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Markov Process & Your Investments

Investment Planning

Hemant Beniwal

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May 30, 2019

A process where the future behavior is not entirely dependent on past behavior is called a Markov process.

It indicates that the future is independent of the past given the present state. Random processes like epidemics, traffic flows or economic behavior are considered Markov processes.

Must Read – Let’s not believe in predictions

Markov Process

A game of snakes and ladders or any other game whose moves are determined entirely by dice and the current state is a Markov process.

This is in contrast to card games such as blackjack, where the cards represent a ‘memory’ of the past moves.

Markov Process & Your Investments Click to Tweet

To see the difference, consider the probability for a certain event in each of these games. In Snakes and ladders, the next state of the board does not depend on the past state but the current state and the roll of the dice. It doesn’t depend on how things got to their current state.

But in a game such as blackjack, a player stands to make gains by remembering which cards have already been shown. So the next state or round of the game is not independent of the past states. Blackjack is not a Markov process.

Mathematically, the Markov process is a sequence of events that have states with some probability and the probability of moving from one state to the next state depends on the current state and not on past states.

Read – The Biggest problem with Financial Planning

Can Markov processes be used to predict the prices of stocks?

You have to identify a variable that affects the price and add the probability to events that can be associated with the price. The events usually are – ‘Price goes up’, ‘Price goes down’ and ‘Price remains unchanged’.

Then a matrix of probability values for different events for different values of the known variable is created. Then one can compute to find the probability of what will happen in the price movement.

Check – Keep away from too much NEWS

A Markov process variation called Hidden Markov process can also be applied to movements in share prices and Mutual Fund NAVs.

Many white papers have concluded that in different stock exchanges in the world, the Hidden Markov model can be used to predict stock prices… This model is an extension of the Markov process that concludes that given the probability of the value of certain economic indicators and the current price of a stock, the next value of the stock can be determined. It is not necessary to use older values.

Check-What are alternative investment funds (AIFs)

For example, to find the stock prices of the future, identify the economic variables that may affect the stock price the most – Examples can be Index value, Inflation, Volatility Index and Average Production Figures. Identify the expected values of these. Look at historical data, to check the performance of the stocks when the values have been similar. You can find the probability of how a stock will do in similar circumstances.

Studies show that stock price movements are not random but follow a pattern and this can be found using Markov models.

It is not easy to predict the stock market movements. Mathematical models give a higher probability of correct predictions. But they can go wrong. It is important to be careful while investing in equity-based assets and follow proper research and analysis.

This post is written by Vidya.

I know it’s a complex topic – feel free to share your views & questions in the comment section.

HDFC Life Sanchay Plus Review – Crazy Guaranteed Return

Insurance Planning

teamtfl

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May 29, 2019

3

HDFC Life Sanchay Plus Review – Crazy Guaranteed Return

I am not sure if this is a coincidence that when equity markets don’t perform insurance companies bring new concepts. You must be remembering the Highest NAV Guaranteed plans like LIC Wealth Plus & how bad was clients experience.

These days the insurance industry is offering Guaranteed Return plans & one which is getting the most attention is HDFC Life Sanchay Plus.

This post is written by Parminder Singh – our Financial Planner.

HDFC Life Sanchay Plus

Retirement Planning investment varies with each individual depending on their needs and risk capacity. In India, it is not an easy job at all. Falling interest rates, slowing economic growth, and of course, too many financial products do not make life easy.

HDFC Life Sanchay Plus Review - Crazy Guaranteed Return Click to Tweet

Setting aside some amount or investing in some assets for the purpose of generating income at old age sounds very simple but be frank it’s very complex. While planning for retirement, consider other expenses such as medical expenses and emergency needs after retirement. Other investment such as children’s education and marriage should be taken care and is not to be mixed with retirement options.

In this article, we will be talking about HDFC life sanchay plus and through light on point if it suits to our retirement portfolio or not.

Overview of HDFC life sanchay plus: Life-Long income option

Note – Rates have reduced from 1st August 2019

(below illustration was added before that)

There are many options in this policy but we are just focussing on Life Long Income – which is most interesting.

This policy comes with two variants, 5 years premium payment option or 10-year premium payment option.

In 5-year premium option, you will get life cover for six years and start getting 33% of the annualized premium from the end of the seventh year till the time you attain the age of 99. At the end of 99 age, the insurance company will pay the total premium you already paid.

In 10-year premium option, you will get life cover for eleven years and start getting 95% of the annualized premium from the end of twelveth year till the time you attain the age of 99. At the end of 99 age, the insurance company will repay the total premium you already paid.

Illustration:

Age	Years	Low Premiums paid	High Premiums Paid
50	01-08-2019	-52250	-522500
51	01-08-2020	-51250	-512500
52	01-08-2021	-51250	-512500
53	01-08-2022	-51250	-512500
54	01-08-2023	-51250	-512500
55	01-08-2024	-51250	-512500
56	01-08-2025	-51250	-512500
57	01-08-2026	-51250	-512500
58	01-08-2027	-51250	-512500
59	01-08-2028	-51250	-512500
60	01-08-2029	0	0
61	31-07-2030	48925	502125
62	31-07-2031	48925	502125
63	31-07-2032	48925	502125
64	31-07-2033	48925	502125
65	31-07-2034	48925	502125
66	31-07-2035	48925	502125
67	31-07-2036	48925	502125
68	31-07-2037	48925	502125
69	31-07-2038	48925	502125
70	31-07-2039	48925	502125
71	31-07-2040	48925	502125
72	31-07-2041	48925	502125
73	31-07-2042	48925	502125
74	31-07-2043	48925	502125
75	31-07-2044	48925	502125
76	31-07-2045	48925	502125
77	31-07-2046	48925	502125
78	31-07-2047	48925	502125
79	31-07-2048	48925	502125
80	31-07-2049	48925	502125
81	31-07-2050	48925	502125
82	31-07-2051	48925	502125
83	31-07-2052	48925	502125
84	31-07-2053	48925	502125
85	31-07-2054	48925	502125
86	31-07-2055	48925	502125
87	31-07-2056	48925	502125
88	31-07-2057	48925	502125
89	31-07-2058	48925	502125
90	31-07-2059	48925	502125
91	31-07-2060	48925	502125
92	31-07-2061	48925	502125
93	31-07-2062	48925	502125
94	31-07-2063	48925	502125
95	31-07-2064	48925	502125
96	31-07-2065	48925	502125
97	31-07-2066	48925	502125
98	31-07-2067	48925	502125
99	31-07-2068	563925	5652125
	XIRR	6.45%	6.58%

Returns in Life Long income option is 6.45% – in other option returns will be different. (Benefits are higher in the case of high sum assured.)

In the case of Death

On the death of the Life Assured during the Payout Period (after policy term), the nominee shall continue receiving Guaranteed Income as per Income Payout Frequency & benefit option chosen till the end of Payout Period. The nominee shall have an option to receive the future income as a lump sum, which shall be the present value of future payouts.

If we think and compare with average life expectancy, we live an average of 80 years, this means the return would be even lower than what it shows. Say it may be less than 6%.

Does it seem to be a great investment option?

My answer to this question is NO because investing in this instrument will surely not going to give enough returns to beat inflation over a long period of time. But if you are a very conservative investor – it’s not bad.

Remember that guaranteed returns come to you only if you stay the course. Even in this case, if you surrender the product mid-way, you will have to let go of your insurance cover, though bundled plans don’t offer a great amount of cover.

Must Read – Best Retirement Plans in India

HDFC life Sanchay vs Annuity

If we compare LIC Jeevan Akshay Annuity & HDFC Life Sanchay Plus – HDFC would definitely a good choice for those who come in higher tax bracket, because there you will get tax free returns.

But again saving taxes can’t be only criteria, we need to see whether it fits our portfolio or not.

It is always preferable to keep a good mix of asset allocation in your portfolio and not just depend on such one kind of income giving instrument.

Some factors like Liquidity, lock-in period, and risk-taking capacity needs to keep in priority and accordingly rebalancing of the portfolio on a timely basis would generate great returns and helps you to beat inflation accordingly.

In nutshell, you need to look at your requirements and your portfolio to make a choice. If you still can’t make up your mind, seek professional assistance from your financial planner.

I would suggest not to go with such guarantee income products to retail investors where tax slab is lower after retirement, it’s better to keep your portfolio diversified according to your risk profile. Systematic withdrawal plan from Mutual funds can be a better option for someone who needs a regular income & willing to take some risk.

Please share your views or ask questions regarding HDFC Life Sanchay Plus or similar products available in the market right now.

Financial Friction – What you can do to Avoid

Family Finances

Hemant Beniwal

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May 2, 2019

8

Financial Friction – What you can do to Avoid

We all are born in a country which is known for its glorious past, history, heritage, various religions, and amalgamation of various cultures.

But there is something more that leaves people across the globe intrigued which is our great family system that too A JOINT FAMILY.

This system is a close-knit bond that keeps us intact, secure and gives us a facelift when in crisis.

Check – Financial Infidelity – what to do

Financial Friction

But if we go into a little detail we find certain cracks and crevices the major reason of this friction is MONEY.

There are a lot of factors like ancestral property, gold, joint ventures that may appear quite systematic and simple but happiness in such families is more of a facade.

Two or more brothers involved in the family business may have similar thinking and understanding but as the generation changes and so does their approach leading to the difference in ideas.

Financial Friction - What you can do to Avoid Click to Tweet

Besides societal compulsions, buying gifts, spending lavishly on weddings etc could be some factors leading to financial frictions in the family, friends, or business associates. These were a few situations and very common circumstances that we all either confront or see around.

Do you know – More than 20% of the divorce happen due to financial friction. It’s not just because of less money or debt – sometimes more money means more problems. What about overspending, financial lies, etc.

Read – 6 steps to escape overconsumption

Prepare Yourself – There’s No Short Cut

Being a financial planner I would like to share a few tips to explain that prevention is always better than cure.

ASSERTIVENESS AND CLARITY

The day your kid turns into an adult by the law get him a separate account and keep all his financial formalities done separately.

Your son or daughter should be explained the importance of accounts, savings, and investing money with appropriate guidance. They should be politely and be explained to steer clear of bad debts and loans.

Must Read – 10 Lessons to teach your kids about Money

If you and your spouse are both earning the role and responsibilities should be taken care of as healthy companions. With the help and assistance of people like us the distribution of income, investment plans, assets, and liabilities calculation should be planned.
This suggestion is both for the elders and the younger of the family. All the elders want to follow and make their kids live in an ideal system which is a myth. The distribution of property legally, making of will and fair distribution of sources of money not only keeps family together but also saves them of a lot of pain of court, disputes and helps them to flourish.

Read – Involve your spouse in Financial Planning

Plan your old age

We from childhood are taught about our future, career, and healthy relationships but we should be counseled and prepared for our old age also.

This would help us from being dependant on our children and we would not be a burden rather an asset for the family.

Read- Are you ready for your retirement?

Health a priority

Old age, death, and diseases are inevitable.

So we should be well equipped to handle and face any of them. All we need to cope with them is money which is a big factor that might lead to misunderstandings, stress, communication gap, differences and even fights among the family members.

So my dear readers as it is rightly said that money makes the mare go or might is right which is directionally proportional to the amount of money a person possesses. We all must have a fastidious approach and meticulous planning towards our future because whatever we do with our money is going to create either crisis or opportunities for us and for our family members.

Please feel free to share your views or questions in the comment section on Financial Friction. In case if you hide your names, feel free to be Anonymous.

6 Steps to Escape the Race of Over Consumption and Debt

Family Finances

Hemant Beniwal

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January 30, 2019

18

6 Steps to Escape the Race of Over Consumption and Debt

If we take a step back and contemplate, we will realize that we are

Eating more..

Drinking more..

Buying more.. than ever before!!

Over Consumption and Debt

Basically, we are spending way too much money and loading up on debt in the guise of trying to be happy, content or live a better life than our neighbor, relative or even Facebook friend.

Check – Medium Maximisation is the biggest trap that Hinders Happiness

It is not easy to ignore the shiny new goods in the shops, the marketing of new products and the lure of a higher standard of living. We try to ape the lifestyle of buying bigger things and trying out everything as we are afraid of being left behind. This leads us to bad habits such as overconsumption, greed and mounting debt.

This kind of life is wasteful. It also leads to reduced savings, lesser investment and a materialistic lifestyle which at some point of time will break us down.

6 Steps to Escape the Race of Over Consumption and Debt Click to Tweet

Even after spending all our hard earned money on various things, we do not get satisfaction. We are always searching for more. Put a FULL STOP to this life.

Let us look at ways to get out of the race of overconsumption –

1. Reduce Spending

How much of your income is allocated to necessities, wants, and investments? At least 20% of your income should be channeled for investments and about the same amount on wants such as luxury holidays, latest gadgets etc. The rest would make up your budget on food, housing, clothing, utilities, schooling etc.

If your income is not categorized at least roughly in this manner, you should make changes to your lifestyle. The savings are important for a rainy day as well as your retirement.

2. Budget and Pay off your debt

Make a budget and live within the budget. Pay off any personal debts and loans taken for consumables that you have taken in your country of residence. It is important to have a plan to pay off the debt and start investing in assets so that your retirement is taken care of.

3. Increase Savings and Investment

Set up long term and short-term financial goals and make sure you save and invest to reach those goals. Invest in different assets to get optimum returns and make your wealth grow.

Participate in the well-being of the less fortunate – You can help yourself by helping others. Share your fortunes with the lesser privileged people or the people at a disadvantage. You will be surprised at how good you feel and the level of satisfaction you reach.

4. Reduce Credit Card Usage

Credit cards are useful in case of emergencies. They are good for traveling abroad, reservations and earning reward points. You do not have to keep too much cash in hand if you have a credit card. But they are an easy tool to overindulge and overspend.

Use your credit cards responsibly. Pay off the credit card balance in full and do not keep too many credit cards.

5. Spend time, effort and money on things that really matter

When you are really old and reminiscing about your life, you would cherish the time spent playing with your children rather than on your material acquisitions. To increase the quality of your life by building strong relationships with those that matter and experiencing the little treasures of life.

YES – Money Can buy Happiness

6. Get your finances in order using the services of an adviser

The financial planning can help you in building discipline. You may have income and expenses that you are not able to budget – you may require cash flow planning.

Taxation, Investment Planning, Estate planning are crucial aspects and it is important that they are taken care of in the most appropriate and most beneficial way for you.

Too much of materialistic aspirations lead to unhappiness and financial problems. Get out of it to have a more meaningful life.

This post is written by Vidya

It may be a good idea to get a competent professional financial adviser

who will work with you to help you reach your financial GOALS.

Comprehensive Financial Planning Solution

If you have questions & concerns regarding overconsumption or loans – please share in the comment section.

Best Tax Saving Mutual Fund 2019 – 5 Researched ELSS Schemes

Hemant Beniwal

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January 17, 2019

75

Best Tax Saving Mutual Fund 2019 – 5 Researched ELSS Schemes

You will agree that Mutual Funds are like chocolates – there are so many different kinds & new is always popping up. How are you supposed to decide where to invest?

There were a couple of questions related to Tax Saving Mutual Fund or ELSS that I keep getting on the blog. So I thought of writing this post.

I am not sure if I will be able to answer “Which is the best tax saver mutual fund in India?” but I promise this post will help you in selecting the right one for your tax planning needs. And you will also learn an important lesson to avoid mistakes 🙂

Check performance of Best Tax Saving Mutual Funds in last three years.

Don’t forget to download consolidated factsheet of these funds that I have shared after performance table.

Tax Saving Mutual Funds

End of the financial year is around the corner. It is the time when the salaried invest to save tax. For those investors who have not done their tax planning hardly any time is left. Eleventh-hour tax planners must be now looking for tax saving instruments to park their funds to claim income tax deductions. The tax saving mutual fund is one such instrument.

Tax Saving Mutual Funds are popularly known as Equity Linked Saving Schemes (ELSS). They serve the purpose of combining tax benefits with wealth creation using equities. They are basically meant for tax saving but over the last few years, investors in these funds have tremendously grown their wealth. Some ELSS funds have been top performers and consistently outperformed the Sensex.

Must Read – 11 Unusual ways of smart tax planning

Oops.. but I have to share this before going forward. Mutual Funds write this in bold “Past Performance may or may not be sustained in future.” But who cares.

Which is the Mutual Fund for ELSS or which is the best Mutual Fund for SIP or which is the best term plan? This is the most common trick to ask secrets from Hemant. 🙂 And as usual, my answer is “There is nothing called best – best comes after postmortem”.

Best Tax Saving Mutual Fund 2019 - 5 Researched ELSS Schemes Click to Tweet

If you don’t have much idea about Mutual Fund ELSS (Equity Linked Saving Scheme) – You should read ELSS the best instrument for saving tax.

Do you know “Equity markets in the US have given a return of 10% from 1991 to 2017 but what investor got was just 4%.” (Dalbar Studies)

Can you guess why this happened? Because people were looking for the BEST FUNDS & not concentrating on other factors which are even more important.

My Second Book about Investor Behavior

I have Highlighted this difference between Investment Returns Vs Investor Returns in my new book “Modifying Investor Behavior” – Check back Cover to get an idea.

But won’t you like to ask what happened if someone made investments in tax saving funds when the Sensex touched its highest point in the last bull run?

If someone had invested Rs in ELSS Fund on 9^th January 2008 (Sensex 20800) & withdrawn it after 3 years on 10^th Jan 2011 (luckily Sensex 19100).

Must Read – Compare ELSS Vs PPF

So as a category ELSS have given negative returns in this period & if you notice in the middle of this period funds lost almost 50% of their value. Equity is the most volatile asset class & it always works like this – if you don’t have risk appetite or if you want that your investments should never go negative, please don’t invest in equity or equity related instruments.

So we have seen a single period but this cannot be much help in any judgment. Let’s see what happened in all 3 year periods since ELSS came to existence – for that we have to understand rolling returns.

Definition of Rolling Returns The annualized average return for a period ending with the listed year. Rolling returns are useful for examining the behavior of returns for holding periods similar to those actually experienced by investors.

3-year rolling return of ELSS

For example, the three-year rolling return for 1996 covers Jan 1, 1993, through Dec 31, 1996. The three-year rolling return for 1996 is the average annual return for 1993 through 1996.

So you can see there are a couple of negative periods here – all 3 year periods that are starting from a peak of the bull market. Deepest fall, almost a 30% negative in 1997 because this is talking about investments done at the time of Harshad Mehta’s Scam (1993).

Read – High Return Investment

5-year rolling return of ELSS

If we look at 5 year period there is only 1 negative period – ending 2012. If you do a Prima Facie observation – on an average investment has given more than 100% return or doubled in the period of 5 years.

If you look both the rolling charts there are a two important learning:

First, with an increase in the investment horizon (3 to 5 years) volatility substantially reduces.
Second, investments done when actual returns were negative have generated a good return. (Check 3 year period)

But the question is which fund to invest. & what about when not to invest in ELSS Funds.

Best ELSS Mutual Fund for 2019

Aditya Birla Sun Life Tax Relief 96
Axis Long Term Equity
ICICI Prudential Long Term Equity Tax Saving
L&T Tax Advantage
Motilal Oswal Long Term Equity Regular

These 5 tax saving mutual funds are based on our research but you can take the decision based on your own research or talk to your financial advisor.

Long term Performance of ELSS Funds (CAGR)

ELSS Funds	1yr	3yr	5yr	10yr
Aditya Birla Sun Life Tax Relief 96 Div TR(ROI) in IN	-6.39	12.57	18.98	19.29
Axis Long Term Equity Gth TR(ROI) in IN	-1.21	11.63	19.42
ICICI Prudential Long Term Equity Tax Saving Gth TR(ROI) in IN	0.22	10.73	16.21	20.50
L&T Tax Advantage Gth TR(ROI) in IN	-11.58	12.90	16.23	18.43
Motilal Oswal Long Term Equity Regular Gth TR(ROI) in IN	-10.20	14.10
Sector: Ind VR Equity Tax Saving TR(ROI) in IN	-10.98	10.31	15.36	16.25

Year on year of Best ELSS Mutual Funds

An optimal way to invest in tax saving mutual funds is by way of monthly SIPs.

Read – You can also have SIP in ELSS

Video – ELSS or PPF Which is better?

Note – Ignore numbers – try to understand the power of equity.

Tax Saving Mutual Fund Vs Diversified Equity Fund

ELSS funds follow the same investment strategy as diversified equity funds. They invest in a portfolio of quality stocks chosen without any market capitalization or sector bias. Investment in ELSS is locked-in for a period of three years from the date of investment. Three- year lock-in period works in favor of these funds. Fund managers can take longer calls and deploy funds without the fear of premature redemption. Because of the stability of the corpus, a higher proportion of assets can be deployed for mid and small caps to get superior returns.

But be aware that few agents try to mis-sell ELSS to earn higher returns.

Who should invest in Tax Saving Mutual Fund?

Investors should go for these funds only if their main aim is to save tax. ELSS funds do not allow you to book profits when markets are rising due to the lock-in period. (or even you can’t apply asset allocation strategies)

Since ELSS schemes invest in equity, over longer investment horizons, they deliver the “highest” long term returns among other tax saving investments. These are suitable for investors with a long investment horizon of more than five years. As these are equity-linked schemes, investors should have a higher risk appetite than pure debt investors.

ELSS is the only tax saving instrument that is pure equity oriented and has the least number of years as lock-in period.

It’s time to stop making haphazard decisions about your INVESTMENTS

and instead talk to us about your GOALS.

Comprehensive Financial Planning Solution

In case you have some questions regarding mutual Funds – feel free to ask. But please don’t ask which is the “Best ELSS Mutual Fund”. 😉

Also, share this with your friends who may be confused about choosing funds to save tax.

ICICI Prudential India opportunities Fund Review – Should You Invest?

Mutual Fund

Hemant Beniwal

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December 24, 2018

8

ICICI Prudential India opportunities Fund Review – Should You Invest?

With the upcoming election year & current global issues, finally volatile storm has hit the Indian market. 2017 was such a smooth sail that investors almost forgot that equities can also go down.

Few think the “risk” as danger & uncertainty others think it is an opportunity. With this view, ICICI launches new fund offer (NFO) ICICI Prudential India Opportunities Fund.

ICICI Prudential India Opportunities Fund

ICICI is going to launch India Opportunity Fund which they committed suitability for investors who are seeking for long term investments.

This fund is seeking Opportunities in “special situations”. These are such situations that companies may face from time to time i.e corporate restructuring, Government policy and/or regulatory changes, changes in crude price, exchange rates, etc.

ICICI Prudential India opportunities Fund Review - Should You Invest? Click to Tweet

They are ‘very’ actively managed equity funds & performance will solely depend on how the fund manager deals with investment opportunities.

These opportunities can be stock specific, sector specific, industry specific, thematic etc. The opportunities can arise due to various reasons as mentioned in ICICI Prudential India opportunities fund brochure – check this

Read – Risk In Mutual Funds That You May Not Know

So now as we are aware of what these funds actually are, let us look out some pros and cons of these funds. I consider these products as high risk (bw high risk does not mean high return) as the fund may take concentrated bets.

It may go against the strategy of fund manager as they are particularly taken some specific sectors, Needless to say, such concentrated portfolio carries a higher risk than a portfolio that is well-diversified across sectors, themes, industries, market caps, etc. that’s why I considered it high risky too. It will be in our favor if the fund manager uses the flexibility of diversification.

So basically, it is for investors who have high risk-taking appetite. But wait…

Fidelity Special Situation Fund Vs ICICI Opportunities Fund

I still remember that Special Situation was one of the first funds that Fidelity introduced in India. Fidelity was one of the rare breeds of fund house which was not in the favor of increasing pollution by adding funds every now and then. Internationally they successfully ran special situation strategy & that was one of the reasons they launched that in India.

Fidelity sold out their business to L&T mutual fund & fund was renamed L&T Special situation fund. Recently when SEBI introduced Mutual Fund categorisation – L&T converted that fund to normal Large & Mid Cap fund.

Even after fidelities huge experience to manage such strategy – fund performed average till 2012. Even no major changes after that. (it’s important to notice that Fidelity Equity fund did pretty good in that same period)

Check this video – ICICI’s view

I respect Shanker Naren as a fund manager but as I worked with AMCs like HDFC Mutual Fund & JM Financial – I know sometime role of Fund Managers is also like a salesperson. So we should take his words with a pinch of salt.

We should be even more careful after the game to take investors for ride unfolded by SEBI – complete violation of rules by ICICI Mutual Fund in the case of ICICI Securities IPO. Forgive but don’t forget.

I don’t know why in video they have mentioned this is for distributors & not investors. They have shared this on their youtube channel so I am sharing.

Check – Low-Risk High Return – Is it Possible

Should you invest in this fund? – My Views

We as an advisor don’t suggest NFO & we also suggest keeping exposure in simple vanilla diversified equity funds. So even ICICI Prudential India Opportunities Fund is a NO from our side.

Let’s understand this by asking a few questions –

If fund manager expects that such opportunities are there why they will not take these stocks in other diversified funds?
When the world is moving towards passive investing because alpha generating is not easy – why one should take exposure to such fund?
Why not let’s wait 1-2 years & check the performance & then take exposure?
Why ICICI Prudential India Opportunities Fund is launched now – such opportunities should have always existed in the market?

Is NFO an Opportunity to (MIS) Sell

I don’t mind repeating this here if this can help investors…

An NFO or New Fund Offer is an offer for investors to subscribe to a newly launched MF Scheme launched by a Mutual Fund House.

An NFO is marketed as an IPO but they are different. An IPO’s price is determined by demand and supply whereas the NFO scheme is priced at Rs. 10 and any number of units can be issued. It is used as a marketing device by Fund houses. It is a tool to get more investments – ICICI is targeting 2000 Cr.

If it is a close-ended fund then the investor can buy the units only during the subscription period and will have to hold the units for the said period, whereas in the open-ended fund, one can buy units even after the subscription period is over and can redeem it at any time.

It is risky to invest in NFOs on the basis of the ‘Low Price’. Moreover, there is no past performance to assess it.

Still, Mutual Funds awareness is low – lower NAV is mis-sold as something available cheap.

Must Read – 5 Reason why you should not invest in Mutual Fund NFOs

My 2 Cents Regarding NFOs – NOW

Going forward we may see more NFOs – there are 2 main reasons:

Markets are still not in bad shape & investors are optimistic – that’s a good time for asset management companies (AMC) to raise money.
SEBI has reduced expense ratio on bigger fund – which means lesser income for AMCs & advisor in those funds. New funds can be a motivation for earning better revenue – who would like to miss higher income?

You can answer the questions that I raised & then take a cool-headed decision on ICICI India Opportunities Fund.

It’s time to stop making haphazard decisions about your INVESTMENTS

and instead talk to us about your GOALS.

Financial Planning Service

If you have any questions or observations regarding this fund feel free to add in the comment section.

Best Retirement Plan In India – Pension, The Need Of Your Future

Hemant Beniwal

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December 12, 2018

19

Best Retirement Plan In India – Pension, The Need Of Your Future

I don’t think I need to emphasize how important it is to plan for your retirement. Searching for the best retirement plan in India is not sufficient.

Have you thought about your financial requirements post-retirement? Some important questions to ponder about –

How much money will I need on a monthly basis when I am 68 years old?
How will I handle a financial emergency?
Have I made financial arrangements in case of my spouse gets hospitalized when we are retired?

How much you will need in retirement?

Let us assume that currently, your monthly expenses are about Rs. 25,000 per month and that you will retire about 30 years from now. With a 6% annual inflation rate, you will need approximately Rs. 1,43,000 per month post-retirement in the year you retire.

Best Retirement Plan In India - Pension, The Need Of Your Future Click to Tweet

It will obviously increase in the succeeding years due to inflation. If you do not expect a similar lifestyle when you are retired, let us assume that you will incur 80% of the expenses today. In this case, you will need about Rs. 1,14,000 per month in the year of retirement.

How do you ensure that you are covered financially post-retirement? By planning your retirement well in advance. You can decide on the best investment products to invest in that can protect you from financial uncertainty during retirement.

Check – 5 Steps for Happy Retirement

Best Retirement Plan in India

Here are a few products and examples of those products which can be used to plan for your retirement.

Before starting let me share – we don’t suggest mixing investment & insurance.

Check – Retirement expectations vs reality

Traditional Pension Plans

A traditional pension plan is an investment product usually managed by Life Insurance companies. The individual will buy a plan and pay the premium either on a periodic basis or as a lump sum amount. There are different types of traditional pension plans –

Immediate Annuity – The individual receives payments immediately after purchase of the product.

Deferred Annuity – The premium will be paid on a regular basis and the individual can decide when to get the pension. It can be taken on a regular basis or as a lump sum amount.

There are other sub-options available within these two main options whereby the individual can decide whether he/she wants a pension for life or whether the spouse should get the pension after the individual’s death or if the pension is to be given for a certain timeframe.

Best Retirement Plan of LIC

LIC Jeevan Akshay is considered as one of the best pension plan after retirement by many. But we are not writing much on that here because we already have done a detailed review (also discussed a lot about annuity) – you can check – new LIC Jeevan Akshay annuity plan

Here are examples of best private retirement plans –

Plan	Max Life Guaranteed Lifetime Income Plan	HDFC Life Pension Guaranteed Plan
Type of Plan	A single purchase price traditional retirement plan. There are four options for annuity payouts. There are options for Return of Premium on death.	Single Premium Annuity Product. There are plans for deferred annuity and Immediate Annuity. It is available for single life and joint life basis.
Payout	Guaranteed fixed income throughout the life of the subscriber. If it is a joint annuity product, fixed income will be payable until at least one subscriber is alive.	Different options for payouts/ annuities based on different time periods as long as the subscribers are alive.
Minimum Purchase Price/Premium	The minimum purchase price is Rs. 1,00,000	The minimum purchase price is Rs 76,046 for Deferred Annuity The minimum purchase price is Rs 160,261 for Immediate Annuity with return of purchase price.

Traditional pension plans offer guaranteed returns. But their terms are inflexible and the annuity may not be enough to sustain the lifestyle one is used to as most plans offer a return between 4%-7%.

For example, the HDFC pension joint annuity plan purchased for Rs. 1 crore will give an annuity around Rs. 7,00,000 per year.

If you purchase a joint annuity plan of Max Life Guaranteed Lifetime Income Plan, you will receive around Rs. 6,70,000 per year

Moreover, annuity proceeds are taxed. So you might want to compare different options and analyze your reasons for buying a traditional pension plan.

Read – Review of LIC New Jeevan Nidhi Pension Plan

ULIP – Pension Plans

Unit Linked Pension plans are similar to traditional pension plans but add the flavor of equity. These products invest the amount collected from subscribers in bonds, stocks etc. The returns are market linked.

Even maturities of these products are expected to be invested in annuity products.

Here are briefs on a couple of products which will give you an idea about them –

Empower Pension – SP Plan is a ULIP from Birla Sun Life Insurance. It is a single premium plan. The minimum premium is Rs. 1,00,000. The investor can choose a risk profile and the funds will be invested based on the risk profile.

At the end of the term, the investor will receive the greater of guaranteed vesting benefit or the fund value on vesting. The investor also has the option to convert to a deferred pension plan as available or extend the period provided the investor’s age is below 80 years. The disadvantages are that the risk profile cannot be changed and there is no life cover.

HDFC Life Click 2 Retire Plan is a ULIP which has single and multiple premium payment options. The minimum premium amount is Rs. 24,000. A death benefit is available. At the end of the term, the investor will receive the greater of guaranteed vesting benefit or the fund value on vesting.

The investor also has the option to withdraw 1/3^rd amount and buy an annuity plan from HDFC Life with the balance or defer the vesting period provided the maximum vesting age remains at 75 years. 100% of the premium paid is invested. The investor has three options on how his funds should be invested based on his risk profile.

ULIP pension plans are more expensive as compared to traditional pension plans. Most of them do not offer a lifetime income flow and the returns can be erratic. If you would lie to reduce tax liability on maturity, you are forced to buy an annuity plan which might or might not be beneficial to you.

On the other hand, ULIPs have the potential to give better returns and have options to exit from the product easily. The disclosure norms are more strict for ULIPs and that ensures transparency.

Check – Is Rs 1 Crore enough to Retire?

Mutual Fund Retirement Plans

Mutual funds offer retirement plans or pension plans. These plans invest in a mix of equity and debt products depending on the investment objective of the product. The key features are –

Investors can invest a lump sum amount or through the SIP route. Withdrawals can also be on a lump sum basis or through SWPs.
These funds have a lock-in period of 5 years or till the retirement age(whichever is earlier).
Exit load on premature withdrawal in most funds.
The investment usually also qualify for Section 80C benefits under the Income Tax Act.
Unlike other products, one does not need to buy annuity products to withdraw the corpus
Returns are taxable
The standard retirement age is taken as 58 years. Post-retirement, the investor can make a lump sum withdrawal or opt for regular payments. The balance units after the withdrawals will continue to be invested and grow.

Let us look at a couple of products in detail –

Name	Reliance Retirement Fund – Income Generation Scheme (G)	UTI Retirement Benefit Pension Fund (Growth Plan)
Asset Allocation	19% of the corpus – invested in equity 81% corpus – mainly invested in debt and held as cash	38% of the corpus – invested in equity 62% of the corpus -mainly invested in debt and money market instruments
1 Year Returns	2.10%	-1.10%
3 Year Returns	6.30%	8.20%
Expense Ratio	2.25% (Oct 2018)	1.91% (Oct 2018)
Exit Load	No Exit Load if you withdraw after the retirement age else the exit load is 1%.	Redemption/Switch within 1 year – 5% Redemption/Switch between 1 & 3 years – 3% Redemption/Switch between 3 & 5 years – 1% Redemption/Switch after 5 years or after retirement age (58 years)whichever is earlier – 0%

MF Retirement plans have greater potential for returns and capital appreciation. If you use the SIP route, you will be coerced to be a disciplined investor.

Investments in MF retirement plans also qualify for Section 80C benefits under the Income Tax Act.

On the other hand, there is a higher element of risk involved and pre-mature withdrawal is penalized. Expenses involved will also be more as compared to traditional pension plans. Moreover, you do not have much flexibility in deciding the asset allocation. It is probably better to invest in Mutual Fund schemes that satisfy your investment objectives and have a portfolio that is suited to your requirements.

Do you have a Post Retirement Plan?

National Pension Scheme

NPS or National Pension Scheme is a long-term retirement focused investment product. It is managed by the Pension Fund Regulatory and Development Authority (PFRDA). Here are the key features –

An individual can invest in NPS between the ages of 18 and 60 years.
Minimum investment amount per year – Rs. 6000 and Maximum investment amount per year – Rs. 2,00,000
The employer contributes an equal amount as the employee has invested in the scheme. It is mandatory for Central Government and State Government employees and optional for others.
80% of money withdrawn before one becomes 60 years old must be used to buy the annuity for a monthly pension. If the amount is withdrawn after the age of 60 years, 40% of it should be used to buy the annuity and the rest can be deployed as per the person’s wish.
Amount contributed towards NPS qualifies for deduction up to Rs. 1,50,000 under Section 80CCD. Another Rs. 50,000 can be treated as a deduction.
The annual returns from NPS are also tax- free. When the amount is withdrawn before or after the age of 60, the amount left after buying the annuity is taxed. The pension received on a monthly basis will be taxable as per the tax-slab that the person falls under.
The NPS subscriber can determine the asset allocation for his investment.

NPS is a good long-term investment product. The returns are good and the costs involved are minimal. Moreover, the investment is managed by experts.

During the deferment period, one has to invest till 60 years and then start getting an annuity from a life insurance company on 40 percent of the corpus, while the balance can be withdrawn. The return during the deferment period and neither the annuity (pension) are guaranteed and entirely depends on the underlying asset classes which can be equity, corporate.

Check – National Pension Scheme Benefits

Atal Pension Yojana

Atal Pension Yojana is a pension scheme mainly aimed at the unorganized sector. It is for the people with the blue collared jobs. In many companies, these employees do not get any pension. This scheme allows people between 18 years and 40 years to choose a pension based on the contribution done.

There is an option of getting a fixed pension of Rs 1000, Rs 2000, Rs 3000, Rs 4000, or Rs 5000 on attaining an age of 60. The pension will be determined based on the individual’s age and the contribution amount. On the death of the subscriber and subscriber’s spouse, the nominee will receive a pre-determined corpus. The amount collected will be invested as per regulations.

Here is an example of different amounts that are required to be paid for starting the account at different ages for different pension amounts.

Subscriber Details		For Monthly Pension of Rs. 2000		For Monthly Pension of Rs. 4000
Age of Joining the Scheme (Years)	Contribution Period (Years)	Monthly Contribution	Return of Corpus To Nominee	Monthly Contribution	Return of Corpus To Nominee
20	40	100	340000	198	680000
30	30	231	340000	462	680000
35	25	362	340000	722	680000
40	20	582	340000	1164	680000

(Sample data is listed here)

If you are 30 years old, you would contribute a total of Rs. 83,160 and the total returns considering a life expectancy of 80 years will be Rs. 8,20,000. But do remember the inflation factor and that the corpus will be received by nominee after the death of the subscriber.

Must Read – Investment options for retired persons in India

Best retirement plans for Individuals

It is important to plan retirement as early as possible so that we are secure from a financial aspect. There are many investment products available for retirement planning. Choose to invest based on their features and how they suit your requirements.

Normally we suggest our clients that don’t mix insurance & investment. We also suggest that there are a lot of good investment products before retirement so don’t get stuck with your hard earned money in a long-term product. You can accumulate assets & on retirement, you can decide if you really like to buy an annuity.

We have years of experience in Financial & Retirement Planning. We will help you get the most of your Retirement.

Don’t just Retire. Live a Happy and Healthy Retired Life.

Contact us Today

So what do you think which is the best retirement plan? If you have any questions regarding retirement or pension plans – add in the comment section.

DSP Healthcare Fund Review – 99% Unbiased

Mutual Fund

Hemant Beniwal

-

November 16, 2018

5

DSP Healthcare Fund Review – 99% Unbiased

DSP after their divorce from BlackRock has launched their first product DSP Healthcare Fund – let me be frank, I am disappointed.

I am not disappointed because they are launching this NFO because most of the AMCs do this in a bull market but… DSP in the last 2 years has taken a couple of decisions which are really progressive & ahead of the curve but launching a fund in a hot sector is regressive.

Must-Read – Health insurance for diabetics

DSP Healthcare Fund Review

Check this detailed Review & decide if this is a good idea to put your hard earned money in this fund. I am sure you will learn something new today. This post will cover

Key Features
Presentation of DSP Health Care NFO by AMC
What’s unique in this fund
NFOs and Sector Funds
Why DSP Health Care Fund is Launched – their story vs my story
Our clients’ exposure to pharma funds
Our Analysis & verdict

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Key features DSP Healthcare Fund

I don’t want to bore you with the fund features – you can check the presentation under these points

The core investment will be equity and equity-related securities of healthcare and pharmaceutical companies.
Some part of the investments will be allocated to international healthcare stocks
The benchmark for the fund would be the S&P BSE Healthcare Index.
It is an open-ended scheme fund

DSP Healthcare Fund Presentation

DSP Healthcare Fund – It’s (a bit) different

It’s not a pure sector fund – it’s a theme fund. (power fund vs infra fund) DSP’s fund will also have 25% exposure in the US healthcare stocks. NFOs and Sectoral Funds

An NFO or New Fund Offer is an offer for investors to subscribe to a newly launched MF Scheme launched by a Mutual Fund House.

An NFO is marketed as an IPO but they are different. An IPO’s price is determined by demand and supply whereas the NFO scheme is priced at Rs. 10 and any number of units can be issued. It is used as a marketing device by Fund houses. It is a tool to get more investments.

It is risky to invest in NFOs on the basis of the ‘Low Price’. Moreover, there is no past performance to assess it.

Still, Mutual Funds awareness is low – lower NAV is mis-sold as something available cheap. I have seen Rs 10 NAV going down below Rs 2 – between most of those were sector funds like this new offering DSP Health Care Fund. (I am not saying this will go to 2)

My view about NFOs from last 15 years is consistent – check this post – Mutual Fund NFO (5 reasons why you should not invest)

Characteristics of Sectoral NFOs

A thematic or sectoral mutual fund scheme invests in one specific sector such as Banking or Pharma. For example, the sectoral fund, Reliance Banking Fund invests in equity, equity related or fixed income securities of banks and financial institutions. The sectoral fund – SBI Infrastructure Fund invests in companies engaged in infrastructure related activities.

A sectoral NFO is riskier as

It invests only in one sector which means no diversification.
The sector will go through different cycles and it will be difficult for the average investor to get the timing of purchase and sale right.

You will love to read Sector Fund Complete Guide

Why DSP Healthcare Fund is Launched

Their Story

Capture the growing demand for healthcare in India, driven by factors like rising incomes, increasing awareness & ability to spend more on health
Invest in not just today’s big healthcare companies, but even tomorrow’s potential leaders, which happen to be more reasonably valued today
Give you access to even international healthcare stocks (especially large US companies), which historically have helped generate a greater return per unit of risk^#
Benefit from this scheme’s fund managers’ global sector expertise, with a collective experience of 30+ years across the US, Latin America, Europe and India

So if you believe that the healthcare sector provides a compelling investment opportunity and are willing to remain invested for the long-term (given this is a sectoral equity theme and may have ups & downs in the short-term), consider DSP Healthcare Fund.

My Story

There’s a classic movie “Field of Dreams” – about an Iowa corn farmer (baseball fan) who hears a voice telling him: “If you build it, he will come.” (so he built a baseball ground in his field & then player came to play)

A similar situation is with our mutual fund industry – so they introduce fancy products in a heated market because they know if they have funds & sector is generating the superior return (even in short term) investors will shower dollars & they will earn more asset management fees.

But I haven’t seen many investors who made money in sector funds.

Classic Example of sector funds asset move – this is one of the infra related funds

Check – ICICI Prudential India Opportunities Fund NFO

Do you think investors made money in this fund?

If you combine above graph & below graph (pink – infra related fund’s performance) – In 2006 & 2007 went up by 300% & assets went up by 12 times.

Clients existed when the fund was not performing – they made huge losses. They invested at top & withdrew at the bottom.

Average large & mid-cap (blue) fund made similar returns in this period.

Is Pharma Sector in Fancy

I think this graph can clarify – 10 years performance of the different type of funds.. Now someone can definitely argue that from last 3 years pharma sector has not performed – I agree.

But will you be able to exit at peak?
Why no pharma fund was launched between 2006 & 2012?
Why you have not invested in pharma fund in 2008 & 2009?
Do you think pharma funds will perform better (Risk & Return) than diversified equity fund in next 5 or 10 years?

Must Read – What are the Risks in Mutual Funds

Our clients’ exposure to pharma funds

We introduced Reliance Pharma in the portfolio of few of our clients in 2009 & 2010 (depending on their risk profile – allocation was small). Even in my sister’s portfolio in 2009. But we exited by the end of 2014 & start of 2015 – that added some alpha.

You should only add sector funds when the risk-reward ratio is on your favor. Again we can debate on our smartness but you will find more details in the sector fund article that we wrote in 2011.

Existing Pharma Funds

Pharma Funds	3m	6m	1yr	3yr	5yr	10yr
ICICI Prudential Pharma Healthcare And Diagnostics	-2.34
Sector : Ind VR Equity LargeCap & MidCap	-7.87	-6.12	-3.86	35.71	118.53	383.57
Mirae Asset Healthcare Regular	0.05
Reliance Pharma	1.53	10.70	14.49	5.18	96.78	740.34
SBI Healthcare Opportunities	1.35	3.76	-2.01	-15.34	66.15	544.04
Tata India Pharma & HealthCare Regular	-2.15	4.87	6.27
UTI Healthcare	-4.07	3.00	1.04	-8.79	52.22	364.64

Our Analysis and Verdict – DSP Health Care Fund

The healthcare and pharma sector has been on a downward trend mainly because of exports going down and the pressure to reduce prices. There is increased competition and strict regulatory alerts and actions too.
On the other hand, the demand for healthcare is rising. There is rising demand in preventive care and wellness care. The population of the elderly is growing. There are government initiatives like Ayushman Bharat that will drive up demand.
NFOs, as mentioned earlier, have no proven track record, no rating and no diversification. This raises the investment risk.
If you are a new investor who is not used to ups and downs of the market, it is better to avoid such funds. If you do invest but have a low-risk tolerance level, you should avoid the fund. Such investors can invest in diversified equity funds which will invest in the sector one is interested in and at the same time invest in other promising stocks and securities.

Unless you can manage big risks, you should avoid investing in DSP Pharma Fund or for that matter any sector fund..

Even if you are a seasoned investor or an aggressive investor who has done enough research to believe that the healthcare sector has potential to perform well and can invest for a long-term, you may take a SIP approach to invest in it rather than investing a lump sum amount. If not, it is better to stay away from the fund.

Why did I say this review is 99% unbiased? Because we all are blinded by our biases 🙂

I will love to read your views on DSP Healthcare Fund in the comment section.

Debt Mutual Fund Risk – are you confused?

Mutual Fund

Hemant Beniwal

-

September 20, 2018

24

Debt Mutual Fund Risk – are you confused?

Is debt mutual fund risk-free? asked a prospect recently. It is a misconception that debt instruments are risk-free.

All investments carry an element of risk. It is important not only to understand the advantages but also the risks of investing in debt mutual funds.

Many people are not comfortable investing in equity and equity-related products due to volatility and risk of returns and therefore invest in debt. Fixed deposits, GOI bonds, Certificates of Deposits, PPF, Debt Mutual Funds, etc. are debt instruments.

Check – How Healthy Is Your Mutual Fund Portfolio?

Debt Mutual Fund Risk

Let us look at the key risk in debt mutual funds –

Credit Risk in Debt Mutual Funds

Risk of Default – Sometimes, bond issuers can default in payment. This will result in a loss. Even if you have invested in debt mutual funds that have invested in bonds and there is a default in payment, your investment will lose value. Even reduce in rating will impact your NAV.

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What can you do – Check the credit rating of the securities that your mutual fund invest in. Check the quality of the portfolio and fund management of the mutual fund scheme that you invest in.

Lower ratings mean higher return but with risk – if you don’t want to take this risk, invest in securities with high credit ratings (AA+ and above). Keep a watch on rerating of securities and payment defaults of loans etc. by the organizations issuing the bonds as this can mean there are issues.

If you want to take credit risk – there’s a specific category with the Name of “Credit Risk Mutual Funds”. That doesn’t mean that all other debt funds don’t have credit risk.

For example – Few days back IL&FS was downgraded & that had a huge impact on funds with exposure to this company. Even the safest categories like liquid funds & ultra short-term funds gave negative returns.

I think it’s very important to understand the risk in debt mutual funds before investing.

You can connect with me on Twitter

Interest Rate Risk in Debt Mutal Funds

Risk of Movement in Interest Rates – Interest rate movement affects debt portfolio. If the interest rate goes up, your returns will be lower. Suppose you invest in a 5-year bond that gives 6.5% interest per annum and 2 years down the line, interest rates move up to 8%. You are stuck with that investment with a lower rate of return.

If interest rates go higher, the value of your bonds will go down. So if you have invested in a mutual fund scheme that has investments in these bonds, then the NAV value of the MF scheme will go down resulting in erosion of the value of your assets. If the interest rate goes down funds with a longer duration can generate better returns.

Must Read – Low Risk High Return Investment – is it possible?

What can you do – Keep a lookout for interest rate movements and invest accordingly.

OR accept the interest rate risk invest in long-term funds with the expectation of higher returns in the long term but with volatility.

OR Invest in dynamic asset allocation funds that do not have restrictions on investments and fund managers can adjust the asset allocation based on market conditions.

Example – in last 1-year interest rates in India are rising so you can see volatility in long-term debt funds. You can see between April & June such funds lost 4% – and in 1 year there’s no return in these funds.

Read – 9 risks in mutual fund investment

Liquidity Risk in Debt Funds

Risk of Illiquidity – The market for bonds is not active. You or even the fund manager may not always find buyers in the secondary market when you want to sell your bonds. This can affect your liquidity position.

Other debt investments like PF, Fixed Deposit, etc. can be liquidated but you have to pay a penalty. Equity and equity-based instruments are more liquid in nature in comparison to debt investments.

What can you do – Maintain a diversified investment portfolio. Ensure you have emergency cash.

You can invest in debt mutual funds as they can be sold off easily – even if mutual funds are stuck in illiquid positions they will not say no to investor redemption. This may impact the NAV, returns & portfolio quality but still, you will get your amount except in some emergency situations.

Check one risk that will apply to all debt investments………

Check – why debt will always give negative return [with Calculation]

Risk of Inflation –

Debt instruments have a fixed rates of interest as returns. They are also on the lower side. Inflation, on the other hand, grows steadily at a compounded rate. Inflation eats into your returns. If it is greater than the interest rate you get (after tax), you will have a negative real rate of return. For example, inflation is 5% interest earned on an FD is 6% (if you are in the highest tax bracket – after tax you will get less than 4.5%) – then your returns are in the negative zone.

What can you do –

As an investor, you should have an asset allocation plan based on your age, risk tolerance and risk capacity levels. You should not invest only in debt instruments but in other assets as well. Even within debt instruments, you can invest in different types such as FMPs, Government Bonds, Debt Mutual Funds and Certificates of Deposits. Avoid prioritizing or investing a large sum in bonds of high-risk companies and new financial institutions. You can get the advice of a professional financial planner to invest such that you get the maximize your returns and minimize your risks.

Hope now onwards you will not ask – is mutual fund investment risk-free? Please feel free to ask questions regarding debt mutual fund risk in the comment section.

I have not shared one major Risk in this post – if you can guess that in the comment section (with why you think that’s a risk), I will share our secret weapon to reduce that risk with you. Even if your answer will be different from mine or same as everyone else you will get that from my side 🙂

The Single Cause Fallacy – Give Me One Reason

Investor Psycology

Hemant Beniwal

-

September 7, 2018

9

The Single Cause Fallacy – Give Me One Reason

In the U.S, a survey showed that the life expectancy of the average American male was lesser than that of a male in Sweden or Japan.

Different people had different theories on this.

One theory attributed the lower life expectancy to the pressure of business performance. Another theory said it was the faulty diet and a third suggested that poor medical practices led to this.

Attributing the lower life expectancy to just one cause is an oversimplification.

Single Cause

Usually, there is a range of causes for one effect. We like pointing to one cause and making it the sole reason for some event as we feel we can fix this one cause and solve the problem.

But this is simplifying the problem too much.

Oversimplification can lead to distortion of facts and even wrong decision making. It will also hinder problem-solving techniques as there will be concentration on the ‘One Cause’ when in fact there might be different facets to the problem.

The Single Cause Fallacy - Give Me One Reason Click to Tweet

Question for You

If a car manufacturer slashes the price of a model by Rs. 1,00,000, will sales reach an all-time high?

People might initially think of buying that model but there are many other factors that lead to a purchase of a car – price, brand, neighbour’s car etc.

Maybe the sale will increase due to the discount but it will not be the sole reason for one to buy the car in most cases.

Single Cause Fallacy in Investments

Similarly in the investment world or financial planning area, it might be unwise to attribute an event to one cause only. We like to simplify things and therefore try to attribute an event or effect to one incident or announcement or cause.

If an economic event has taken place like a fall in the stock prices or a surge in real estate prices, it should be analysed in the following manner to truly understand the event, its causes and consequences –

1) Understand the event – You should understand it by asking these questions –

What is it? – What has happened exactly?
Why did it happen? – What are the factors that caused the event?
What will happen next? – What are the consequences of this event and how will I get affected by it.

2) Analyse the factors that caused the event.

3) Understand the consequences of the event and how it will affect you

4) Decide whether you have to take some action and the best action to take so that your objectives are fulfilled.

Read – The Art of Thinking Clearly in Finance

One Reason – Not Enough

In case of investments and personal finance, many of us try to find one reason to base our decisions upon. But it is never that simple. Let us look at some examples –

Higher Risks for Higher Returns

We often hear that higher risks lead to higher returns. Does that mean you invest all your money in a risky asset?

Of course not! When they say higher risks lead to higher returns, it means there is potential for higher returns. It does not mean you can invest all your money in one stock or one mutual fund scheme today and expect fantastic returns one year down the line.

There are many factors that have to be considered –

Your Risk Profile
May be valuations
What about your Goals
Asset Allocation or Exit Strategy
Many more etc.

SIP is the best way to build wealth

Systematic Investment Planning(SIP) is the regular investment of a small amount commonly used as an investment strategy in a mutual fund scheme. This can be done in many asset investments.

It is a great way of regular investments and building wealth. But you cannot conclude that ‘SIP investments can build great wealth’.

For example an investor invests Rs. 10,000 in January and gets 1000 units of an MF scheme. The markets are on a rising trend and he keeps investing Rs. 10,000 on a monthly basis. Each month he will get fewer units. Now suppose there is a crash at the end of the year or 3 yrs and he need to sell his investments, he will be disappointed as he will get lower returns.

SIP investments are good but at the same time you to look at other things. Factors such as horizon, volatility, type of investment, investment goals are also factors that affect the wealth building process.

For example, SIP investments do better when there is volatility in the market. They are good for long term goals such as retirement. If you are investing to generate money to build a house 2 years down the line, you should probably invest keep most of your savings in liquid fund.

Read – How Hindsight Bias Impact our Decision Making

Financial Markets are Complex

Investment strategy and financial markets are complex subjects. Usually events never occur due to a single reason. A multitude of factors affect them and a whole set of other factors affect our personal finances.

Media is badly suffering with Single Cause Fallacy

It is better to understand that a single fix cannot solve all issues and regular review and steps to optimise the investment portfolio will help us in getting better returns and building wealth.

Hope you learned something new. Please share your experiences in the comment section on single cause fallacy.