right? But how long is long term? 1 year, 5 years, or 10 years?

If you think 5 years is long term then here’s the spoiler. If you make 30% CAGR for 4 years and then suffered a 50% loss in the 5th year then your 5-year CAGR is just 7.4%. That is, less than FD returns.

And if you think 10 years is long term then here’s another spoiler. 10 year CAGR of SBI, Bharti Airtel, ONGC, Tata Steel, NTPC, BHEL, Reliance, Wipro, are either ZERO or less than FD returns. Remember, all of them are or were once blue chip stocks.

That’s not all! Today’s star performers are Hindustan Unilever and Infosys. But if you invested in those stocks at its peak in 2000 then your 10-year CAGR would be ZERO or less than FD returns. Likewise, if you invested in Reliance (today’s another top performer) in its 2008 peak then your 10-year CAGR is actually ZERO or less than 4%.

Remember these are the stocks that are recommended at all times by experts. Out of the above stocks, Hindustan Unilever is really interesting. Hindustan Unilever’s 10-year CAGR from its 2000 peak is actually ZERO. But its 17-year CAGR is around 8% and its 18-year CAGR is around 10% and again its 18-year CAGR + Year To Date return is around 12% which is clearly impressive.

So this video is for retail investors who are entering the stock market hoping for huge returns. Thanks to ‘Mutual Funds Sahi Hai’ ads which is clearly encouraging an equity culture in India. And Mutual Fund sellers are advertising their plans as if it’s safe as FDs in the long term.

It’s true that SIP is risk-free but not for 5 or 10 years but when your investment horizon is 15 years or more. Because for one-time investments, the stock marketing timing (or the entry price) does matter. A lot.

Experts always say: BUY. They will recommend a SELL only when the stock is going down and not when it’s going up. So your entry/exit time matters a lot.

Video / Malayalam

I hope you have learned a thing or two from my new video. If so, do share my video with your friends and family on your social media channels!

Happy Investing/Trading! 🙂

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Forget 100% Stock Market Returns. Even 30% Is Huge!

Forget 100% Stock Market Returns. Even 30% Is Huge!

Normally, when it comes to investing people want 100% returns. That is, everyone wants to double their investment — no matter what.

Perhaps that explains the reason why people jump into penny stocks. Because they think that it will be easier for a Rs. 4 stock to double to Rs. 8 and then to Rs. 16 and so on. And it’s not just in stocks. People enter real estate as well with the idea of doubling their investment.

But do you know that only a handful of stocks offered 30% returns over the past 15-20 years? I randomly checked the CAGR of some multibaggers on my watchlist and I realized that only a very few of them offered 30% CAGR in the past 18 years.

Some of them are Eicher Motors, Titan Company, Page Industries, Lupin, Sun Pharma, etc. All those multibagger stocks like MRF, Maruti, HDFC Bank, Infosys, TCS, Britannia, Hero Motocorp, ITC, L&T, Reliance Industries, etc. offered less than 20-25% over the past 18 years.

So I would say 100% CAGR for 15-20 years is not just practical but it’s IMPOSSIBLE. You know why? Because a $10,000 investment growing at 100% p.a. for over 30 years could list you on Forbes Billionaires List.

$10,000 investment compounding at 46% CAGR for 40 years gives you $40 bn:

$10,000 investment compounding at 50% CAGR for 40 years gives you $120 bn:

One biggest mistake that I did when I started investing in stock market is that I never tracked my CAGR. Of course I have my own reasons too for that. Like, I was not salaried and and my investments and withdrawals were random, etc. So if you are a stock market investor then you should have an investment goal.

Video / Malayalam

I hope you have learned a thing or two from my new video. If so, do share my video with your friends and family on your social media channels!

Happy Investing/Trading! 🙂

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