April 6, 2010

A simple idea

Let’s start with a premise. Let’s say you believe as I do, that India and its economy is likely to do well for the next 10-15 years. I think it would be safe to assume that the Indian economy would grow between 5-6% for the next 10-12 years.

If you agree with the above point, the nominal growth (real growth – 6% + inflation) is likely to be in the region of 10-12%. If the nominal growth of the economy is 10-12%, then the top companies in India are likely to grow at the same or slightly higher amount over the same period of the time.

The top companies in India are represented by the Nifty 50 or BSE sensex and hence we can expect that the index would grow by 10-12% over the next 10-15 years. It is quite possible that the returns will fluctuate wildly from year to year, but over the long term the returns are likely to average more than 13%. The actual returns for the last 15 years have been around 13-14% when the growth rate of the economy was much lesser.

If you agree with my logic above, then this is my idea -
If one invests in the index via a systematic investment plan (SIP) in a low cost ETF or mutual fund on a monthly or quarterly basis, the overall returns should be fairly good with moderate or low risk over the next 10-15 years.

So where’s the catch
There a two issues. The first issue is discipline. A lot of people equate excitement with high returns and end up with low returns and lots of disappointment. As a result, due to ignorance or mistaken beliefs, they will not follow a simple and sensible plan which could provide good returns at low risk.

The second issue is the validity of the hypothesis that India will do well and not go down the drain. For starters, if it does then all of us will have more to worry than the stock market alone. I sincerely hope that it does not happen, otherwise all bets are off

So are you doing this ?
If I could go back in time and meet the Rohit of 1990’s, I would kick his ass and ask him to start an SIP program in the index or a decent mutual fund instead of chasing some IT stocks. Well, I can’t do that :). So I have done the next best thing – I have an SIP plan for the last couple of years and have kept at it irrespective of the market levels, near term outlook and any other forecasts and prophecies.

I have discussed this approach with several of my friends and have yet to meet anyone who has taken up my suggestion. I think there is a perverse thinking that decent returns require some complex insight and a simple ideas such as this is too good to be true.

37 comments:

Sachin Purohit said...

Besides the two issues, don't you think there is a third one too?

Has the current index level raced far ahead of the picture-perfect future projections of Indian GDP growth? In which case, the SIP may reflect a slow-moving or even a declined index over a prolonged period of time though India may still be growing at a very healthy growth rate?

Rohit Chauhan said...

Hi sachin
that would be true if invested completely in the index now. however i am recomending an SIP for the next 10 yrs.
so you will be buying during highs and lows and will average out.
also the current levels may discount a few years of growth, but over 10-15 yrs the slight overvaluation should not have too much impact

Sachin Purohit said...

A problem with SIPing in index-based fund scheme is that very few of these funds seem to be reflecting the index to the maximum. There is considerable amount of underperformance viz 'a viz the index that scheme claims to be tracking.

Do you have any schemes in mind that have been able to match up with its corresponding index?

drmadhupv said...

dear rohit,
i had written earlier , about my quantum to be achieved to make me feel rich.i decided 100 crores before my death. my basic calculation is 1 lakh at 12% annually would yeild 270 crores over a life time.the questions are
1. how to achieve 12% at lowest risk
2. how to keep it going for over a lifetime
i have figured out 80% debt and 20% equity allocation for a comfortable journey
i want to time etf purchase keeping an sip in ur kotak lt g fund
mybsic plan is to keep rs 100000/-untouched each in three streams -EPF, ETF AND SEN CIT SAVINGS SCHEME
over a lifetime
my grand children are now assured of more than 100 crores from me.
as for me u blog provides all i need.
a fabulous return of over 400% over last 2 years on ur portfolio, then , a flat as my first real estate and a great habit of contentment and moderate expectations with anything in life

warm regards
drmadhupv

Ninad Kunder said...

Hi Rohit

This simple idea is a great idea for a vast majority of ppl but it is not and I repeat "Not a great idea for Rohit Chauhan".

Why would you pay 1% out of your return to a fund manager and a further 0.5-1% for tracking error, considering the fact that you have consitently outperformed the index.

Cheers

Ninad

abhikush said...

You can do better by diversifying into other asset classes. I had done a post sometime back that showed the benefits of diversifying into stocks and bonds. I think adding gold ETF to your portfolio will also help (but to do any statistical analysis you need data for longer periods).

Ankur said...

I completely agree with you. Simple and elegant solution are always far better than complex solutions. Rohit, can you also share Equity well diversified MFs you invest in. It will be of great help. Also, for tax saving purpose also.

One more request for a post on planning for your kids' education using equity.

Thanks a lot for your blog.
Ankur

Mayank said...

Hi Rohit,

But with the interest and understanding that some of us have in the financial markets (much less than what we would like us and others to believe) much more than the average investor in the Indian stock market, should we not demand higher returns than what can be achieved by this simple idea? No gains without pains philosophy also advocates that we should be able to beat the average with our research. what say?

Cheers,
Mayank

Anonymous said...

Hey rohit,

It's a nice idea and one i started implementing after reading the boogleheads guide to investing.

The biggest problem is however also a very simple one:

Who can honestly say they have a 10-15 year timeline for investing? The answer is pretty much nobody!

As a wise man once said: All my long term investments, are my short term investments gone wrong!

We love buying when prices are going up, and hate it when prices drop. It's human psychology!

And in investing that is often the biggest drawback!

What i would be interested to know is have you done any posts on picking the right mutual fund? that too is a task in itself!

Just my two bits.

By the way, like the new look :-)

Rgds
Mark

Pradeep said...

This is such a surprise. I have been thinking about the same for quite some time and was evaluating the various mutual funds offering Sensex and Nifty ETF's (which I guess is same as index funds). With which MF have you taken it? I felt that a company called Benchmark in Gujarat has secured few awards and has a low cost MF. Your advice please.

Charlie said...

Hi, Rohit what you have said is really true. It is better to put your savings on the auto pilot mode and SIP is an excellent way to do it. I have come across people who have all their investment in PPF, Provident fund and various schemes of LIC. It might not have given superlative returns but people who saved this way are still better off than people who never got started or kept dabbling in stock market with the aim of making it big. Today a lot of information about investing is available online thanks to various blogs including yours. Most of us have got full time job and that is where the cash needed for investing comes from. It cannot and should not be neglected till we have build up a good corpus and that will take some time. In the meanwhile we can keep sharpening our investing skills and keep learning before we take a head long plunge.

Vic said...

Good post Rohit.

I think you had also posted something which is different from this process i.e. Buy Nifty Index when PE is below 12, sell when it is above 20..something like that. Or may be I read somewhere else. The idea is to slowly start buying when it is discounted and start selling when it is getting heated. This is called Value Indexing..:-)

Other point is: If we were to SIP, best route is Nifty BeES as it is cheaper. We can buy allocated amount on a certain date of the month. As I doubt one can SIP into ETFs.

Thanks,

Vikas

Vic said...

Ninad,

I think you have become the Delisting idea expert now, therefore these mediocre returns won't appeal to you.

Also you have to make it appealing enough for Rohit.

:-)

Vikas

Sachin8778 said...

Hi Rohit,

Great post! SIPs are my favorite but recently more inclined towards selective SIP--here is the post on concept by TIPGuy. http://www.tipblog.in/strategy/investing-strategy-for-niftybees-etf/

Cheers,
Sachin

Investologic said...

Hi Rohit
I had posted about Nifty Index investing here:
http://investologic.wordpress.com/2009/09/25/nifty-investments-simplified%e2%80%a6/

and here
http://investologic.wordpress.com/2009/09/27/nifty-investments-simplified-ii/

I have been using this approach using nifty BEES.

Venkat Ramakrishna said...

I would perfectly agree with this logic. An ETF like NIFTY BEE would be an ideal choice with a small expense ration. However ETFs do not allow SIPs so as you mentioned discipline is the key.

Mansukh. M said...

I have been regularly reading for past many year in various magazines - START EARLY.. and i gave into my "laziness" and have started a SIP of Rs.4000 every month in Religare PSU fund (2000 each for my daughters)
I suggest the same for all readers... Start TODAY!!!

Regards
Mansukh

Rohit Chauhan said...

Hi sachin
most index funds have a tracking error of 1%, but allow an easy SIP. ETF have low expense and low tracking error, but one cannot do an SIP and has to manually implement this plan which is more diffcult.
i will put some names in the next post

rgds
rohit

Rohit Chauhan said...

drmadhupv
its good you have a consistent savings and investment plan for the long term. that puts you ahead of 90% of the people.
i assume u mean 270 lacs and not 270 crs ?

Rohit Chauhan said...

ninad - why not for me :) ?

remember we speak about return on time invested. well, i have spent 30 mins finding such ideas and an automatic SIP gives decent returns. ofcourse if i can find better ideas then i can move cash from the SIP to the stock.

it boils down to what is next best option available

Rohit Chauhan said...

abhikush
i agree asset class diversification makes sense, but stocks, bond and a little bit real estate is good. i am not in favor of gold. metals have barely beaten inflation in the last 30 yrs and are not great long term investments

rgds
rohit

Rohit Chauhan said...

ankur - let me cover some ideas in a new post

mayank - yes one should invest more directly instead of index funds, if you think u can beat the market. the question is how sure one can be about that ? has the recent outperformance been due to luck or skill ? that is an important question to answer. personally i have waited for 10 yrs to answer that for me..ofcourse not everyone would want to do that

Rohit Chauhan said...

hi mark
thanks for the comment

i have done a few posts on mutual funds. ofcourse implementing this idea requires discipline which is the hard part

pradeep - yes benchmark ETF are good, low cost option. but you can create automatic SIP plan in those

rgds
rohit

Rohit Chauhan said...

hi charlie
you have hit the nail on the head. while one is learning, the investment program should not be on hold. An SIP is a good way to start, till one learns more on active investing. then one can divert more funds to stocks directly

rgds
rohit

Rohit Chauhan said...

Hi vic
yes, ETFs dont allow automatic SIP.

btw, ninad is an expert on SIP. if you want ideas on that, you should visit his blog :)

rgds
rohit

Rohit Chauhan said...

Hi sachin, investologic - thanks for your comment

venkat - agree with you. discipline is the tough part here

mansukh - yes starting is the key and not waiting for the perfect situation

rgds
rohit

drmadhupv said...

dear rohit
the exact amount is rs 2,68,91,93,422/- as power of compounding formula at moneycontrol.com for rs 100000/- at 12%.
thnx for ur prompt responses as always
drmadhupv

Anonymous said...

Dear Rohit,

What you think about Navneet Publications as a company. ??

Regards,
G

Anonymous said...

Hi Rohit,

A nice post. Start & Discipline is the key :).

I started managing my finance a year back - investing through SIP only. I read your blogs and try to digest what I can and appreciate what I cannot, as one day I might be able to do so. Keep spreading the knowledge.

I have a question for you on discipline. I try hard to save some extra money for investment. I have not been able to follow a disciplined approach in investing with this extra money. I do try to - (1) Not invest on the same day as I have a SIP deduction, (2) I do see (better say time) when to buy, (3) Correct the asset allocation (currently tilted more towards debt). Any suggestion on how to be less market emotional with this extra money and invest wisely.

Thanks,
Shree

Rohit said...

I am reading your blog for almost 2 years now.I read in your blog and at other places also that house is not a v great investment. For living definitely but questionable for investment.

Lets assume a guy in early 40's with a family has total assets = 1 house (of worth 50 lacs) + 20 lacs in FDs and + 50 lacs in equity which he built over past 10-12 years. He didn't achieve extraordinary returns in equity. Now his equity is around ~ 40% of his total assets. Now if he keeps same money in equity he should be ready to take a hit of atleast 20% down in equity because of capital market unpredictability. 20% is 10 lacs. Slowly in next few years this 50 lacs with increase.
So my question how easy is it for a person to keep this kind of money in stocks and be okay to see +-10lacs fluctuations..Personally just by thinking I dont feel very comfortable about it. I feel money in safer in property which I know is wrong. Does it mean it has to do with my psychology?

Currently I am pretty young 31 and I think a lot about this. I would really appreciate if some senior members can share their experiences . I guess Rohit must be 5 yrs senior to me so would like to hear his story and how he deals with this kind of thinking. Any suggestions would help.

What are your thoughts on it.

MG said...

Eloquent thoughts. Reasonable assumptions. One caveat is the fundamental premise of 10-12% growth over 15 year time period. Given the increasing instability of India's population, governance, speculative and regional dynamics....I think this is being extremely optimistic. As a value investor, one gives significant haircuts to globally accepted estimates....so, I will not offer beyond 7-8% growth prospects.

Rohit Chauhan said...

Hi drmadhav

i think its an unrealtisic assumption for this kind of compounding. to turn 1.0 lac to 2 crore something @ 12% will require 40+ yrs. i think that would be a stretch

Rohit Chauhan said...

hi anon
i may have looked at navneet in the past, but did not like or maybe it was overvalued then

hi shree/ rohit
you bring up interesting questions on the pschology of investing. let me respond via a separate post

rgds
rohit

Rohit Chauhan said...

Hi MG
10-12 % is nominal growth..7-8% is real growth excluding inflation. so you need to add 5-6% inflation to come up with the 10-12% number. the current GDP growth is the real growth excluding the effect of inflation

rgds
rohit

Venkat Ramakrishna said...

I for one have taken up this suggestion and started SIP in NIFTY BeES and Nifty Junior BeES. Both are ETFs and they track Nifty and Nifty Junior respectively. Neither of the funds charge any entry or exit load. Nifty BeES has an expense ratio of 0.5% and Nifty Junior BeES has an expense ration of 1%. (Which is still high). Tracking error is less than 0.5% for both ETFs. I think they are much better than open ended to Index funds to start a SIP program.

rayhaan said...

hey rohit
heard u r interested in options?
maybe u shud chek this out http://www.sfgate.com/cgi-bin/article.cgi?f=/g/a/2010/04/21/investopedia43652.DTL
saw the price of nifty puts a few weeks ago looked quite cheap at 52.10
( i mean the market has to drop by just 2.2% for u to start makin money)

indianist said...

Sir I invested a big amount in single plan now i understood Systematic investment plan. I am going to separate the amount and invest in mutual fund thanks for the information.....