2. 2
Sections
• Lets look at the Past? – Should Investors be unhappy?
• Equity Markets – A SWOT Analysis
• Future of Equities…
• How does asset allocation help your portfolio?
• Should you invest in hybrid funds?
• Which option to choose? – Dividend or Growth
• How to build a pension plan for your investor and yourself?
3. 3
The reality is very different from the perception
• The investor has lost money in
equities
• Equities have not generated
returns
• The investor has made more
money in fixed deposits
• Equities have no hope in future
• Investors have made money in
equities
• Equities have generated returns
in line with expectations
• A portfolio of well diversified
stocks has out-performed
• The future is geared for equities
Myths Reality
5. 5
However, longer holding periods have yielded predictable returns
Summary since March 31, 1979
Time Period
1 year 3 years 5 years 7 years 10 years 12 years 15 years
Yearly Rolling Return
Observations
32 30 28 26 23 21 18
Negative Return Observations 11 6 3 3 1 0 0
Loss Probability 34% 20% 11% 12% 4% NIL NIL
Median Return (%) 16 15 18 19 18 15 15
Average Return (%) 27 19 18 18 17 17 16
Max Return (%) 267 82 53 43 35 34 27
Minimum Return (%) -47 -15 -5 -2 -2 2 6
Standard Deviation (%) 56 21 15 11 9 8 5
Data as on March 31, 2013
7. 7
Stock performances vary hugely over time – the key is to identify the
right business
Sustainable business
performance is the
driver of stock returns
Investment process
has to capture all
factors that can impact
a stock
Actual performance
can be far away from
the average
8. 8
A well diversified portfolio will always outperform
Name of the Company 5 Year CAGR Beta
Sun Pharmaceutical 22 2
TCS 21 1.7
Mahindra & Mahindra 20 0.8
ITC 19 1.8
UltraTech Cement 18 2.1
HDFC Bank 17 1
Hindustan Unilever 16 2.3
Tata Motors 15 0.1
Kotak Mahindra Bank 14 0.7
Axis Bank 13 0.4
HDFC 12 0.9
Indian Oil Corp. 11 2.2
ONGC 10 1.4
State Bank of India 9 0.5
ICICI Bank 8 0.2
Infosys 7 1.1
Wipro 6 1.6
Larsen & Toubro 5 0.3
Cairn India 4 1.2
NTPC 3 1.3
Bharti Airtel 2 1.5
Reliance Industries 1 0.6
Coal India 0 1.9
Average 11 1.2
12. 12
But investors have lost money in equities
• There are many reasons which we know but do not rectify
– Investing in direct equity without research and understanding
– Chasing “the fashionable scheme” in mutual funds
– Not staying invested
– Etc., etc., etc.
13. 13
Fixed Income Vs. Equity – What should you choose?
• Both are important as asset allocation
tools
• Key metric for tactical allocation can be
yields generated from the asset class
• 10 Year G-Sec Yield – 7.40%
• EPS of Sensex – 1368
• Hence P/E = 20000 / 1368 = 14.62
• Yield of the equity market – 100 /14.62
= 6.84%
• Growth of 15% for the year – 6.84%
becomes 7.86%
14. 14
Summary
• Equities are predictable for long term – short term gain is
good luck and short term loss is bad homework
• Outlook on equities cannot be based on market levels
– Sensex at 6000 can be highly valued and at 20000 can be cheap
• Selection of the right investment avenue is key – investment
philosophy and process is more
• Understanding risk and reward is the key to investment
success
15. 15
Lets play a game
• Amount Invested – Rs. 100
– Month 1 return + 10%, Month 2 return -10%, Month 3 return
+10%, Month 4 return -10%, Month 5 return +10%, Month 6
return -10%, Month 7 return +10%, Month 8 return -10%,
Month 9 return +10%, Month 10 return -10%, Month 11 return
+10%, Month 12 return -10%
• What will be the amount at the end of the year?
16. 16
Warren Buffet says
• Rules of Investing
• Rule No. 1
– Never lose money
• Rule No. 2
– Never forget rule no. 1
• Any portfolio wherein all components go up or down in value
at the same time is not diversified
20. 20
Equities are powerful, but volatile in nature
This is historical data for the period Dec 1994 to Jun 2012. Past performance may or may not be sustained in the future. Stocks are represented by the S&P CNX
Nifty and Bonds by the I-Sec Sovereign Bond Index. Triple Asset comprises of Stocks, Bonds and Gold weighted equally and rebalanced monthly. Triple Asset is a
simulated portfolio. Source of data: Bloomberg.
23. 23
Bonds preserve capital, but create limited wealth
This is historical data for the period 1 Jan 2002 to 31 Dec 2012. Past performance may or may not be sustained in the future. Triple Asset comprises of Stocks, Bonds
and Gold weighted equally and rebalanced monthly. In the Triple Asset, stocks are represented by the S&P CNX Nifty and bonds by the I-Sec Sovereign Bond Index.
Triple Asset is a simulated portfolio. Source of data: Bloomberg.
24. 24
Which Option to Choose – Dividend or Growth?
Amount Invested (Rs.) 1,000,000
NAV as on Date of Investment (Rs.) 10
Units purchased 100,000.00
NAV 1 Year later 10.80
Scenarion under Growth Option Dividend Option
Gain 80,000 80,000
Dividend Distribution Tax 28.32%
Tax Paid (Rs.) 17,655.86
Withdrawal / Dividend per month (Rs.) 6,667 5,195
Annual Withdrawal / Dividend (Rs.) 80,000 62,344
Units redeemed (ann. Withdrawal / latest NAV) 7,407.41 -
Capital Gain (Rs.) (diff in NAV* units redeemed) 5,925.93 -
Short Term Capital Gains Tax Rate 30% 30%
Short Term Capital Gain Tax Paid (Rs.) 1,778 -
Exit Load paid (1% for 1 year for amount withdrawn) 800.00 -
Net Amount in Hand 77,422.22 62,344.14
(Ann dividend / withdrawal - all taxes - exit load)
Difference of Growth Option - Dividend Option 15,078.08
Difference as a % of Investment 1.5%
25. 25
Even then, Dividend is better than FDs
Traditional Fixed Income
Instruments
Fixed Income Mutual Funds
Amount Invested 1,000,000 1,000,000
% Return 10.00% 10.00%
Absolute Return 100,000 100,000
Tax Rate 30.90% 28.33%
Tax 30,900 2,073
Net Return 69,100 77,927
Net return % 6.9% 7.8%
Difference 0.88%
26. 26
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