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3 Dumb Stock Picking Strategies That You Need to Avoid!

“It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent.” – Charlie Munger

Over the last couple of years, since I’ve started investing, I’ve come to know so many strategies followed by different investors. Whether they are- Value pickers (those who buy great businesses at a discounted price), growth picker (those who prefer stocks which are growing at a high pace compared to peers or industry) or income stock pickers (those who invests in stocks which give huge dividends), I have heard of them all.

Apart from them, another category of popular stock picking strategy are the ones who rely on algorithms, programs, expensive arrangements or robo-advisory to pick stocks. And they are also quite successful in making money from the stock market.

However, after interacting with thousands of the Trade Brains’ blog subscribers and also through my personal experience, I’ve also come to know a few dumb strategies that many people use to pick stocks which mostly turn out to be a disaster a few years later down the road. (Btw, I’ve also been a victim of a few such strategies during my rookie days. Therefore, do not feel too bad if you have been using these strategies to pick stocks.)

Now, I totally understand that picking these stupid disastrous strategies are not entirely the fault of the beginners. After all, we are neither educationally trained or psychologically programmed to pick the best strategy that suits our interests. As humans, we generally prefer taking shortcuts and this is one of the biggest reason for the individuals to pick these dumb stock picking strategies.

Nevertheless, knowing the strategies which may turn out to be a catastrophe in the future may help the newcomers to avoid them. Therefore, in this post, we are going to discuss three dumb stock investing strategies that investors need to avoid else it may turn out to be a disaster in the future.

3 Dumb Stock Picking Strategies That You Need to Avoid

1. Investing based on Free Tips/Recommendations.

You are getting consistent stock tips on your phone to buy/sell equities and you finally decided to give it a try. This is one of the most dangerous stock picking strategies. Better you should put that money on a lottery ticket if you are willing to take such a risk.

Moreover, the majority of the free tips or recommendations that you receive on your phone via SMS or WhatsApp these days– are SCAMS. Don’t believe me, then read further regarding the same here: 3 Most Common Scams in Indian Stock Market That You Should be Aware of.

Besides, let’s say you’re discussing the market with a colleague/friend/neighbor and they advised you to invest in a particular stock. Unless they are professionally trained in the market (such as research analyst or investment advisor), most of these recommendations are crap and a definite path for future regrets.

2. Picking a stock because a big investor recently invested in it.

Seriously, this is your strategy? Are you planning to match your investing strategy with that of a big successful investor?

As a matter of fact, you should understand that you can never meet the risk appetite, resources, and exit-strategies of the big investors. There are hundreds of things that may go wrong in this strategy and hence, it’s never a good idea to blindly picking a stock just because a big stock market player invested in it.

Anyways, I agree that following the stock picking strategies and portfolio of big investors can be good learning. However, do your own research before investing and avoid being anchored with big investors’ stock picks.

Also read: Is Copycat Investing Hurting Your Portfolio?

3. Picking a stock because it is continuously going higher

If there is a single lesson that you should learn from this post, then remember this- “Stock prices going upwards is not a reason to buy and prices going down is not a reason to sell.

You should never pick a stock just because it is going higher. Stock prices movement on its own tells nothing.

Here, you need to look into the fundamentals, recent quarterly/annual results, corporate announcements, and other related news to find out the reason of price movement. Always make an informed decision after properly analyzing the company, rather just the price movement.

Bonus

4. Picking a stock because you feel it will go high

Recently, I was talking with one of my friends, Manish, and we begin discussing the equity market. After debating various investing ideas, Manish said that he is planning to buy Tata Motors share because he thinks that its price will re-bounce in upcoming months (Btw, at the time of writing this post, Tata’s share was down by over 57% in last one year).

I knew that Manish didn’t have much investing experience and hence I simply asked why he thinks that Tata Motor’s price will go up. He replied that the price is really down and he’s getting a feeling that the share price will recover and go up in the future.

Now, the share price of Tata Motors ‘may’ or ‘may not’ go up in the future. This is an entirely different discussion which I do not want to start right now. However, the answer that he gave to explain why Tata’s share price may go up is really stupid, right?

If he had talked the stuff like the sales of Tata Motors is going up, or their profit margin is increasing or Tata’s are launching a new vehicle in a segment which may be demanding among the audience, then I might have considered the reasoning. I mean, if someone gives me a factual reason why they believe that the price will go up, then I might discuss it further. However, if the reason is your ‘intuition’ or ‘gut feeling’, I can’t argue much regarding the same.

While investing in stocks, remember that you are not predicting whether it’s gonna rain today or not. Here you are analyzing companies which have fundamentals. There are a lot of pieces of information like the company’s financials, the board of directors talks/speeches, related news etc which are publically available to analyze companies. However, if instead of using these informations, you are making an investment decision based on your intuitions, you should rather be ready for an investment disaster.

Also read:

stock market meme 31

Closing Thoughts:

According to Benjamin Graham, the father of value investing, investment can be defined as “An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative.”

If you want to make decent returns from the share market, you need to stop speculating and making decisions based on these dumb strategies. If you are new to investing, take your time, learn and start building your own repeatable strategy by properly analyzing the companies which may produce consistent returns in the long term.

That’s all for this post. I hope it was helpful for you. Happy Investing!!

Why You Should Invest in Balanced Mutual Fund?

The Balanced Mutual Fund is a type of Equity Mutual Fund which combines the feature of both equity and debt in a single instrument. It means that the money pooled from the unitholders are invested both in debt and equity instruments.

However, the equity element in the underlying portfolio of a Balanced Fund should consist of at least 65% of the entire assets under management. The rest portion of the portfolio can consist of debt instruments and cash in hand. In general, the exposure in equity can range from 65% to 85% and is dependent on the market condition and the fund manager’s investing philosophy.

Through a balanced mutual fund, the fund manager tries to achieve portfolio diversification within a single product. The main aim here is to increase portfolio returns by managing financial risks along with maintaining the stability of the fund.

Quick Note: You can read more about Debt Funds and Equity Funds on our website here:

Why You Should Invest in Balanced Mutual Fund?

Risk management:

A Balanced Fund comes with a mix debt-equity portfolio. As stated earlier, a substantial portion of the assets consists of equity instruments and the rest in debts. However, if the stock market returns declines, the loss on equity portfolio can be absorbed by the debts. For example, if the stock market witnessed a drop by 10%, considering your Balanced Fund is having only 65% equity exposure, your portfolio will only get reduced by 6.5%. Moreover, here the debt instruments might help you to constrain the market risks.

Asset allocation:

It takes a significant amount of corpus to create a well-diversified portfolio consisting of both equities and debts. Therefore, if you are looking to create a risk-adjusted portfolio by allocating your savings in both these assets individually, it may demand a huge amount of capital.

However, if you invest in the market through a Balanced Fund, not only your money gets spread across diverse stocks but you can also enjoy a sound equity-debt mix at a lower corpus. Taking positions in equity through Balanced Funds will not only help you grow your wealth but also reduce the fund volatility to a minimum.

balanced funds. market movements-min

(Image Credits: Sanasecurities)

Taxation:

Balanced Funds have a considerable amount of debt instruments in their underlying portfolio. But, they are taxed by the Indian Government as per equity instruments.

So, if you are redeeming your units within a year of investment, short term capital gain tax @ 15% is applicable. Otherwise, for the long-term capital gain, you are required to pay tax @ 10% if the gains exceed Rs 1 lakh. You can learn more regarding mutual fund taxation in India on our blog here. 

Switching Benefits:

Suppose you have a portfolio consisting of equity funds and debt schemes. Now, if you have to rebalance between debt and equity by mutual switching, this would cost you capital gains tax and probably exit load. However, if the fund Manager performs this activity, neither tax nor exit load is attracted on your account.

Overall, it looks relatively profitable to invest in debt and equity through a Balanced Fund than naturally creating a debt-equity mix by yourself.

Things to consider while picking a Balanced Mutual Fund

Your willingness to bear risk:

If you have a moderate risk profile, you can opt for a Balanced Fund. Balanced Fund is meant for providing equity allocation with stability support through debt securities. In case you are looking for a highly aggressive portfolio, you can consider investing in a small-cap or a mid-cap fund instead. On the other hand, if you are a high risk-averse investor, debt fund would be a more appropriate choice for you.

Performance of the fund: 

As a general rule, you should invest in a fund that has consistently beaten its peers and benchmarks over a significant period of time. Although, it may be possible that that fund performed well because it has taken comparatively more risks than its peers. However, you can’t ignore the fact that the fund’s splendid performance has occurred due to the effective asset allocation by its Fund Manager which should be considered as an advantage while investing in that fund.

The expense ratio of the fund:

The expense ratio of a Balanced Fund is the measure of the costs associated with carrying out the operation and management of the same. It is expressed as a percentage and in general, the expense ratio for an active fund can be between 1.5-2.5%. As a thumb rule, a lower expense ratio means more money in the bucket on the investors rather than the fund house. You should choose a particular scheme only after you have thoroughly compared its expense ratio with its peers.

Fund’s underlying portfolio:

As a prospective investor, you should have an overall idea of the stocks and bonds which constitute the portfolio of your fund.  The higher the quality of assets, the more is the probability of earning better returns on your investment. Therefore, always check the fund’s underlying portfolio before investing to understand a better picture.

Fund Manager’s history:

A fund which is managed by a series of Fund Managers over a considerable period of time should be less preferred compared to one which is managed for the long period by a single Fund Manager.

Further, you should also try to avoid a fund whose turnover ratio is on a higher side. Turnover ratio means the frequency of churning the underlying assets of the fund by the Fund Manager in a year. If the turnover ratio is too high, it means your cost of investing will be on a higher side too.

Here are a few other resources to read to get an in-depth knowledge of how to choose a Mutual Fund scheme:

Further, here is the list of a few best balanced mutual fund by Cleartax at the time of writing this article.best balanced mutual fund by groww

(Source: ClearTax)

Closing thoughts

You must have heard the famous dialogue “Mutual Fund investments are subject to market risks, please read all scheme related documents carefully before investing.” The said quote is not a joke but a serious disclaimer which needs to be strictly followed. Before you start off your investment journey, make sure that you have a basic understanding of the Financial Markets.

If you are a fresher in the field of equity investing, it is recommended to start your investing journey with Balanced Funds. Any person who is willing to invest in the equity market but at the same time seeking stability of his/her corpus should consider a Balanced Fund. For example, if you are a middle-aged person who is approaching retirement age, it is safer to opt for equity exposure through balanced Funds.

Investing in a Balanced Fund gives you the scope to enjoy the features of both debt and equity in one product. Moreover, here the job of fund allocation and timing of the market is in the safe hands i.e. Fund Manager of the Asset Management Company. Although, while investing in mutual funds, all you need to do is to simply stay invested and relax. However, here you also need to periodically monitor your portfolio and be active with your investments.

That’s all for this post. I hope you have understood the concept of the balanced mutual fund by now. Happy investing!

21 All-Time Best Quotes by Charlie Munger

Charlie Munger, 95, is a name that doesn’t require any introduction for those involved in the investing world. If you are new to investing, you might have heard Charlie as Warren Buffett’s right hand. However, even individually, Charlie Munger is considered as one the world’s wittiest investor.

Anyways, let me first introduce Charlie Munger to the newbies. Charlie Munger is an American investor, businessman and a self-made billionaire with the net worth of over $1.7 Billion (as of Feb 2019). He is the vice chairman of Berkshire Hathaway, the conglomerate headed by Warren Buffett. And like Buffett, Charlie Munger is also an active philanthropist and has donated millions of his personal wealth for good causes.

Interesting, if you look into his background, Charlie Munger never took any course in investing, finance or economics while he was in university. During World War II, Charlie studied meteorology at Caltech to become an army meteorologist. Later, he earned a degree in law from Harvard Law School.

Charlie Munger and Warren Buffett met in 1959 during a dinner party and got along immediately. Although they knew each other for a very long time, however, they built their informal partnership by investing together only in the 1970s. Later in the 1980s, both started the present structure of Berkshire Hathaway and have been running in profitably ever since by building wealth for themselves and their investors. Here’s what Warren Buffett thinks of his business partner Charlie Munger:

We’ve got an extremely good partnership and business is more fun — just as life is more fun — with a good personal partner and to have a great business partner. You know it’s just — we’ve accomplished more but we’ve also had way more fun.” -Warren Buffett

Charlie munger and warren buffett-min

Charlie Munger’s wisdom is an asset for all the investing community. The knowledge and success that he has gained in the past many decades is quite inspirational.  Therefore, in this post, we are going to highlight twenty-one evergreen quotes by Charlie Munger that every investor should know. Let’s get started.

21 All-time best Quotes by Charlie Munger

Charlie Munger Quotes on investing wisdom

“People calculate too much and think too little.”

“It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent.”

“What is elementary, worldly wisdom? Well, the first rule is that you can’t really know anything if you just remember isolated facts and try and bang ’em back. If the facts don’t hang together on a latticework of theory, you don’t have them in a usable form. You’ve got to have models in your head. And you’ve got to array your experience — both vicarious and direct — on this latticework of models. You may have noticed students who just try to remember and pound back what is remembered. Well, they fail in school and fail in life. You’ve got to hang experience on a latticework of models in your head.”

Charlie Munger Quotes on Wealth Creation

“The big money is not in the buying or the selling, but in the waiting.”

“What are the secrets of success? -one word answer: ”rational”

“It takes the character to sit with all that cash and to do nothing. I didn’t get to where I am by going after mediocre opportunities.”

“To get what you want, you have to deserve what you want. The world is not yet a crazy enough place to reward a whole bunch of undeserving people.”

“All I want to know is where I’m going to die so I’ll never go there.”

Charlie Munger Quotes on Importance of learning

“There isn’t a single formula. You need to know a lot about business and human nature and the numbers… It is unreasonable to expect that there is a magic system that will do it for you.”

I paid no attention to the territorial boundaries of academic disciplines and I just grabbed all the big ideas that I could.”

“In my whole life, I have known no wise people (over a broad subject matter area) who didn’t read all the time — none, zero. You’d be amazed at how much Warren reads — and at how much I read. My children laugh at me. They think I’m a book with a couple of legs sticking out.”

“Spend each day trying to be a little wiser than you were when you woke up. Day by day, and at the end of the day-if you live long enough-like most people, you will get out of life what you deserve.”

Also read: 31 Hand-Picked Best Quotes on Investing: Buffett, Munger, Graham & More.

Charlie Munger Quotes on Circle of Competence:

“Knowing what you don’t know is more useful than being brilliant.”

“If something is too hard, we move on to something else. What could be simpler than that?” 

I try to get rid of people who always confidently answer questions about which they don’t have any real knowledge.”

“We have three baskets: in, out, and too tough. … We have to have a special insight, or we’ll put it in the “too tough” basket.” 

Charlie Munger Quotes on life rules to live by

“Mimicking the herd invites regression to the mean.”

“Remember that reputation and integrity are your most valuable assets — and can be lost in a heartbeat.”

Just because you like it does not mean that the world will necessarily give it to you.”

“Life, in part, is like a poker game, wherein you have to learn to quit sometimes when holding a much-loved hand — you must learn to handle mistakes and new facts that change the odds.”

Take a simple idea, and take it seriously.”

Suggested Readings on Charlie Munger

Book: 

Articles: 

Why buying a house can be good investment?

As millennials we are often given a lot of investment advice- save early, take advantage of mutual funds and employer savings accounts and get rid of high-interest credit cards. But research has shown that one of the best ways to build up that retirement nest-egg is by investing in a house. According to leading financial advisors, purchasing a home is a great investment because the property is ideally protected from inflation and it is a physical asset that theoretically does not crash or disappear as stocks do.

 Why should you invest in a home?

“Buy land, they’re not making it anymore.” – Mark Twain

Any investment you make comes with its own set of risks so it is important to do thorough research into the advantages and drawbacks before you dive into a single investment. In many countries, especially India, buying your dream home is seen as an important investment as it is the place you create your happiest memories with family and friends.

In other countries such as the US, there has been a dip in home purchasing in recent years due to the volatility of markets and an increase in the cost of living but it is worth noting that the millennial generation represents the largest percentage of first-time homebuyers.

Purchasing a home is a life goal for many and the number of people investing in real estate is slowly picking up as more people recognize its many benefits. Here a few reasons why buying a home is a great investment:

Buying a home is a safer investment

When compared to all other forms of investments such as stock and gold, buying a home is a safe and stable investment. Unlike the stock market, the housing market does not face high volatility. But although it is a safe investment, you still need to be diligent and weigh the pros and cons before you invest in a home.

You can become smarter about your expenses

When you decide to rent a home, all your rent payments go straight into the landlord’s pocket while eating into a large proportion of your income. But mortgage payments or loan payments towards your home are an investment for the future. The monthly payments you make will reduce the amount you owe on the house while your home equity increases. It is a much better solution to make payments towards a home in place of short-term rent expenses that will not provide any value in the future.

It is a great way to save your money

Buying a home these days has become an accessible goal for many young people as salaries have increased and the ability to procure a loan is much simpler. In order to ensure that you are not spending your hard-earned money on unnecessary things, a great option is to invest in a home. Not only does investing in a home lock up all your savings in one asset but it also generates a lot of revenue if you have invested in property in the right location. In India, the Central Government has a PMAY scheme which provides first-time homebuyers with a subsidy of 2.67 lakhs.

The emotional aspect of homebuying

Homeowners are more motivated to form relationships with the people in their community than those who rent. The people in the area you live in can create a dependable support system. Although this may not be a tangible benefit, buying a home brings a sense of pride and accomplishment for homebuyers. Many people view homebuying as accomplishing a milestone in their lives. Moreover, this home can be passed on from generation to generation as a family inheritance.

Buying a home can help augment your retirement income

Due to the high costs of healthcare, funding your retirement is not as simple as it once was. If you choose to buy a home earlier in your life, there is a good chance that your home will be paid off by retirement age. The equity of your home can help supplement your retirement income. It provides a safety net against the rising costs and will give you the added benefit of not having to pay rent every month.

While many people think that investing in stocks is a better way to save for retirement, it is important to remember that any return on stock comes with an added risk. There is a further risk that your stock may lose its value when you reach the retirement age, or worse, it could be wiped out completely. Investing in a home is a safer alternative for funding your retirement as the value of the investment is more stable.

It provides a safety-net

There can be many unexpected twists and turns in your life both professionally and personally. An investment in a home provides a safety net in those instances as you have something to fall back on. In a situation where you lose a source on income or there has been a surge in rent prices or an emergency that requires a lot of money, your property, which is essentially your savings locked up in a single place, can serve as a source of income.

The stability of home-ownership

Owning a home provides a sense of belonging and kinship. Moving houses frequently is often tedious and emotionally taxing, especially for children. As you become older, moving houses becomes more difficult as you begin to form a close relationship with the people in the area you live in. Owning a home is therefore important as it provides a sense of community and helps avoid the emotional discomfort of moving.

Also read: Planning to Invest in Commercial Real Estate? Read This First!

Conclusion

There a many benefits to owning a home and it is one of the best investments millennials can make. However, it is important to study the housing market in the area you decide to invest in and weigh the pros and cons before you make a decision. It is recommended to talk to real estate brokers who can give you more details on the real-estate marker along with a loan officer who can provide information from a financial perspective. Do your homework and play it safe before buying a home.

What is the Prisoner’s Dilemma?

The Prisoner’s Dilemma is a popular two-person game of strategic thinking that is analyzed as part of game theory. It demonstrates how rational individuals are unlikely to corporate even when it is in their best interests to do so.

The game uses the example of two prisoners being interrogated and how they respond and change their strategy over time depending on the situation.

However, before we discuss the prisoner’s dilemma, let’s first understand what is game theory.

What is Game Theory?

Game theory is the use of mathematical models to identify the reasons for conflict and cooperation between individuals. It helps us understand why an individual makes a certain decision and how their decision affects others.

The application of this theory in non-gaming scenarios is called gamification. The three main branches discussed below are closely related to game theory:

— Decision theory: This can be described as a game of an individual against nature. People’s decisions are based on their personal preferences and beliefs. The decision among risky alternatives is described by the maximization of the utility function. In turn, the utility function is dependent on various factor but mostly the level of money income.

— General equilibrium theory: This is a branch of game theory that deals with a large group of individuals such as consumers and producers. It is used in macroeconomic analysis such as the tax policy, to analyze the stock market or to fix exchange rates.

— Mechanism theory- While the game theory follows the rules of the game, the mechanism theory discusses the consequences associated with each of the rules. The questions addressed include wage agreements, spreading risk while maximizing revenue.

The Prisoner’s Dilemma

Game theory can be described as two players playing a game and listing out the choices and alternatives available to each player.

A famous example of the game theory is the Prisoner’s Dilemma where two individuals who are partners in crime are caught by the police and interrogated in two separate rooms and are given the chance to confess.

Since each prisoner has two possible options (either to confess or don’t confess i.e. remain silent), there are four outcomes to the game as represented in the matrix below:

the prisoner's dilemma 1-min Rules of the game:

  • If both players confess to the crime, they both get sent to jail but they will get a shorter sentence if one of the players is ratted out by his partner in crime.
  • If one player confesses while the other one remains silent, the one who remains silent gets a long severe prison sentence while the one who confesses goes free.
  • However, if both players don’t confess, they both get a shorter prison sentence than if they were to both confess.

 The options in the game (both risks and rewards) are represented as utility numbers.

In the table above, the positive numbers are favorable outcomes while the negative numbers are negative outcomes. However, one outcome is better than the other if the total value is greater. So -5 is better than -10.

In the table above, there are four outcomes, if both players confess, they are blamed equally for the crime (-5,-5). But if one player provides information on the other player in exchange for going free, the individual receives a utility of 3 units. But the other prisoner who does not confess and is sent to prison has a low utility of -10.

The last option is both prisoners don’t confess and sent to prison on reduced terms which results in a very low utility of -1.

Analyzing the Prisoner’s Dilemma

Once the various outcomes in the game are described, the next step is to analyze how the players are likely to respond. Economists make two assumptions when it comes to analyzing this game.

The first is that both players are aware of the total payoffs for themselves and the other player. The second assumption is that both players are looking to satisfy their personal gain from the game.

To analyze the outcome of the game, we can look at the most dominant strategies- this is the most optimal solution for one player, despite the response of the other player. Using the table above, confessing to the crime would be the dominant strategy for both players.

  • It is better for player 1 to confess if player 2 confesses as well because a utility of -5 is better than -10.
  • Player 1 should confess even if player 2 remains silent as 3 is better than -1.
  • Similarly, it would be better for player 2 to confess if player 1 confesses as -5 is more optimal than -10.
  • Player 2 should confess if player 1 remains silent as a utility of 3 is better than -1.

For player 1 and 2, confessing to the crime would be the equilibrium solution to the game.

the prisoner's dilemma 2-min

The Nash Equilibrium

The Nash Equilibrium was developed by mathematician John Nash and it shows the best response strategies in any situation. It is an outcome where one player’s strategy is the best response to the other player’s strategy and vice versa.

As per the outcomes in the table above, if player 1 confesses, it is in player 2’s best interest to confess as well as -5 is better than -10. And if player 1 doesn’t confess, player 2 should still confess as a utility of 3 is better than -1 and vice versa. The best strategies are highlighted in green in the table above.

Note: In case you enjoy visuals, here’s a simplified video on Prisoner’s dilemma:

Also read:

Why has this game become so popular among economists?

There are many reasons why the Prisoner’s Dilemma has become an important tool for economists in developing numerous economic theories.

The strategies to ‘confess’ or ‘not confess’ is used to identify if certain economic theories ‘contribute to the common good’ or ‘behave selfishly’. This is also known as the public good problem.

For example, if the government decides to construct a road, the construction of the road is beneficial to everyone. But, it would be better for the individual if the private sector and not the government built the road. When government spending does not benefit the individuals in the economy, it is known as an externality.

For two competing firms, the outcomes can be ‘set a high price’ or ‘set a low price’. For both companies, it would be beneficial to set high prices to earn higher revenue. But for each individual company, it would be more optimal if they set a low price while their competition set a higher price.

The game also shows how a rational individual should behave. As shown by the dominant strategy, it is best for both player to confess but in terms of utility confessing only results in -5 unit of versus the -1 unit they would receive if they did not confess. The conflict between the individual and the common goal is the basis of many economic theories.

The Prisoner’s Dilemma is an important tool used by economists when making decisions on economic theories and public spending. The payoff matrix can be applied to our everyday lives to find the most optimal solution in any situation.

Why You Should Try Thematic Investments?

Suppose you believe in an idea and confident that it will perform well in future. For instance, let’s say you are optimistic towards the renewable source of energy. Here, you are assured that the grid and other conventional sources of energy will be replaced by the renewable source of energy like solar or wind energy in the future. And therefore, you want to invest in this idea.

However, you are not certain of the best leading company in this segment to invest. Moreover, you also do not want to invest in the entire energy sector through any sectoral mutual fund as you want to focus just on the renewable energy-related companies. How to proceed further with your investments? Enter the thematic investments.

What is Thematic Investments?

As you might already know, mutual funds also provide an option to invest in different sectors via sectoral funds. For example, pharmaceutical funds focus on pharma companies or banking funds focus on investing in companies in the banking Industry. However, thematic funds are different than the sectoral fund.

Thematic funds are growth-oriented equity funds that focus on investing in a set of companies based (or closely-related) to a particular theme. They follow a top-down approach and targets a broader macro-economic theme on which the fund manager has a good knowledge of. Here, the thematic fund investors studies and understand the impact of structural shift in economics, political, technological, corporate or social trends on sectors, demographics etc which may reveal investable opportunities.

For example, electric vehicles (EVs) can be considered a theme. Here, the thematic fund based on EVs do not just need to focus on one automobile industry, rather they can include a set of industries which are a part of the theme. For example- this theme may include companies from the automobile industry, battery industry, auto-ancillaries industry or any other companies related to the EVs.

A few other popular themes in India right now are digital India, make in India, technological progress, Internet of things, blockchain, environmental sustainability, social security etc.

thematic investments approach-min

Mutual funds vs thematic funds:

Here are a few major differences between the mutual fund and thematic funds:

— Mutual funds are over diversified while thematic funds are compact. Mutual funds invest in somewhere between 40–100 stocks. On the other hand, the number of stocks in thematic funds are smaller, typically between 5–20.

— Mutual funds are rigid and not easily customizable. Although there are thousands of mutual funds available in the Indian market, however, they are not customizable. On the other hand, it’s easier for investors to choose their ideas/sentiments and factor their risk appetite through thematic funds.

— The costs involved with mutual funds are high. For managing a popular active fund, the fund house may charge an expense ratio as high as 2.5-3%. However, the fees involved with thematic funds are comparatively cheaper.

Advantages of Thematic Funds

Here are a few common advantages of thematic funds:

—  Thematic funds are potentially more rewarding compared to diversified mutual funds.

— As thematic funds offer a compact theme, they have a concentrated impact because of news or happenings in other non-related industries.

— There are a lot of publicly available popular themes in the Indian market and hence, finding the right investment opportunity is not a tough task for investors. For example, you can use FYER’s thematic investment platform to try new different themes.

— Thematic funds allow strategic exposure to the investor’s portfolio and encourage common sense investing as themes represent the investor’s ideas and thoughts.

Risk associated with thematic funds:

No investment option is perfect. And the same goes to the thematic investments. By making investments in thematic funds, you are preferring a concentrated theme. This portfolio concentration makes these thematic funds comparatively riskier over diversified mutual funds.

Moreover, there’s also a controversy regarding thematic investments which says that investing in a concentrated idea which is still untested and underappreciated, may not be a sound approach.

Also read:

Closing Thoughts:

A major difference between thematic investments and traditional ones is that the thematic investors look into the future and makes decisions based on the predictions on the future trends or upcoming shift in the structure. On the other hand, traditional investors check the history and weights more importance to past performance, market behavior etc.

Moreover, we cannot deny the fact that themes change fast with time. In the last two decades, we have witnessed massive changes in the industrial and technology theme. Therefore, if you are planning to make thematic investments, be observant and careful of the entry and exit decisions. Only enter these funds after you have researched the idea thoroughly.

Nonetheless, if you are able to invest in right thematic funds, they are capable of giving huge returns to the investors compared to other index or diversified funds.

6 Common Mistakes to Avoid While Investing Through SIPs

Since the past few years, people are increasingly showing their inclination towards mutual fund investments. However, just an attraction is not enough to invest correctly in the mutual funds. They also need to know how to invest effectively and moreover, what mistakes to avoid.

While investing in mutual funds, people can either opt for lump sum or via SIP mode. For example, if you plan to invest a huge amount of money, say Rs 10 lakh in mutual funds all in one go, this is a lump-sum investment. On the other hand, if you choose to make your investments in chunks, say Rs 20,000 per month for the next 10 years, then this is considered a systematic investment plan (SIP).

In general, the SIP mode can be a little more convenient way to invest in the Indian equity market. It facilitates the people in building long term wealth without putting a lot of pressure of making huge investments all at once. Anyways, if SIPs can make your life more comfortable, it can also add trouble if you don’t use it in the right manner.

Here are some common mistakes which majority of investors do while investing in the Mutual Funds through SIPs.

6 Common Mistakes to Avoid While Investing Through SIPs

1. Choosing an incompetent SIP amount

While investing in a Mutual Fund via SIP mode, you should know the right amount to invest in order to reach your goals/needs.

In general, most people start with a small amount for their SIPs. This may be because they do not have much money to invest at that time or any other reason. However, subsequently with time, one should not forget to increase the size of their investments. On the other hand, there are also a few investors who start investing in SIPs with big amounts without performing a proper analysis of the funds. Moreover, they also don’t monitor their investments and thereby later suffer losses.

While investing in mutual funds through SIPs, you need to find the right size to invest that you can maintain on a regular basis. Furthermore, you need to monitor your portfolio closely in order to make decisions regarding whether to increase, decrease or stop your investments in the underlying schemes.

2. Investing for short-term

Mutual Fund investing is generally meant for generating wealth in the long run. One common mistake that majority of investors make is to redeem their investments in the short term in case their portfolios are unable to earn profits.

A lot of people start their SIPs with an objective to make money in a small time period. However, the fact is that when you opt for a small tenure, you are exposing yourself to a higher risk of market volatility. It is highly unlikely that you will get higher returns in a shorter tenure. Remember, SIP investing works on rupee cost averaging approach and helps in creating wealth in the long run.

3. Picking the Wrong fund

Before you start investing, you need to ensure that you have opted for the correct fund based on your financial aspirations, risk appetite, and liquidity requirements.

If you invest in the wrong fund, your SIP investments might not fetch the expected returns. Furthermore, before finalizing your scheme, you need to check some of the key parameters like its historical performance, underlying portfolio, expense ratio, fund manager credentials etc.

You may have a look at this blog on our website to gain a basic understanding regarding how to pick a right mutual fund.

4. Abruptly stopping SIP investments

Mutual Fund is associated with long term investing and it would be highly profitable if you hold your units for a longer period of time. However, on most occasions, the investors tend to lose their patience when they find their portfolio bleeding in the short run. A similar situation was witnessed by the Indian economy last year (2018) when most investors found their Equity Mutual Fund portfolio running at a substantial loss.

It is understandable that people may start to panic seeing their portfolio in red. However, the risk of market fluctuations drives the majority of the investors to shy away from further investments and this is where they make a mistake.

Also read:

5. Completely forgetting the SIPs after commencing

Ironically, you can find many investors who start their SIP and later forgets it completely. A lot many people have this misconception that long-term wealth creation means it doesn’t require monitoring at all.

However, even the soundest mutual fund which is managed the best fund manager requires monitoring. You need to monitor your mutual fund performances after every 6 months or at least a year.

6. Waiting for the perfect time to start

“Time in the market is better than timing the market.”

When it comes to timing the market vs time in the market, it is said time and again that don’t try to timing the market. You will never find the right time to enter. Here, time in the market is more important as the longer you stay in the market, the better will become your investment return.

Nonetheless, it has been seen that many investors keep waiting for the perfect time to start their SIPs.

The best feature of investing in Mutual Funds through SIPs is that it averages out your costs of investing. And that’s why there isn’t any proper time for you to start your SIP. The earlier you can enter, the higher is your chance to build huge wealth and to enjoy the benefit of compounding.

Quick Note: If you are new to investing and want to learn how to invest in mutual funds from scratch, check out this amazing online course: Investing in Mutual Funds- A Beginner’s course. Enroll in the course now to start your journey in the requisite world of investing today.

Conclusion

Mutual Fund investing through SIPs can help you reach your financial milestones if you invest in the right way. However, investing via SIP requires focus and discipline.

In this post, we tried to cover a few common mistakes to avoid while investing through SIPs. As discussed earlier, while investing in SIPs, always think long-term. Here, you can’t afford to abrupt your SIPs even if the market starts showing a bearish trend in the short duration. The longer is your investment horizon, the higher will be your scope to build wealth from the market.

That’s all for this post. We wish you all the best in your SIP investing journey. Happy Investing.

Planning to Invest in Commercial Real Estate? Read This First!

It goes without saying that investing in commercial real estate is a huge decision. Therefore, it is important that you are well informed before you make any money moves.

Investing in commercial real estate gives you the chance to dip into a new customer base and develop your business interests. It is quite different from investing in traditional real estate and requires some additional considerations. Patience is a virtue when it comes to commercial real estate as the cycle is longer and the investor needs to be well aware of trends in the market and economy.

Here are some key points to keep in mind when investing in commercial real estate:

Location Location Location

It’s all about the location when it comes to investing in commercial real estate. In every city, there are those areas that are in high demand (macro markets) and other micro-markets that are not so favorable.

When it comes to buying commercial property, there are many factors that come into play such as accessibility to roads and public transport, distance to neighboring cities and infrastructure projects currently in development in the area.

But as an investor, you need to be vigilant about emerging markets that are created as a result of the infrastructure developments. These are great areas to invest in because not only will they be in high demand but it also guarantees capital appreciation in the long term.

The property’s marketability

In addition to a great location, it is important for the property to create a steady cash-flow for the investor. The property needs to remain marketable and be able to withstand a large number of tenants and future growth. This means that you need to invest in property that is modern with trendy architecture.

Properties that encourage ‘green living’ and are eco-friendly will add to the attractiveness of the property. Other factors to consider are environment-friendly utilities, maintenance of the common spaces and good building management.

The amenities

The amenities available can add value to the property and these benefits tend to override the cost. Amenities can include many different things that can increase efficiency for the tenants on the property such as extra parking spaces or a food court if the commercial property is used for a campus or office space. These amenities can enhance the space while increasing the marketability of the property.

real estate amenties

While assessing the property, it is important for the investor to ask about who usually does the interior fit outs for the property. Traditionally, the tenant receives a bare space and installs the fit outs such as air-conditioning, lighting and sensors but some tenants may ask the building developers to install such fittings and pay an additional fit out rent.

Tenants who install their own equipment are likely to rent out the space for a longer period of time to cover their expenses.

The property’s risk

The assessment of risk bears a different meaning when it comes to commercial real estate as each property is different. While residential properties that are right next to each other face more or less the same risks, commercial property risks can fluctuate independently. Hence, it is important for investors to understand the potential risks of their investment.

These risks can include a variety of things such as zoning changes that can cause a commercial property to become residential as new suburbs develop in the area. Additionally, having similar commercial properties can create an oversupply in the market, that could drastically reduce demand. Infrastructure projects in other commercial areas can drive potential tenants away from your property.

The market dynamics

Investing is always a numbers game so it only makes sense that you keep up with them before investing in commercial property. It would be helpful to understand trends in the market along with customer’s changing wants and demands. You also need to study the historical market performance over the last three to five years to identify any anomalies or potential for reduced demand in the future.

Along with this, you should plan for the future and map out details about the tenant profile, the rent roll out, the lease contract (expiry date) along with any other information that will provide more clarity on the financials of the property. It would also help to talk to a real estate agent to discuss the details before making any big decisions.

The lease structure

Commercial leases are structured very differently from residential leases. They are either a 3+3+3 or a 5+5+5. This means they could either be a 9 year or a 15 year lease with increments in the rent every 3 or 5 years respectively.

The tenant has the freedom to vacate the property without notice, while the owner of the property cannot ask them to leave until the lease period is complete. They can, however, have a lock-in period in the contract of 3 years, during which the tenant cannot vacate the property. It is important for the investor to understand the lease structure of the property as they are often inherent risks involved. A lease with a long lock-in period is great for the investor.

Documentation

As an investor, it is important to perform due diligence and carefully analyse all title documents, permits and taxes associated with the commercial estate along with the presence of any mortgages. It is recommended to have all documents examined by a legal authority.

If you plant to rent out the space, it is important that the lessee understands their duties and obligations as per the contract. This will reduce the chance for any future errors. In addition to the legal documents of the property, the local area may have local laws that property owners need to abide by. You should have a thorough understanding of all the rules and regulations related to the property and the area it is located in.

Also read:

Closing Thoughts

Investing in commercial real estate can certainly add immense value to your portfolio but it is a decision that needs to be taken after a lot of thought and consideration. You need to conduct a thorough market analysis of the property while taking into consideration the factors listed above.

While the process of investing in commercial real estate is very time-consuming, it is unquestionably beneficial to an investor in the long-run.

Interim Budget 2019-20: The Talk of the Town

On the 1st of February, 2019, the Interim Budget of India, for the financial year 2019-20 was announced in the Union Legislature. Our honorable Finance Minister, Mr. Piyush Goyal, who is a Chartered Accountant by qualification, gave the budget speech, which lasted for around two hours, where a plethora of points were covered.

If you were at home while the budget was announced, you might have got the privilege to watch it live on television. Anyways, I was out on the street when the budget was broadcasted live. And therefore, unfortunately, I missed it. But subsequently, I watched the same on YouTube.

A Union Budget does cover plenty of pointers out of which only a few are those which we, as an individual, can relate with ourselves. This year budget has famously talked about taxation, agriculture, health industry and many other key aspects of our country’s economy.

In this article, we are certainly not going to discuss the entire budget as a whole. Rather, we shall talk a few selective crucial points which you, as an investor, need to know in order to manage your personal finance in the upcoming fiscal year for which this budget will be applicable.

Personal Taxation and Union Budget 2019-20

Income Tax

Firstly, let me tell you that the Income Tax slabs which were for the earlier financial year will remain the same for the FY 2019-20. In other words, there is no change in the tax slab for the people. However, the tax rebate under section 87A has been made applicable for an individual having total income up to Rs. 5 lakhs, (where the previously applicable limit was Rs. 3.5 lakhs).

The tax rebate limit for the ongoing financial year is Rs. 2,500. Nonetheless, the maximum limit of this tax rebate has been raised to Rs 12,500. Therefore, as an individual taxpayer, if you have annual taxable income up to Rs 5 lakh, it won’t attract any income tax.

Note: Currently, the net income falling within Rs 2.5 lakh and Rs 5 lakh is taxed by the Indian Government at the rate of 5%.

Considering this tax rebate, even if your annual gross income goes up to an amount of Rs 6.5 lakh, you won’t require to pay any tax on the same, provided you have made investments in the instruments prescribed u/s Section 80C of the said Act.

Quick Note: Under section 80C, a deduction of Rs 1,50,000 can be claimed from your total income by investing in a few tax-deductable investment options like LIC, PPF, Mediclaim, incurred towards tuition fees etc. This can help you to reduce your total taxable income by up to 1.5 lakhs.

However, if your taxable income exceeds Rs 5 lakh (and you have not made any investment in tax saving instruments u/s 80c), then, unfortunately, you won’t get any rebate in Income Tax.

The table shared below is an example which can help you understand what our honorable Finance Minister has tried to say with respect to the new income tax rebate clause.

income tax rebate

Capital Gains Taxes of Houses

As announced in the interim budget, you will not be taxed by the Indian Government on the notional rent of the second self-occupied house property. Therefore, here the key takeaway is that exemption is made allowable up to two self-occupied house properties.

This exemption u/s Section 54 of the Income Tax Act, 1961 will now be available on your second house property but it has come with a proviso. Your capital gains should either be less than or equal to Rs. 2 crores. Anyways, this benefit can to be availed by you only once in your lifetime. (Read more here).

TDS Relief

Presently, if your interest earning on Post Office Savings and Bank Deposits used to cross Rs 10,000, TDS u/s 194A used to get attracted.

However, the proposed budget has raised the limit from Rs 10,000 to Rs 40,000. In case of senior citizens, the limit has been increased to Rs 50,000. This proposal will surely benefit the individuals who are highly dependent on the interest income from their deposits interest earned on savings deposits, fixed deposits, as well as other deposit schemes in banks and post offices.

Standard deduction and other taxes

In case you are a salaried person, previously you used to get Standard Deduction of Rs 40,000. Now, this figure has been increased to Rs 50,000 which is, of course, going to benefit you financially.

Also read: What are the capital gain taxes on share in India?

Closing thoughts

This Interim Budget will become final unless a new Government comes into power after the Lok Sabha election which is to take place in a few months. However, if indeed a new Government comes into the picture, then this Interim Budget will cease to exist. Such new Government will frame a different Union Budget which will govern the Financial Year 2019-20 in India.

Since the day this Interim Budget was announced, it has created a plethora of confusions on some specific aspects of the budget among the residents in our nation. Out of all such confusions the clause related to rebate u/s 87A has so far seemed to be the most difficult and weird for the majority of the Indians to decode. This is again needed to be said that the tax slab has not been changed at all.

Every February, the new Finance Act (i.e. Union Budget) is declared by the Central Government of India. In every occasion, the budget brings new and/or amended clauses with it which subsequently makes the Indian taxpayers feel puzzled. Therefore, it is expected that even this budget will become clear among the people in India within the next few weeks.

There are people who have shared their negative feedbacks with respect to this budget. On the other side, many people are saying that this is one of the best budgets that India has witnessed since its independence. They have also added that this budget is probably the best budget that our current Government, formed by BJP (Bharatiya Janata Party), has come up with within its current five years tenure.

An Essential Guide to Financial Planning for Non-Salaried

If you are a non-salaried person, you may understand the phenomenon of uncertain earnings. Unlike ‘salaried’ people who earn a regular income from their jobs, ‘non-salaried’ people are those whose expected annual earning is a little difficult to guess.

In general, the non-salaried people are those who earn their living by doing some business, engaging in a part-time profession or carrying out freelancing. They do not receive a monthly paycheck from their company or bosses. Moreover, this irregularity in the income of the non-salaried people is dependent on several factors like demand, workflow, competition, technical innovation, regulations, and technical know-how.

Anyways, when we talk about financial planning, for most salaried people, the health insurances and retirement funds are somewhat taken care of by their employers. However, for the non-salaried people, they need to plan all these by themselves. And that’s why financial planning for the non-salaried person is a must.

In this post, we are going to discuss how non-salaried people can plan their personal finance effectively. Let’s get started.

Financial Planning For Non-Salaried People

Last Sunday, I met my friend Aditi for a coffee. We met after a long gap of three years. She told me that she has been working on a food blog for the last two years and making decent money from it.

After talking on a few causal stuff for some time, we started discussing her finances. She told me that although she was making good money as a freelancer, however, she is struggling a little as her income as they are very irregular in nature.

If we look into her finances, in general, whatever she saves, she deposits the same in her Savings Bank Account. She has also bought a Life Insurance policy and pays her premiums quarterly. Nonetheless, she was feeling a little clueless regarding how to come up with effective financial planning that can help her meet her future financial aspirations.

As a personal finance enthusiast, I tried to help her in my own way. So, we discussed in details regarding the four pillars of the financial Planning- Emergency Fund, Insurance, Retirement Fund, and Passive Income.

Emergency Fund

Firstly, I advised Aditi to build an adequate Emergency Fund. This fund should be big enough to protect her for at least six months in case her income declines or comes to a halt in the nearer term. By Emergency Fund, what I actually meant to say was that Aditi should have sufficient money in her Bank Savings account to run her expenses for a minimum of half a year.

Therefore, Emergency Fund = 6 times Aditi’s expected monthly expenses.

Anyways, these days Bank Savings Accounts do not offer a high interest on the deposits. In fact, the saving interests are not even good enough to beat the current consumer inflation rate in our nation. Therefore, I suggested Aditi to park her savings in a liquid Mutual Fund, which will not only help her in forming a good Emergency Fund but also boost her savings appreciate at around 7 to 8 % per annum.

Insurance

Next, we discussed Insurances. Aditi already mentioned earlier that she has a life insurance policy. However, when we started discussing it in detail, I came to know that her insurance was in the nature of “Term Plan”.

According to me, although Aditi does not have an extremely high standard of living, still her Life Insurance plan should cover a minimum of 15 months’ expected annual income. So, I told her to review her policy once and in case she feels she is under-covered, she should give a thought to take another Life plan.

Another important point that I came to know was that Aditi didn’t have any Medical Insurance coverage at all. For a self-employed person, Mediclaim is an essence. I told her that it should cover a minimum of  5 months’ expected monthly income. Here, please note that many people prefer to go with Life Insurance policies in the nature of the endowment plan. For the risk-averse investors, as endowment plans provide decent insurance plus investment option.

Also read: 6 Reasons Why You Should Get Health Insurance

Retirement Fund

After discussing insurances, I asked Aditi how long she is willing to work as a freelancer. In other words, when does she plan to retire? To this question, Aditi answered that she would like to work at least 25 to 30 more years from now.

When talking about the retirement savings,  I must tell you that it does take an immeasurable amount of time to build an adequate fund. By the immeasurable amount of time, what I mean to say is that you might need to wait for around two to three decades to build a substantial Retirement Fund which could help you maintain a similar (or even better) standard of living after you finally stop earning from an active source.

If you ask me what should be the desired retirement corpus, my answer would be that you need to build a corpus which should be at least twenty-five times the expected annual expenses. Nonetheless, the big question here is how can you build such a huge corpus from around 25-30 years from now.

Don’t worry, the answer is not very complicated. Here, I will suggest you to consider investing in Equities or Equity Mutual Funds. Yes, of course, Equity investing is a little risky in the short term. However, if you opt for value investing, it can aid you in creating a huge corpus in the long run.

retirement fund-min

Passive income

As a non-salaried person, Passive Income can help you to support your basics expenses as your earnings may be filled with ups and downs.

In meaning, passive Income is that income which does not require your active time. Once your passive income mechanism is set up, you don’t need to do anything to earn that income. Moreover, Passive Income can be stable and act as your secondary source of income. A few examples of Passive Income can be your rental income, dividends, and Interests from Equities and Bonds etc.

Apart from your emergency and retirement fund, you need to build a few consistent passive income sources and to add them as other income in your financial planning.

Also read: 11 Best Passive Ways to Make Money While You Sleep.

Closing Thoughts

There is no doubt in highlighting the fact that non-salaried people are subjected to more financial risks compared to the salaried people. For all the self-employed people out there, like Aditi, effective financial planning can help you manage and mitigate the financial risk of your irregular income.

And therefore, as a non-salaried person, you should take your financial planning seriously and start working on your Emergency Fund, Passive Income, Insurance, and Retirement Fund.

That’s all for this post. Today, we tried to cover how a freelancer, business owner or an independent professional, can manage their personal finance effectively. We wish you all the best for your financial investment journey ahead. And Happy Investing!

5 Psychology Traps that Investors Need to Avoid

Benjamin Graham once said that “an investor’s chief problem and even his worst enemy- is likely to be himself.” It is a well-known fact that the human brain is a wonder that is capable of numerous mathematical, problem-solving and communication skills that is unparalleled with any other living species.

However, when it comes to investing, humans have been known to make terrible decisions and often fail to learn from their own mistakes. They go through a ‘roller-coaster of emotions’ as shown below.

Investment process – Roller coaster of emotions

(Image Source: Credit Suisse)

While the human mind is incredibly unique, people still fall victim to the investor traps that can have serious consequences in the financial markets. This has led to the emergence of behavioural finance, a new field that aims to shed light on investors’ behaviour in financial markets.

This post discusses the most common psychological traps investors need to overcome to increase their chances of earning high returns.

5 Psychology Traps that Investors Need to Avoid:

Anchoring Bias

Anchoring Bias occurs when people rely too much on a reference point in the past when making decisions for the future- that is they are ‘anchored’ to the past. This bias can cause a lot of problems for investors and is an important concept in behavioural finance.

For example, if you had a favourable return on a stock when you first invested in it, your perception on the future returns of stock is positive even when there may be clear signs indicating that the stock might take a dive. It is important to remember that financial markets are very unpredictable so you need to remain flexible and seek professional advice when not-sure of making considerable investment decisions.

Herding

Also known as the mob mentality, is a tactic that was passed on from our ancestors and believes that there is strength in numbers. Unfortunately, this is not always the best strategy in the financial market as following the crowd is not always the right move.

Ironically, this herding mentality among investors is the major reason for ‘bubbles’ in the financial markets. Investors often ‘herd’ to secure their reputation and base their decisions on past trends or on investors who have had success with the same stock in the past. However, people are quick to dump stock when a company receives bad press or go into a buying frenzy when the stock does well.

As an investor, you should perform your own analysis and research on every investment decision and avoid the temptation to follow the majority.

Loss Aversion

Loss Aversion is when people go to great lengths to avoid losses because the pain of a loss is twice as impactful as the pleasure received from an investment gain. To put in simple terms, losing one dollar is twice as painful as earning one dollar.

Loss Aversion- How it can ruin your investments

As emotional beings, we often make decisions to avoid a loss, this could involve investors pulling their money out of the market when there is a dip which leads to a greater cash accumulation or to avoid losses after a market correction investors decide to hold their assets in the form of cash.

However, this perceived security of exiting the market when it is unstable only leads to a larger amount of cash circulated in the economy which results in the inflation. During the 2007 financial crisis, there was $943B worth of cash increases in the US economy.

Investors can avoid the loss aversion trap by speaking to a financial advisor to learn how to cut their losses and optimize their portfolio for higher returns.

Superiority trap

Confidence is an asset when it comes to investing in the stock market, but over-confidence or narcissism can lead to an investor’s downfall. Many investors, especially those who are well educated and have a good understanding of finance and in the functioning of the stock market often believe they know more than an independent financial advisor.

It is important to remember that the financial market is a complex system made of many different elements and cannot be outwitted by a single person. Many investors in the past have lost large sums of money simply because they have fallen prey to the mentality of overconfidence and refused to heed anyone’s advice. Overconfidence is the most dangerous form of carelessness.

Confirmation bias

Confirmation trap is when investors seek out information that validates their opinions and ignores any theories that refute it.

When investing in a particular stock that believe will result in favourable returns, an investor will filter out any information that goes against their belief. They will continue to seek the advice of people who gave them bad advice and make the same mistakes. This results in biased decision-making as investors tend to look at only one side of the coin.

For instance, an investor will continue to hold on to a stock that is decreasing in value simply because someone else is doing the same. The investors help validate each other’s reasons for holding on to the investment, -this, however, will not work in the long-term as both investors may end up in a loss. Investors should seek out new perspectives on a stock and conduct an unbiased analysis of their investment.

Also read:

How can an investor overcome these psychological traps?

The human mind is very complex and there are many factors both internal and external that can affect the decisions we make. The pressures we face in society make it easy to feed into temptation and fall prey to the psychological traps listed above. Being overconfident, seeking validation from others and finding comfort in other people who are in the same boat as you are just some of the reasons that can have an impact on the investment decisions we make.

Nobody is perfect and it is only human to fall into a psychological trap. The best way to mitigate these effects is to stay open to new information and think practically about how the investment will affect you as an individual. You should also seek the advice of industry experts to ensure that your investment decisions are based on well-researched information that can help you make unbiased decisions.

6 Best Investment Options for NRIs in India

Since last two decades, India has been rapidly developing as an industrial hub. Day after day, our country is attracting more and more foreign direct investment (FDI). Moreover, these days we can see more and more investments coming from the NRIs to the Indian markets. And this is all happening because the Indian economy and government are offering adequate stability and flexibility to the investors. Not only India is conducive for business growth but our economy is also equipped with an extremely profitable financial market.

The year 2018 was not an immeasurable year for investing in the stocks as it witnessed significant bleeding throughout the year. Nonetheless, a similar situation was observed in any other country across the world. However, if you have a look at the year previous to that i.e. 2017, you would find that India’s stock market yielded around 29% return which was relatively higher than any other economy in the world.

Anyways, financial markets are subject to lots of ups and downs. It goes without saying that you need to undertake end-to-end research before you make your investment decision. Nevertheless, whatever investment option you opt for, it should always depend on your financial goals, liquidity requirement, risk appetite and expected returns.

In this post, we are going to discuss a few of the best investment options for NRIs in India which can provide them with adequate returns depending on their goals and needs.

6 Best Investment Options for NRIs in India.

Here are a few solid investment options in India where you can consider investing if you are an NRI.

— Fixed Deposit

Investing in Fixed Deposit is not only popular among the residents in India but also an attractive investment scheme for the NRIs. Being an NRI, you can open your FD with your NRE, NRO, or FCNR Account. All three of these are the types of bank accounts that an NRI can open in India.

Anyways, how much rate of interest will be applicable to your FD depends on the tenure of your deposit. In general, you can expect to earn interest between 6 to 7% on your account balance. Further, if you are a senior citizen, you would get the privilege of earning an extra interest of one percent. Moreover, this investment option is suitable for risk averse investors as FD is a comparatively safer form of investment.

Note: You can read more about the current Fixed Deposit rates in India here.

— Equity

In case you are an aggressive investor, you can consider investing in the equities listed in the Indian market. If you are an NRI, you can directly invest in the Indian stock market under the Portfolio Investment Scheme (PINS) of the RBI.

As an NRI, in order to invest in the stock market in India, you are required to have a bank account (NRE or NRO Account), a trading Account (with a SEBI registered Stock Broker), and a demat account. However, the maximum amount of your investment in the stocks of an Indian company cannot exceed 10% of its paid-up capital.

Further, this is to be noted that, as an NRI, you are not at all permitted to carry out intraday trading and short selling in India. This implies that you need to own the stocks before you can sell them.

— Mutual Fund

These days AMFI is working hard to promote Mutual Funds among the Indian population. Mutual Fund organizations pool money from their investors and then invest the same in the different financial assets. Mutual Funds have moderate risks as they are neither as risky as direct trading in stocks, nor they are as risk-candid as FDs. Further, mutual Fund investments can be highly profitable. There are a plethora of schemes available for Mutual Fund which can choose depending on your risk appetite and financial aspirations.

Anyways, if you are a person residing outside India, you would, unfortunately, face some limitations in mutual fund investing in India because of some rigid FATCA regulations. You are required to have an NRE or NRO Account for investing in the Indian Mutual Fund industry. Furthermore, you also have to invest in Indian rupees and not in any foreign currency.

Note: If you are new to mutual funds, check out our beginner’s resources for Mutual Fund Investing.

— Public Provident Fund (PPF)

A safer form of investment similar to FD is Public provident fund. PPF is an investment alternative which is backed by the Indian Government. Even if you are an NRI, you can invest in PPF. However, here the maximum limit is Rs 1.5 lakh in a financial year.

You can open your PPF account through a post office or through a branch of any nationalized bank in India. Although PPF comes with a lock-in period of 15 years it is definitely more tax efficient than FD. To know more about PPF, you can read this blog on our website.

— National Pension Scheme (NPS)

If you are looking for another tax-efficient investment option, you can even consider investing in NPS (National Pension Scheme). This is also cost-effective, easily accessible, and tax-efficient way to invest your money.

National Pension Scheme is an Indian Government sponsored pension system. If you invest in this instrument, your entire capital during maturity is treated as tax-free. Apart from that, you are not required to pay even a penny to the government as tax on the amount that you withdraw as pension. If you are an NRI aged between 18 and 60 years, you can open an NPS Account to start investing in this scheme. Click here to know more about NPS.

— Real Estate

It’s a fact that there are a lot of NRIs who stay abroad but look to buy their own house in India. Indian population is ever-growing and this is itself paving way for the advancement of Real Estate business in the nation. Being an NRI you can invest in a house property in India from where you can earn handsomely by letting it out to a third party.

However, this is to be noted that, you have to make any such purchases only in Indian rupee. Furthermore, you can’t buy agricultural lands, farmhouses, and plantations in India. Nonetheless, there is no restriction on you to inherit any such property or accepting them as gifts. Check out more on Real Estate investing in this article.

Closing thoughts

In this article, we tried to cover some of the best investment options for NRIs that they can consider if they are  planning to invest their savings in India from abroad.

If you are a profit-loving investor and looking for a long term capital appreciation, you can choose to invest in the Indian stocks or mutual funds. In case you are having a huge corpus, high risk appetite, and high return expectation, you can invest in the real estate sector. Besides, you can invest in an FD if you have a short investment horizon and looking for a guaranteed return. Lastly, you can opt for investing in PPF or NPS if you are willing to earn tax efficient returns and at the same time not bothered to park your money for a longer period of time.

Overall, nn the basis of your priorities, budget and expected returns, you can make a choice of any investing scheme that suits you in the most effective manner. While making any investment in a financial instrument, ensure that you have gone through the relevant documents and understood the salient features of the same.

Our best wishes on your investment journey. Happy investing!

Warning: Random Walk Theory may change the way you look at stocks

The Random Walk theory is a statistical model of the stock market that shows that stock prices with the same distribution can be independent of each other. In other words, the prices of these securities are not influenced by past events in the market.

The random walk theory was developed by Burton G Malkiel, a professor at Princeton University and was discussed in his book A Random Walk Down Wall Street. The theory applies to trading securities and states that movements in the price of a stock are random and that any research conducted to predict future price movements is a waste of time.

What is the random walk theory?

The random walk theory does not involve the technical analysis of a stock which uses historical data to predict future prices. Nor is it a fundamental analysis to study the financial health of a company. It is, however, a hypothetical theory that states that the prices of the stock move at random. The random walk theory asserts that stock returns can’t be reliably predicted, and stock movements are just like the ‘steps of a drunk man’, which no one can foretell.

This theory is based on the assumptions that the prices of securities in the market moves at random and the price of one security is completely independent of the prices of the all the other securities.

It’s as random as flipping a coin

A random walk down the wall streetThe concept of random walk theory goes all the way back to a book published in 1834 by Jules Regnault who tried to create a ‘stock exchange science’. This was further developed by Maurice Kendall in a 1953 paper that suggested that share prices moved at random. The hypothesis was popularised by Malkiel in his best selling book A Random Walk Down Wall Street.

To prove his theory Prof. Malkiel conducted a test. He gave his students a hypothetical stock worth $50. At the end of the day, he would flip a coin which would determine the closing price for the stock. Heads meant the closing price would be a half point up while Tails meant the price would be half-price down. This meant there was a 50-50 chance of the price going up or down. Prof. Malkiel and his students tried to determine the market trends from the prices.

Using the results gathered from the test, the professor went to see a chartist. A chartist is a person who predicts future movements in stocks based on past trends and believes that history repeats itself.

Looking at the results, the chartist told the professor to buy the stock immediately. However, the coin flips were random and the stock did not have any historical trend. Prof. Malkiel used this example to argue that movements in the stock market were as random as flipping a coin!

What are the implications of random walk theory?

Many people only invest in a stock because they believe that is worth more than they are paying. However, the random walk theory suggests that is not possible to predict the movement in the stock prices. This means that investors cannot outperform the market in the long-run without taking on an inordinate amount of risk. The only solution is for an investor to invest in a market portfolio (such as an index) which is a representation of the total stock market. Any changes in the stock prices in the market will be reflected in the portfolio.

In addition to this, if the short-term movements of stock are random, investors can no longer buy stocks based on the time-value of money theory. Therefore, a buy and hold strategy will be ineffective as stocks can be bought and sold at any point of time.

Criticisms of the theory

One of the criticisms to the random walk theory is that it ignores the trends in the market and various momentum factors that have an impact on the prices. Many critics say that the price is affected by many trends and very often these trends are very hard to identify and it may take a large amount of historical data and fundamental analysis to figure it out. But just because these trends are hard to recognize, it doesn’t mean that they don’t exist.

Another criticism states that the stock market is vast and there are a countless number of elements that can have a large impact on stock prices. There a large number of investors in the market and each trader has a different way of trading. Hence, it is likely that trends emerge over a period of time which would allow an investor to earn a return in the market by buying the stock at low prices and selling at high prices.

Also read:

A Non-random walk

As a refute to the random walk theory, there are a number of technical analysts who contend that the price of a stock can be predicted on past trends and historical data. They believe that traders who can analyze these trends and make predictions have the ability to outperform the market with their superior knowledge.

Then there is the luck factor. The random walk theory states that only way a trader can outperform the market is purely by chance. This is an inaccurate statement, however, because there are some traders such as Paul Tudor Jones who managed to continuously outperform the market. It is more likely that technical analysis of the stock market is in play here and not just dumb luck.

However, it is important to remember that technical analysis can only help predict the probable changes in stock prices and not the actual price.

Conclusion

Choosing to trade based on the random walk theory is based on the preferences of each trader. If you believe that stock prices are random, it would be best to invest in a suitable ETF or mutual fund and hope for a bull market. But if you truly believe that trends and predictable and that stocks can be traded based on historical data then you should use your technical and fundamental analysis skills to actively trade in the stock market.

How Sunk Cost Fallacy Can Affect Your Investment Decisions?

Have you ever been in a situation where you went to watch a movie in the theatre, however, it turned out to be terrible? What did you do next? Did you walked out of the theater or continued watching it till the end because you were afraid that you have already paid for the ticket? If you choose the latter, you have fallen for the sunk cost fallacy.

In this post, we are going to discuss what exactly is a sunk cost fallacy and how it can affect your investment decisions. But first, let us understand what are sunk costs.

What are sunk costs?

Sunk costs are those irrevocable costs which have already been occurred and cannot be retrieved. Here, the costs can be in term of your money, time or any other resource.

For example- Let’s suppose that you bought a brand new machine. However, after using it for three months, you realize that the machine is not actually working as you desired. And obviously, the return period of the machine has surpassed. Here, even if you sell the machine, you will get a depreciated value compared to what you originally bought. This cost is called the sunk cost.

In general, people should not consider sunk costs while making their decisions as these costs are independent of any happenings in the future. However, humans are emotional being and unlike robots, we do not always make rational decisions.

Examples of Sunk Cost Fallacy

Sunk cost fallacy, also known as Concorde fallacy, is an emotional situation where the individuals take sunk costs into consideration while making the decisions.

We have already discussed the example of watching the entire movie (even if it is terrible) just because you, as a consumer, won’t get back the money of your ticket. This is a classic example of sunk cost fallacy.

Another example can be when you eat foods that you do not like because you have already bought that food and cannot revoke that sunk cost. Similarly, overeating after ordering foods in restaurants because food has been already ordered is also an example of sunk cost fallacy.

Further, a typical example of the same fallacy is when you keep attending the miserable classes of your college (that you do not enjoy) because you have already invested a lot of time in that course and also have paid the tuition fee. Besides, salaries, loan payments etc are also considered as sunk costs as you cannot prevent these costs.

A quick point to mention here is that not all past costs are sunk costs. For example, let’s suppose you bought a shoe and you didn’t like it after reaching home. However, as the shoe is still in the return-period of 30 days, here, you can return the shoe and get back your purchase price. This is not a case of ‘sunk cost’.

Sunk Cost Dilemma

Sunk cost dilemma is an emotional difficulty to decide whether to continue with the project/deal where you have already spend a lot of money and time (i.e. sunk cost) or to quit because the desired result has not been achieved or because the project has an obscure future.

Here, the dilemma is that the person cannot easily walk away from the project as he has already spent a lot of time and energy. On the other hand, continuously pouring more money, time and resources in the project also does not seem a good idea because the outcomes are uncertain. This dilemma of deciding whether to proceed further or to quit is called sunk cost dilemma.

For example- Let’s say you started a business and invested $200,000 over the last three years. However, you haven’t achieved any wanted result so far. Moreover, you cannot see the business working out in the future. Here, the dilemma is ‘what to do next?’. Should you bear the losses and move on, or should you invest more resources in that uncertain business?

Another common example of sunk cost dilemma can be a bad marriage. Here, the couples find it difficult to decide whether to save themselves (and their spouse) by splitting up when they are sure that the things are not going to work out. Or should they hold on to the marriage just because they have already spend a lot of time together and breaking up will make them look bad?

Sunk cost dilemma in Investing

Even investors are common people and they face the sunk cost dilemma while making their investment decisions.

For example, let’s say that an investor bought a stock at Rs 100. Later, the price of that stock starts declining. In order to minimize the losses, the investor averages out the purchase price by buying more stocks when the price kept falling (also known as Rupee cost averaging).

Here, the dilemma happens when the stock keeps underperforming for a stretched period of time. Here, the investors are uncertain whether they should book the loss by selling their stocks, or should they continue averaging out with the hope that they may recover the losses in the future.

As an intelligent investor, people should not consider the sunk costs while making their decision. However, this is rarely the case.

Also read:

Closing Thoughts

It is no denying the fact that nobody likes losing and hence the past losses can influence the future decisions made by the individuals. However, one must not consider sunk costs while making their investment decisions.

As sunk costs cannot be changed (recovered), a rational person should ignore them while making their judgments. Here, if you want to proceed, first you should logically assess whether the project/deal is profitable for the future. If not, then discontinue the project. In other words, try to forecast the future and react accordingly.

Anyways, a few methods of solving the sunk cost dilemma is by opting for incremental wins over the big ones, increasing your options (not just to completely quit or go all in) and in the terminal case, cutting your losses. When stuck in this dilemma, try to make minimum losses by looking at the mitigating options.

What is Algorithmic Trading (Algo Trading)? And how it works?

Technological developments help define the future and we tend to rely on them more and more everyday. Investors are no exception to this rule as they use of technology to take advantage of optimal market conditions and earn high returns.

One such technology is algo trading or algorithmic trading which is a type of stock trading that uses statistical models and equations to run trades on a program designed by the user. Algo trading has become more popular in the last few years as it has been made more accessible to investors. It currently comprises of 35-40 per cent of turnover in Indian Stock Exchanges.

What is algorithmic trading?

An Algorithm is a code that is designed to carry out a certain process. Algorithmic trading uses computer programs to initiate trades at high speeds based on preset conditions such as the stock prices or the current market conditions.

The algorithms can include a level of manual intervention or can be fully electronic also known as zero-touch algos. The trades are initiated based on pre-set quantitative factors, arbitrage opportunities and the client’s preference. In India, the most commonly used algo is the Application Program Interface (API) that lets investors choose their strategy and enter in their requirements. The trades are then executed by the brokers.

For instance, algorithmic trading can be used by a trader who might want to implement trades when the stock price reaches a certain point or falls below a certain level. Based on the current market conditions, the algorithm can recommend how many shares to buy or sell. Once the trader enters the program requirements, they can sit back and relax as the trades automatically take place based on the preset conditions.

What are the benefits of algorithmic trading?

Algorithmic trading automates the trading function which is incredibly advantageous to traders. This makes sure that the trades are carried out at the right time during optimal market conditions which increases the chances of high returns. The traders does not face the risk of missing out on important opportunities in the market.

Another key advantage of algorithmic trading is that it removes human emotion from the trading equation as the trades are defined by preset conditions. This is advantageous because human emotions can cause investors to make irrational decisions based on fear and greed.

Algorithmic trading also allows you to backtest. This essentially means that the algorithms can be tested on past data to see if they have worked in the past or not. This is helpful because it lets the user identify any flaws in the trading system before they run the algorithm on live data.

In addition to this, algo trading reduces the time spent analyzing markets and lowers the associated transaction costs. The numerous benefits have made it a popular tool among investors in many stock exchanges today. 

Strategies used in algorithmic trading

Although the computer initiates the trades, the user still has the ability to input the strategy they wish to use. They can decide the volume, the price and at what time the trade should happen. Therefore the algo strategies used by the investors can have a large impact on their earnings. Here are the most common strategies used in algorithmic trading:

Trend based strategies:

One of the most commonly used algo strategies used is trend-based strategies. The involves following the current trends in the market and executing trades based on that. The trader uses technical indicators such as the moving average and the price level of the stock to assess the market and the system generated recommendations to buy or sell required to fulfill the conditions entered by the trader. This is one of the easiest strategies to implement as the figures are based on historical and current trends with no requirement for complex predictions.

Arbitrage strategy:

An arbitrage opportunity exists in the market when there is a difference in the price of securities on two stock exchanges which can result in a risk-free profit. In algo trading, the arbitrage strategy algorithm is used by the computer program to identify the differences in prices and make use of the opportunity in an efficient way.

The speed and accuracy of algo trading comes into play here because the price difference in the stock may not be high but the high volume of trade can lead to a considerable amount of profit. This arbitrage strategy is most commonly used in forex trading.

arbitrage trading

(Image credits: Corporatefinanceinstitute)

Trading Range or Mean Reversion strategy:

Also known as the counter-trend or reversal, this strategy is based on the principle that although prices go up or down, it is only temporary and they eventually come back to their average price. In this strategy, the program identifies the upper and lower limit of the stock and carries out trades when the price goes above or below this range. The algorithm calculates the mean price of the stock based on historical data and when the price goes out of bounds the trade is executed with the expectation that the stock will come back to its average price.

However, this strategy may not always work as the price may not come back to its average price as quick as expected and the moving average can catch up to the price leading to a lower risk to reward ratio.

Also read: How to read stock charts for beginners?

Conclusion

Algorithmic trading was introduced in India in around 2009 and has been growing in popularity due to its low cost and the availability of skilled resources, especially with traders who trade on proprietary books. SEBI (Securities and Exchange Board of India) has also played a positive role in the adoption of algorithmic trading in India which will help further its acceptance and incorporate the trading on a larger scale in stock markets.

Although algorithmic trading is automated, the user still has the authority to choose which strategy to follow depending on various factors. It is especially beneficial for small-time investors who want to increase liquidity in the market making it easy to enter and exit the market while decreasing price inefficiencies in trading stocks.

A brief study of Petrol & Diesel price history in India

Crude Oil. You definitely have heard of this word, right? Crude oil is a naturally occurring unrefined petroleum product. It consists of organic materials and hydrocarbons. When the crude oil is refined, first it is heated until it starts boiling. Then, the boiling liquid is separated into various liquids and gases. These liquids are further utilized in making petrol, diesel, paraffin, and other petroleum products.

The products and by-products of crude oil are used in direct or indirect consumption by the end users. They are also used in manufacturing several commodities by a wide range of industries. Crude oil is also traded in the commodity market like gold, silver, etc. This results in the global price of crude oil to fluctuate. In India, only one-fifth of the crude oil requirements are met from domestic production. Therefore, we are heavily dependent on the US, African, and Middle East countries to support our nation’s demand for petrol and diesel.

How the prices of diesel and petrol are determined?

The Oil Marketing Companies or OMCs take crude oil to the refinery houses to generate petrol, diesel, kerosene and other products. After that, they dispose those products to the dealers of the same. In India, 90% of the share of oil marketing is owned by Indian oil corporation Ltd (IOCL), Bharat petroleum corporation ltd (BPCL) and Hindustan petroleum corporation ltd (HPCL).

Here is the exact process of how the price determination of diesel and petrol takes place in India.

First, an OMC imports crude oil from an oil producing nation like UAE. The cost and freight are the initial costs incurred on the same. Import charges (plus insurance charges, losses due to transportation and port fees) are further added to the same. Next, the Government of India adds Customs Duty on such crude oil, after which they are carried to the refinery houses.

The refineries charge Refinery Transfer Charge for their work. After that, such refined oil is sold to the dealers by the OMC at Depot Price after incurring inland freight on the same. So the total desired price is the result of all the Cost & Freight charges, Import charges, Refinery Transfer Price, Inland Freight, OMC’s Marketing costs, and Profit margin.

In addition, the Central Government of India adds Excise Duty on the Depot Price and the State Governments add State VAT on the same. Further, the dealers also add their commission which is calculated on the basis of per liter. So, after adding all the costs and taxes, we get the Retail Price that a consumer pays for buying a liter of petrol or diesel.

If you compare the prices of diesel and petrol in the South Asian nations, you would find that the prices in India are always the highest. This is because our Government regulates the prices by imposing taxes. Ironically, when you would see the prices of the crude oil dropping, Indian government increases the Excise Duty and State VAT to not let the retail prices of diesel and petrol fall. On the other hand, when the prices of crude oil rises, here the Government doesn’t reduce the said taxes so that the prices of the fuels in the nation don’t undergo fluctuations.

Besides, there is no doubt in stating that the prices of diesel and petrol would vary from one state to another in India due to differences in commission pattern of OMCs and transportation charges.

Petrol & Diesel price history in India

Now, let us have a look at the price history of diesel and petrol in India over the last few years. Given below is a table which shows the petrol prices per liter in the four metropolitan cities in India. 

Petrol Price history in India:

Date Chennai Mumbai Kolkata Delhi
05-11-2018 81.61 84.06 80.47 78.56
29-10-2018 82.86 85.24 81.63 79.75
29-09-2018 86.7 90.75 85.21 83.4
29-08-2018 81.22 85.6 81.11 78.18
29-07-2018 79.11 83.61 79.05 76.16
29-06-2018 78.4 83.06 78.23 75.55

As you can see from the above table, generally the petrol prices have been on the higher side in Mumbai. However, Delhi witnessed the most reasonable petrol prices in the last few months of 2018. 

Further, here is the historical petrol price movement in the big four metropolitan cities in India.

Date Chennai Mumbai Kolkata Delhi
29-05-2018 81.43 86.24 81.06 78.43
16-05-2017 68.26 76.55 68.21 65.32
17-05-2016 62.47 66.12 66.44 63.02
16-05-2015 69.45 74.12 73.76 66.29
07-06-2014 74.71 80.11 79.36 71.51
23-05-2013 65.9 71.13 70.35 63.09
24-05-2012 77.53 78.57 77.88 73.18
15-05-2011 67.22 68.33 67.71 63.37
01-04-2010 52.13 52.2 51.67 47.93
27-02-2010 51.59 51.68 51.15 47.43
02-07-2009 48.58 48.76 48.25 44.72
29-01-2009 44.24 44.55 44.05 40.62
24-05-2008 49.64 50.54 48.98 45.56
16-05-2007 47.44 48.38 46.86 42.85
10-06-2006 51.83 53.5 51.07 47.51
05-06-2006 51.83 53.5 51.07 47.51
20-06-2005 44.26 45.93 43.79 40.49
16-04-2003 35.48 37.25 34 32.49

When you look at the longer time period shown by the above table, the picture looks similar as well. Anyways, one comparable takeaway is that, in every metropolitan city, the petrol price has consistently gone up at the same rate in the last one and half decades. (Note: You can find the latest prices of petrol in India here).

crude oil price

Diesel Price history in India:

Now, let us talk about the historical prices of diesel per liter in India. Here is a short-term view of diesel prices in the four Indian metropolitan cities:

Date Chennai Mumbai Kolkata Delhi
05-11-2018 77.34 76.67 75.02 73.16
29-10-2018 78.08 77.4 75.7 73.85
29-09-2018 78.91 79.23 76.48 74.63
29-08-2018 73.69 74.05 72.6 69.75
29-07-2018 71.41 71.79 70.37 67.62
29-06-2018 71.12 71.49 69.93 67.38

The table given above shows that in the last few months of 2018, the diesel prices first have gone up and then they showed consolidation at the beginning of November.

Next, here is the long-term diesel price history in India. If you look at the table shared below, it is easily understood that the diesel prices in the said four Indian cities have actually witnessed consistently rising prices in the last fifteen years.

Date Chennai Mumbai Kolkata Delhi
29-05-2018 73.18 73.79 71.86 69.31
16-05-2017 58.07 60.47 57.23 54.9
17-05-2016 53.09 56.81 54.1 51.67
16-05-2015 55.74 59.86 56.85 52.28
07-06-2014 61.12 65.84 61.97 57.28
23-05-2013 52.92 57.17 53.97 49.69
24-05-2012 43.95 45.28 43.74 40.91
15-05-2011 43.8 45.84 43.57 41.12
01-04-2010 38.05 39.88 37.99 38.1
27-02-2010 37.78 39.6 37.73 35.47
02-07-2009 34.98 36.7 35.03 32.87
29-01-2009 32.82 34.45 33.21 30.86
24-05-2008 34.44 36.12 33.96 31.8
16-05-2007 33.3 34.94 32.87 30.25
10-06-2006 35.51 39.96 34.96 32.47
05-06-2006 35.95 39.96 34.96 32.47
20-06-2005 31.51 35.2 30.8 28.45
16-04-2003 23.55 26.7 23.51 21.12

Quick Note: You can find the latest price of diesel in India here.

diesel price

Difference between prices of Petrol & Diesel in India:

Below is a table shared for your reference which shows the price gap in diesel and petrol in the Indian metro cities during the mid of the year 2016.

City Diesel Price /Liter Petrol Price /Liter Price Gap
Chennai Rs 55.82 Rs 62 Rs 6.18 / Litre
Mumbai Rs 59.6 Rs 67.11 Rs 7.51 / Litre
Kolkata Rs 56.48 Rs 66.03 Rs 9.55 / Litre
New Delhi Rs 54.28 Rs 62.51 Rs 8.23 / Litre

Further, here is another table that would give you an idea of the price gap with regard to diesel and petrol during as of November 2018.

Date Diesel Price /Liter Petrol Price /Liter Price Gap
Chennai Rs 74.99 Rs 78.88 Rs 3.89 / Litre
Mumbai Rs 74.34 Rs 81.50 Rs 7.16 / Litre
Kolkata Rs 72.83 Rs 77.93 Rs 5.1 / Litre
New Delhi Rs 70.97 Rs 75.97 Rs 5 / Litre

From the above tables, it can be clearly noticed how substantially the price gap has been narrowed down within the period of around two years.

Consequences of petrol and diesel price hike

As you might have observed from the above tables, the fuel price in India has undergone a significant hike over the last multiple years. So, what does it imply? Does it mean that the overall cost of living in India has gone up too? If you look back in 2018, the rate of consumer inflation in India was around 4.75%

When the price of fuel increases, in general, it narrows down the gap between disposable income and expenditure of the consumers. It means that the consumers will try to reduce the consumption of luxury commodities like automobiles and electronic equipment in order to manage their necessities comfortably.

Hike in fuel price also has a direct adverse effect on the revenues of a few industries like tyres and fertilizers as the retail prices of their outputs shoot upwards. However, if you look at the financials of oil producing companies in India, there is no doubt in saying that they do enjoy a gala time during such period.

Further, you might think that only those companies which produce crude oil based products suffer during the fuel price bull run. But, the fact is that most of the companies in our nation (belonging to diverse industries) suffer as a result of the price hike. Even if you consider the FMCG industry, the cost of its products goes up considerably as a result of the upward movement in the prices of diesel and petrol. This happens because transportation costs go up significantly.

Now, what kind of impact can you expect to see in financial markets during fuel price hike? Well, when the price of diesel and petrol goes high, not only people will try to cut down their unnecessary expenses but they may even reduce financial investing. In order to finance their necessities, people would refrain from putting their money in the financial markets.

Therefore, will the banks have adequate funds to advance the businesses? Not really! Can the corporate organizations listed in NSE and BSE comfortably raise capital through IPO and FPO? Certainly not! Will the Asset Management Companies of Mutual Funds have an adequate corpus to pour into the market? No, my friend, they won’t have!

Also read: Rupee Depreciation: Is it a cause of concern?

Final thoughts

The hike in the global price of crude oil depends primarily on the demand-supply theory that we study in Economics. However, it also depends on other factors like the trade war, geopolitical tensions, and willingness of oil-producing countries to charge a higher price. As we had already seen earlier that hike in crude oil price results in inflation. So, to fight against the same, the Central Government charges more taxes and duties on diverse stuff. For a similar reason, the RBI also instructs the commercial banks to increase their interest rates on loans so as to squeeze money supply in the Indian economy.

Further, the price of petrol and diesel can be controlled if we lay emphasis on a few points. Firstly, price controlling mechanism has to be adopted either partially or fully. The half of Retail Prices of fuels in India consists of taxes and duties. The government (both central and state) does need to look into the matter. It would also be great if the OMCs can try to witness some of the price burdens that the ultimate consumers have to bear in our nation.

Finally, the consumption of petrol and diesel in India in terms of US Dollar is even higher than the GDPs of many small nations across the globe. And that’s why the government and the people need to consider petrol and diesel price hike in India seriously.

The 3 Words that may be holding you back from investing in stocks.

Fear of Losing!!

Since childhood, we are taught to save money. “A penny saved is a penny earned.” And the idea of losing money is something which we are not psychologically programmed to opt for.

When you invest in stocks, there is a probability that its value may decrease if you have made the wrong investment choice. Unlike most other investment options like Fixed deposits, Gold, Real estate, bonds etc, the stock market is a place where your invested amount can fluctuate a lot within hours. And these daily fluctuation of prices ignite the fear of losing. And trust me, no one likes losing, especially their hard-earned money.

Moreover, when you invest in stocks, there is no guarantee that it will give you good returns. Even the safest stocks may decline in value because of unforeseen reasons. And that’s why, a majority of the population tries to keep a safe distance from the stock market.

But, there’s one thing that most of these people forget.

You are already losing money!!!

When you are not investing, you are losing the value of your money. How?

The old common answer- “Inflation”

Inflation can be described as a continuous increase in the general level of prices. And when the price increases, obviously the purchasing power of your money will decrease. The money in hand that you have ‘today’ is not of the same worth in ‘future’. Therefore, no matter how much safer you are keeping it in a vault or bank account, you are losing your money.

Currently, the predicted inflation rate in India is +4.89%. Therefore, if you are not making interest on over 4.89% on savings, this means that you are not beating the inflation and in other words, losing money. Frankly speaking, most of the savings account in India do not offer such high-interest rate. And in the worst case, if you are keeping cash, you won’t getting any interest at all.

inflation in india

(Source: Statista)

Historically, stocks have out-performed all other investment options.

Traditionally, people in India used to invest in gold and property. The came savings, fixed deposits, bonds etc. And finally, since the stock exchanges became more active in India, the next investment options were stocks and mutual funds. Anyways, history says that the returns from the stock market has out-performed all the other investment options.

sensex last 30 years

Also read: 75x Returns by Sensex in last 30 Years of Performance.

You can reduce the risk while investing in stocks.

Although you cannot completely get rid of the risk, nonetheless, you can definitely reduce it by following a few simple rules. And when the risk reduces, it will also decrease your fear of losing money. Here are a few methods which can help you reduce the risks while investing in stocks:

Diversify your investment:

It’s true that no one cannot correctly and precisely predict the future returns from any stock. However, you can increase the chances of being correct by making multiple good bets in different companies.

Even if two out of ten doesn’t perform well or fails miserably due to whatever reason, if the other eight stocks are performing decently, you can get decent returns and minimize the harm done on your overall portfolio. Portfolio diversification is the easiest approach that investors can follow to reduce the risks while investing in stocks.

Also read: How to create your Stock Portfolio?

Invest in blue chips

Blue chip companies are large and well-established companies with a history of consistent performance. These companies are financially strong (usually debt-free or very low debts) and are capable to survive in the tough market situations.

Most of the blue-chip companies are the market leaders in their industry. A few common examples of blue chip companies in India are HDFC Bank, ITC, Asian Paints, Maruti Suzuki etc. These companies are comparatively safer to invest vs mid or small cap companies who are associated with high risks.

Also read: 10 Best Blue Chip Companies in India that You Should Know.

Get an investment advisor.

This is the easiest approach that people anyone can follow to minimize the risk without limiting the investment options. If you do not have time to study or research stocks or your own — hire a financial planner for making your investment decisions instead of you.

Now I understand that most people are reluctant to hire investment advisors or financial planners. But think of it in this way — If you can hire a doctor for taking care of your physical health, why cann’t you get the help of an investment advisor to take care of your financial health?

Ovearll, if you find investing by your own boring or do not give sufficient time to research in order to make the right investment decisions, then hire a professional.

Apart, a few other ways to reduce risk in your stock investments are rupee cost averaging, investing in index funds and having a big margin of safety.

Closing Thoughts

It’s a fact that the fear of losing cannot be completely detached when you are investing in stocks. However, the ability to overcome this fear to make wise decisions is necessary skill to learn for the individuals if they want to build good wealth. Therefore, mind these three words and make sure that ‘fear of losing’ is not the actual reason why you are losing money.

How to read stock charts for beginners?

For anyone looking to actively trade in the stock market, it is essential to know how to read stock charts. A stock chart is a chart that shows the price of a stock plotted on a time-frame that can range from minutes to many years. It serves as an important tool for picking the right stocks and easy to find on websites such as Yahoo Finance or Google Finance.

The ticker symbol of a company can help you find its stock chart. The ticker is a series of letters found in a company’s name (Apple= AAPL). Stock charts can help you identify stock price movements and make decisions on whether to enter, buy, sell or exit the trade.

When you first look at the chart

Stock charts come in various forms, they can be candle charts, bar charts or line charts.

In addition to the view of a stock chart, you also get to pick the time frame. The most commonly used ones are intraday, weekly, monthly, year-to-date (YTD), 5 years, 10 years or even a complete history of the stock.

how to read chart 1-min

(Stocktrader.com)

Once you have picked the chart view and time-frame, it is now time to understand the various features of a chart. For demonstration purposes, we can look at a candlestick chart.

On a candlestick chart, the red candles show downward price movement, while the white (or green) candles show an upward price movement. The chart has numerous technical indicators such as the moving average index (MA), the relative strength index (RSI) and the moving average convergence divergence index (MACD). These technical indicators are used to analyze future price movements.

Support and Resistance lines

how to read chart support and resistance

(Image credits: BabyPips)

The next step is to look for the support and resistance lines. As the name suggests, the resistance line indicates a point which resists the price from rising further. It shows the maximum supply for a stock where the level is always above the current market price. There is a great probability that the stock would rise up to the resistance level, absorb the supply and then decline. For traders, the resistance line is an indicator to sell.

Alternatively, the support line indicates a point that stops a price from falling lower. It shows the maximum demand for a stock in the market. There is a high chance that a stock price will reach the support line, absorb all the demand and then bounce back. The support line is a signal to buy stock.

Below the stock chart is a window that shows the trading volume of the stock. The volume shows how much of the stock has been traded over a period of time. The green bars show the greater buying volume days and the red bar shows the greater selling volume days.

how to read chart

(Image credits: Investors Underground)

Why is the volume important?

The volume of a stock is an important indicator of whether or not to invest in a stock. This is because the trading volume is influenced by the buying and selling of stocks done by big traders, large investment banks, mutual funds or exchange-traded funds (ETFs). It can be the high-value trading done by these large firms that causes the price of a stock to go up or down.

An individual investor can use the volume as an indicator of buying or selling stock, forecasting future price trends and identifying the support and resistance level. When there is a bullish market- that is investors are optimistic and expect the prices to rise- there is high volume trading on up days and low volume trading on low days. However, during a bear market- when investors are less optimistic- there is high volume trading on down days and low volume trading on up days.

how to read chart

(Investopedia)

Other technical indicators

In order to better understand the price movements and trends in a stock chart, investors use a variety of technical indicators. One such indicator is the 200-day moving average which is a stock’s average closing price in the last 200 days. A high 200-day average signifies a bullish market while a low 200-day average shows a bearish market. In reality, however, when the 200-day average is extremely high it is a sign that the market may soon go down and that investors are far too optimistic and when the 200-day average is low it signifies the reverse. The shorter the moving average, the greater the change in the market.

The 200-day average indicates whether a stock is healthy or not and is often compared to the 50-day moving average. When a stock in the 50 day moving average crosses the 200-day moving average, it achieves the ‘golden cross’ status. That is the stock may go up to a much higher price. On the flip-side, if a stock in 50-day moving average goes below the 200-day moving average, it is known as the ‘death cross’. This means there is a good chance the price of the stock will go down in the future. Technical indicators are used in conjunction with momentum indicators to analyze the direction and strength of a stock’s price movement.

Understand the overall trend of the stock

When looking at a stock chart it is important to understand the upward and downward trend of a stock but you also need to analyze the background of the stock as well. This involves understanding how a particular stock usually trends- does it have low price movements or is it constantly volatile?

Another factor to consider is the possibility of the trends reversing. Momentum indicators such as Relative Strength Index (RSI) or MACD can help identify if a stock has reached its peak giving investors the opportunity to exit the market. Understanding these trends can help you make better decisions about what stocks to purchase.

Also read: Fundamental vs Technical Analysis of Stocks

Conclusion

Knowing how to read stock charts is important for any trader. It provides perspective on the price movements of stocks and will help you make better decisions to improve profitability. Hopefully, this guide gives you a better understanding of how to read stock charts before you start trading. Always remember, by failing to prepare, you are preparing to fail.

How Does The Government Control Inflation?

We cannot minimize the explosive effects of inflation. High inflation has the ability to topple governments, ruin nations and reduce economic growth. It discourages savings and reduces the overall productivity in the country. In its creepiest form, inflation can reduce the purchasing power of people, this means the pensions and savings of people can now buy less than it did before.

In response to this, governments have many powerful tools they can use to control the rate of inflation in the economy. These policies have been discussed in detail in this article.

What is inflation?

Inflation can be described as a continuous increase in the general level of prices. In some cases, inflation can be used to encourage spending in the economy. However, this is not always the case as inflation can often get out of hand and the purchasing power of people drastically decreases. The government will then have to intervene to create balance in the economy.

Inflation can be measured using the Consumer Price Index (CPI). The bureau of labour statistics chooses close to 500,000 products from more than a 100 categories which are included into a ‘basket’. The prices of the goods are used to calculate the price index.

Effects of inflation

Inflation, depending on its severity, has the ability to disrupt economies. There is an uneven distribution of income that can affect many sectors in the economy. They are discussed as follows:  

— Effect on various economic groups- If there is low inflation in the economy, job seekers can benefit from this as increased demand will lead to a rise in employment. However, an unhealthy level of inflation can be disastrous for the economy as people pull their money out of financial institutions and their purchasing power reduces.

— Government spending- During inflation, the government, like individuals, have to pay more for wages and supplies. In order to raise more revenue the government can increase taxes but people will may have the ability to pay for them and some groups will be affected more than others.

— Savings and Investment- If inflation is on the rise, it is not a great time for savers as the decrease in the value of money reduces the value of savings. Many people move their investments to stocks and property during inflation. It is a favorable time for borrowers because the value of the money they owe reduces.

How Does The Government Control Inflation?

If the rate of inflation in the economy goes beyond a rate that is uncontrollable, the government has to intervene with policies to help stabilize the economy. Since inflation is the result of too much expenditure on the economy, the policies are created to restrict the growth of money. There are three ways the government can control the inflation- the monetary policy, the fiscal policy, and the exchange rate. They are discussed as follows.

— The Monetary Policy

Monetary policy is a tool used by the government to control the amount of money circulated in the economy. This includes paper money, coins and bank deposits held by businesses and individuals in the economy. Monetary policy uses interest rates to control the quantity of money in the economy.

— Open market operations

When there is high inflation in the economy, the amount of money created by financial institutions needs to be restricted. The Federal Reserve Bank lowers the supply of money by selling their large securities to the public, specifically to security dealers. The buyers pay for the securities by writing checks on the deposits they hold in the commercial banks. This is an effective way to control the supply of money as the deposits of the commercial banks at the Federal Reserve Bank are the legal reserve for the banks. With the sale of securities, the banks are forced to restrict their lending and security buying, therefore reducing the quantity of money in the economy.

— Increasing the reserve requirement

The reserve requirement refers to the amount of money that the commercial banks are required to have on deposit with the Federal Reserve Bank. A low reserve requirement means banks have more money to lend out which can increase the money supply. But when there is high inflation in the economy, the government increases the reserve requirement which restrains the growth of money and even reduces it.

— The rediscount rate

The rediscount rate is the rate of interest charged by the commercial banks. The commercial banks borrow from the Federal Reserve in exchange for a promissory note. In exchange, the Federal Bank increases the deposit of the bank. The rediscount rate controls the cost to banks for adding additional reserves. When inflation is high the bank increases the rediscount rate, which makes it more expensive for banks to buy reserves. This cost is usually translated to customers in the form of high interest rates on loans borrowed from commercial banks which ultimately reduces the supply of money in the economy. In order to control the supply of money in the economy with the monetary policy, the rediscount rate is used in conjunction with the reserve requirement and sale of securities.

— Fiscal policy

The Fiscal policy uses government spending and taxation to control the supply of money in the economy. The policy was designed by John Maynard Keynes who studied the relationship between aggregate spending and the amount of economic activity in society. He also claimed that government spending can be used to control aggregate demand.

— The decrease in government spending

Sending by the government constitutes a large part of the circular flow of income in the economy. During periods of high inflation, the government can reduce the spending to decrease the amount of money in circulation. In many instances, high government spending is the root cause of inflation. However, it is often hard for governments to differentiate between essential and non-essential expenditure so, the spending policy should be augmented by taxation.

— Increase in taxes

An increase in the level of taxes reduces the amount of money that people have to spend on good and services. The effect of the tax can vary with the kind of tax imposed, but any increase in tax would reduce spending in the economy. An increase in tax combined with a decrease in government spending can have a double-barrelled effect on the supply of money in the economy.

— Increase in savings

Another theory derived by Keynes was his belief in compulsory savings or deferred payments. In order to achieve this, the government should introduce public loans with a high rate of interest, attractive saving schemes and provident or pension funds. These measures lock people’s income into savings accounts for an extended period of time and are an effective way to control inflation.

Also read:

Conclusion

Inflation can have a major impact on the economy and can affect the government, investments and the purchasing power of people. A high rate of inflation for an extended period of time can lead an economy into a recession. Fortunately, the government has the ability to use the monetary and fiscal policies to help control the supply of money in the economy. When used in the conjunction, the policies can help achieve a lower rate of inflation and a more stabilized and balanced economy.

What is XIRR in mutual funds and how to calculate it?

Last weekend, one of my friends, Monika, came to my house to meet me. She is an old friend and we met after a long time that day. She told me that she is currently working in an Indian FMCG company after having completed her MBA in HR last year. We discussed a lot about general stuff, our school days and the extent to which our lives have undergone changes over the last few years.

As our conversation gradually progressed, I came to know that she has recently started investing in the Mutual Funds. I remember that a year back, we discussed on a call regarding the importance of investing in Mutual Funds for creating wealth in the future. Ever since she got her job, I have been telling her to invest in the Mutual Funds which would ultimately help her to achieve her financial goals. And that’s why I felt really pleased to know that she has finally started taking her personal finance seriously.

Anyways, I was just taking a sip of coffee when all of a sudden, she fired a wonderful question at me. She asked me how could she correctly calculate how much returns she is making from her Mutual Fund investments. I must tell that most of us focus on the absolute returns that we are generating. Only a minority of the investing population emphasizes on the underlying mechanism to compute our returns in relative terms. And therefore, I found her question truly charming.

How to measure returns on your Mutual fund portfolio?

If you have invested your money in a variety of securities, it is logical to say that the computation of portfolio returns is indispensable for evaluating the performance of your investments. This is because once you know the performance of your portfolio, you can decide whether you want to invest more, continue investing, or redeem your investments.

There are primarily two ways of computing your portfolio returns.

The first one is ‘Simple Return’ or ‘Point to Point return’ method. In this method, you consider the starting value of your investment and the ending value. However, here you do not consider when you made such investments and when did you withdraw.

The other method is by calculating XIRR (extended internal rate of return) of your investment portfolio. It takes into consideration multiple investments and withdrawals occurred at different time intervals– between the first investment and the last redemption.

The former method can be easily applied only if you are investing in Mutual Funds on a lump sum basis. On the other hand, the XIRR method can be applied for lump sum investing and it is also extremely suitable if you have opted for Systematic Investment Plan (SIP).

Also read: SIP or Lump sum – Which one is better?

Simple Return or Point to Point return

Simple Return method gives the absolute return on your investment portfolio. This method only requires your initial Net Asset Value (NAV) and the present NAV. It can be calculated as:

Simple return

Now, sometimes it might be possible that your holding period may not be in a complete number (i.e. not perfectly a year). In that case, you can compute returns using this formula:

Annualized return

Further, instead of using the Simple Return method, one can also opt for the CAGR (Compound Annual Growth Rate) method. The latter works in a similar way and the result is the same too. The only difference is that, even if your investment time period is not perfect one year, it will still calculate your returns in a one step. The formula for CAGR is:

CAGR

Let us take an example to understand how the Simple Return Method works.

Imagine you have invested Rs. 1 lakh in a Mutual Fund scheme on February 23, 2017, when its NAV was Rs. 10. As of March 20, 2018, its NAV has spiked to Rs. 35.

In this case, Simple Return = {(35-10)/10} x 100 = 250%.

On the other hand, Simple Annualized Return = [{(1+2.5) ^ (365/390)}-1] x 100 = 323%

I hope the above example is clear to you. As we already discussed earlier that if you’re simply going to follow ‘buy and hold’ investing strategy, then the Simple Return method would work well for you.

I also explained the same to Monika that evening. However, later what I came to know was that she invests a portion of her salary in Mutual Funds via SIP route i.e. periodic investments. Moreover, she also said that she doesn’t necessarily invest at regular intervals every month. So naturally, she can not even use IRR method for calculating her returns here.

Also read; What is Internal Rate of Return (IRR)? And How Does it Works?

So as discussed previously, the XIRR method can be useful to calculate returns in her case. This is a method that you can use to compute returns on your investments when you are carrying out multiple transactions at diverse points of time.

Calculating returns using XIRR in Mutual Funds

While investing in mutual funds via SIP, you can make multiple investments at different points of time. Further, it might also happen that you redeem some of your units if you required some cash at any particular time. And that’s why I guess by now you would have understood that it is going to be a little tricky to calculate your returns when you are investing via SIPs.

In these cases, the XIRR approach is the most appropriate measurement of the returns that you make on your Mutual Fund investments. Now, let’s understand how you can make use of MS Excel to calculate XIRR

How to use MS Excel to calculate XIRR?

Microsoft Excel provides a financial function called XIRR which you can use to calculate your Mutual Fund portfolio’s rate of return. The expanded formula of XIRR formula in MS Excel is: “= XIRR (value, dates, guess)”

Let us now discuss the step by step process that you can follow to compute XIRR in Excel:

Step 1: Open MS Excel and enter the dates of your transactions in a single column.

Step 2: Go to the next column. Here you have to mention the figures of your cash flows (investments made, dividends received and redemption proceeds).

Date Transaction (Rs)
01/01/19 -5,000

Step 3: Go to the first column and mention the current date (just below the last date mentioned by you) and put the figure of your present value of Mutual Fund in the adjacent column corresponding to the date mentioned by you in the earlier step.

Date Transaction (Rs)
01/01/19 -6,000
04/02/19 -6,000
31/07/19 13,000
XIRR (%)  ?

Now you have to use the XIRR function [“= XIRR (value, dates, guess)”] in MS Excel to find the XIRR for your investments.

To perform the calculation, you have to first select the values which are the series of cash inflows and outflows. Then, you have to select the dates from the dates column. Finally, in the ‘guess’ parameter you may not select anything for it. If you keep it blank, MS Excel is going to use the default value which is 0.1 (10%).

Example to demonstrate the use of XIRR function in MS Excel:

Let us assume that you are going to make seven monthly SIPs of Rs 6000 each. The SIP dates start on 01/01/2019 and it ends on 01/07/2019. Let the date of redemption be 31/07/2019 and the maturity amount is ₹ 43000

You can write the data set on MS Excel in the following manner:

XIRR in excel

As you can see, in the table given above, your cash flows are taking place at different intervals. So, here, we have to use XIRR function for computing the rate of return as a net result of these receipts and payments.

Quick Note: Do not forget to put the ‘minus’ sign before the figures which represent an investment of money.

Now, in the first column i.e. B, please enter dates of transactions. After that, go to the adjacent column, i.e. C. Here, you have to enter the SIP figures of -6,000. Next, again, go to column B and put the redemption date. Against that date, put the redemption figure of 43,000 in Column C.

Next, go to the cell below where you have put 43,000. For calculating the required XIRR, type “=XIRR(C3:C10, B3:B10)” and press ‘Enter’ key on your keyboard. You will get XIRR as 7.84% which will be displayed as a result of this operation.

I used the same example on my laptop to explain the process of XIRR computation to Monika. By this time, she had understood how she can apply this technique in calculating the returns on her Mutual Fund investments. I hope this is also clear to you guys now.

So, what are you waiting for? Open MS Excel and try this function with hypothetical figures to calculate IRR. In case you are an active Mutual Fund investor, try calculating the XIRR of your current portfolio.

Closing Thoughts

In case, if you choose growth scheme Mutual Funds and plan your SIPs at regular intervals, you can definitely opt for the IRR (Internal Rate of Return) method to evaluate your returns. However, in reality, this might be a little difficult to execute. We don’t always follow the ‘buy and hold strategy’ in Mutual Fund investments. As our savings witness debits and credits off and on with regard to our mutual fund transactions, we have no other way but to apply XIRR in computing our returns on investments.

Furthermore, you can, of course, give importance to CAGR as this parameter is useful for you in making a selection of your Mutual Fund scheme. However, when it comes to evaluating your personal investment portfolio, it is XIRR which is always more helpful.

So, if you have a series of cash inflows and outflows occurred over time (which includes withdrawals, dividends, investments, and transfers), the best way of computing the rate of returns is by using XIRR. Through this article, we have tried to make you understand how XIRR works far better for computing returns of your Mutual Fund portfolio in comparison with IRR and CAGR.

Best wishes for your mutual fund investment journey. And happy investing!