Monthly Archive: August 2018

Mutual Funds SIP: Why Start Early

Mutual Funds SIP — Why Start Early

The best time to start a Mutual Fund SIP was yesterday. If you missed it then the next best time is today. Today I will show you a Mutual Fund SIP example that really shows the magic of compounding.

The idea is to show why you should start investing at an early age. Let’s say you started investing Rs. 12,000 per year in a Mutual Fund SIP plan at the age 20 and stopped it when you turned 30. So you invested Rs. 12,000 per year for 10 years and your total investment is Rs. 120,000.

When you stopped your SIP, one of your friends started a SIP. Since he started at the age 30, he continued his SIP investment until age 60 (or for 30 years). So he invested Rs. 12,000 per year for 30 years and his total investment is Rs. 360,000 (or he invested 3 times more money than you did).

So who is going to have more money at age 60? You or your friend? The answer may surprise you because YOU will have 3x more money than your friend. In fact, if your friend wants to beat your corpus then he should increase his SIP by almost 3 times.

Here’s the math:

In the above example, I applied a CAGR of 14% as Nifty 50/Sensex long term average return is around 14-16%. But there’s a very little chance of our market growing at the same pace as it did in the past 30 years.

However, individual stocks and portfolios could perform better than that. Anyhow, if you are thinking about starting a Mutual Fund SIP (or a Nifty ETF SIP) then now is the best time. But there’s a Onevestor thing. Your time horizon should be at least 15 years (Stay tuned to Onevestor to know 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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Absolute Return vs. Average Rate of Return vs. CAGR

Absolute Return vs. Average Rate of Return vs. CAGR

In my previous video, I introduced my favorite financial tool — a CAGR Calculator. Today I’m comparing 3 kinds of returns: Absolute Return vs. Average Rate of Return vs. Compounded Annual Growth Rate (CAGR).

There are more kinds of returns namely: Relative Returns, Risk-Adjusted Return, Rolling Returns, Internal rate of Return(IRR), Extended Internal Rate of Return (XIRR), etc. But I believe Absolute Return, Average Rate of Return, and CAGR are the must-knows.

I have compared all the 3 kinds of returns using the same example. That is, I assumed that you bought a stock at Rs. 1,000 and sold it for Rs. 2,000 after 5 years. And then there’s a Onevestor thing. Because there’s another reason why I made this video and that’s the new Mutual Fund (or rather SIP) culture that’s happening in our country.

1. Absolute Returns

* Absolute Return is simply an asset’s return over a certain period.
* It actually ignores the timeframe.
* For e.g., let’s say you bought a stock for Rs. 100 and sold it for Rs. 200 after 5 years.
* Your absolute return here is 100%.
* Your absolute return is still 100% even if you sold it after 10 years.

2. Average Rate of Return / Simple Annualised Return

* A simple annualised return simply divides the rate or return for the period by the number of years in the investment period.
* It ignores the time value of money.
* For example, suppose an investment returns the following annually over a period of five full years: 10 percent, 15 percent, 10 percent, 0 percent and 5 percent. To calculate the average return for the investment over this five-year period, the five annual returns are added together and then divided by 5. This produces an annual average return of 8 percent.

3. CAGR

* CAGR shows how much a person’s investment grew in one year.
* It is the average returns an investor has earned on the investments after one year.
* As you can see, unlike absolute return, CAGR takes time value of money into account. As a result, it is able to reflect the true returns of an investment generated over a year.
* In other words, 1000+14.87%+14.87%+14.87%+14.87%+14.87% = 2,000.014320624
* 1000+20%+20%+20%+20%+20% = 2,488.32
* CAGR is crucial for any asset class. Here’s why.
* Suppose you invested Rs. 1000 in a stock. It gave 100% returns in first year and your stocks value becomes Rs. 2000.
* In second year, it falls 50% and that takes your stock value back to Rs. 1,000.
* Here CAGR and your Absolute Return = 0. But simple annualized return = 50/2=25%
* It represents one of the most accurate ways to calculate and determine returns for individual assets, investment portfolios and anything that can rise or fall in value over time.

* There’s another reason too –– why I explained all above types of returns.
* And it’s the new Mutual Funds (and SIP) culture that’s happening in our country.
* The reason is they are highlighting CAGR as if it’s something that’s guaranteed.
* A Mutual Fund’s CAGR and real return can be totally different.
* For instance, check out the returns of Axis Long Term Equity Fund – Regular Plan (G) — I have personally invested in this ELSS plan.

* So next time when you see that Mutual Fund ad that says “5 year – CAGR of 20%”, just tell yourself that its NAV was NOT moving up 20% every single year.

* Now I guess you know why CAGR is THE most important metric when it comes to investment returns comparison.

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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CAGR Calculator: My Favorite Financial Calculator

CAGR Calculator — My Favorite Financial Calculator

“Compound interest is the eighth wonder of the world. He who understands it, earns it… he who doesn’t… pays it.” – Albert Einstein

Today I’m sharing my favorite financial calculator with you – the “CAGR Calculator”. CAGR stands for Compounded Annual Growth Rate. Compounded Annual Growth Rate (or CAGR) shows how much a person’s investment grow in one year.

I started using a CAGR Calculator to track the performance of real estate and not stocks. Now I use it for anything and everything related to “Returns” like Stocks, Real Estate, Chit Funds, FDs, Insurance, Mutual Funds, etc. Previously, my favorite financial calculator used to be the Compound interest calculator. It demonstrated the Compound Interest’s magic.

CAGR Calculator

  • You invest in stocks for higher returns, right?
  • And stock markets are for long term, right?
  • But how do you measure your returns?
  • For example, 3 years back, you bought Tata Steel for 300 and today you sold it for 375.
  • That is, 25% returns in 3 years.
  • Optically it looks good. Because its Average Rate of Return = 25/3=8.33.
  • But I would say you earned below FD returns.
  • Because, if you invested Rs. 300 in FD @ 7.50% for 3 years then you would have the same amount of money. That is, Rs. 375.

  • That means, even after risking your money in the stock market… you haven’t even earned FD returns.
  • So the financial tool that I used to calculate the real return is called CAGR calculator.
  • CAGR stands for compounded annual growth rate.
  • CAGR shows how much a person’s investment grew in one year.
  • It is the average returns an investor has earned on the investments after one year.
  • Actually, I ended up using a CAGR Calculator to track the performance of real estate and not stocks.
  • Previously, my favorite financial calculator was Compound interest calculator.
  • That is, its purpose is to demo the Compound Interest’s magic.
  • So many tools are there for CAGR.
  • My favorite is from easycalculation.com.

  • So in Tata Steel’s case CAGR = 7.72%.

  • As you can see, CAGR considers timeframe.
  • 25% in 3 years is absolute return. And it’s the same even if it took 5 years or 10 years.
  • As mentioned, I started using CAGR Calculator for real estate and it immediately became my favorite financial tool.
  • Now I use it for anything and everything related to “Returns”.
  • Whether it’s Stocks, Real Estate, Chit Funds, FDs, Insurance, Mutual Funds, etc.
  • For e.g. You bought a land in 2000 for 10 lacs and sold it for 40 lacs today.

  • You can do the same calc for any asset class. Like Gold, Stocks, Insurance, etc.

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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