Friday, April 17, 2020

Should I invest even if my Fund is showing Negative Returns?






Should I invest even if my Fund is showing Negative Returns?

When funds we have already invested in are showing negative returns like in the current market scenario, it may actually make sense to add more to that investment.  Here is why ?

You have invested 50000 in Axis Bluechip Fund at a price (NAV) of 32.22
and have 1551.831 Units.
The NAV of Axis Bluechip is today 26.50
So the value of your investment is Rs.41123.52 down by Rs. 8876.48
or -17.75%

Now suppose you invest another 50000/- today in Axis Bluechip at 26.50.
You will get 1886.792 Units
So now  you have invested 1 lakh and have 3438.62 Units

Invested
NAV
Units
Total Units
50000
32.22
1551.831
1551.831
50000
26.50
1886.792
3438.62

Let's analyze the results
·         When you invest at lower prices you get more units for the same amount
·         For the first investment our cost is 32.22 per unit.  after the second investment our cost comes down to 29.08 per unit. Now we do not need the NAV to go back to 32.22 to start gaining from our investment but once it reaches 29.08 we start gaining
·         From 32.22 to 26.50 is a drop of 17.75%  But from 26.50 to 32.22 is a rise of 21.58% !!!

Of course this whole exercise hinges on the fact that the fund is a well managed fund with a portfolio poised to recover in the coming months.

·         So investing when the price is down is more beneficial.

Happy Investing!
Michael Duarte

Tuesday, April 7, 2020

It may not be the best decision to stop your SIP right now..



It may not be the best decision to stop your SIP right now...

The current locked-down situation has resulted un uncertainty of our finances in the immediate future at least.

In an attempt to stream-line our finances one of the things that comes to mind is to reduce/stop our monthly investment in Mutual Funds (SIPs).  Well, this may not be the best decision.

Let us see how our SIPs work... Below are a two tables for an Equity Fund and the purchase details from April 2007 to March 2008 (At a normal time – when markets are stable and rising) and from April 2008 to March 2009 (At a time when the markets were collapsing – during the Financial Crisis of 2008)

FRANKLIN INDIA BLUECHIP FUND - GROWTH
Date
NAV
Investments
Units
10-04-2007
124.4232
5000
40.185
10-05-2007
130.3859
5000
38.348
10-06-2007
134.0950
5000
37.287
10-07-2007
145.0525
5000
34.470
10-08-2007
145.2212
5000
34.430
10-09-2007
150.6874
5000
33.181
10-10-2007
175.8169
5000
28.439
10-11-2007
173.6504
5000
28.793
10-12-2007
190.1854
5000
26.290
10-01-2008
192.7679
5000
25.938
10-02-2008
156.0509
5000
32.041
10-03-2008
148.7650
5000
33.610
Total:
60000
393.013

During a stable – rising market note the NAV column above.  Beginning at an NAV of 124 it went all the way to a high of 192 before coming down to 148.  During that time 5000 invested for 12 months (Rs. 60000) accumulated 393.013 Units



Let's see what happens in a Falling Market scenario (like now)
Date
NAV
Investments
Units
10-04-2008
145.7610
5000
34.303
10-05-2008
154.5640
5000
32.349
10-06-2008
139.4043
5000
35.867
10-07-2008
130.8970
5000
38.198
10-08-2008
144.0627
5000
34.707
10-09-2008
139.2883
5000
35.897
10-10-2008
108.6052
5000
46.038
10-11-2008
107.4882
5000
46.517
10-12-2008
99.6224
5000
50.190
10-01-2009
97.1565
5000
51.463
10-02-2009
99.8969
5000
50.052
10-03-2009
88.9042
5000
56.240
Total:
60000
511.820
During the next 12 months falling markets, note the NAV column above.  Beginning at an NAV of 145 it went up only in the next month to 154 and then began coming down finally settling at 88.  During that time 5000 invested for 12 months (the same Rs. 60000) accumulated 511.820 Units – 118.807 more units than in a rising market.
The NAV of Franklin Blue-chip today is 347... The Average Cost of the accumulated units was just 132 again helped by the units purchase in the falling market.

Period
Market Type
Investments
Units
Accumulated
Value of 60000 at NAV of 347
April 2007 to March 2008
Stable rising market
60000
393.013
136375
April 2008 to March 2009
Falling Market
60000
511.820
177601
Rs. 120000/- invested during those troubled time would today be valued at Rs. 313977/-

While stopping our SIPs may be the first thing that comes to mind,  let us see if we can cut down expenses elsewhere. Already our leisure activities have been curtailed in the last fortnight.  The money saved here can surely go towards savings?
Let's think of ways to continue investing since it will pay us well when things settle down.
Best Wishes and Hope God keeps us all safe and gets us out of this situation soon

Michael Duarte
07th April 2020.

Friday, March 27, 2020

Corona Virus situation and Our Investments - First Thoughts




It's March 2020 We (the World) are in the midst of the Corona Virus Pandemic.......

There are more than enough articles, videos and the ever present whatsapp opinions on the virus situation gripping our lives today.  Most of what is said or written last week is already irrelevant because  of the situation evolving on an hourly basis.

Without adding more gyan on this subject I am giving below some thoughts that are pertinent to our investments.

Unless this is the end of the world as we know it - This situation will pass like all situations affecting our financial lives in the past.  If it is indeed the end of the world then our investments won't matter.

Since the situation as it is, has no precedent it is impossible to give a time line to the return to some sense of normalcy.  The reaction we are seeing now is panic and fear of the virus itself.  The after effects on the financial health of businesses and balance sheet numbers cannot be estimated - and it is this that will further impact stock prices and our portfolios in the coming months.

To understand the scale of a downturn lets visit the 2008 Financial crisis -
At that time the Sensex plummeted from 20812 (Jan 2008) to 8451 (Nov 2008) 10 months a drop of 60% (presently we are down 30%).  It remained around those levels for 6 months till March 2009 and regained 20000 in Oct 2010 (The comeback took 18 Months)

I'm daring to make a comparison with 2008 only because we were all investing at that time too.  The situation then was Financial mismanagement  in the US  our markets were affected only because of the size of their investments here.  Today the situation is Medical and Global without any positive news on the horizon so we cannot really compare the two situations.

I propose the following:
1) Ensure that you have enough cash flow to run your life and home for the next 12 to 18 months.  Hopefully this can be met without touching your investments in the Equity markets (through Mutual Funds).

2)If you are investing any amount monthly (through the SIP route) let that continue as you are accumulating more with every drop in the markets.  Let those monthly investments continue

If you can allocate a little more on a monthly basis this is the time to start considering

3) Do not withdraw more than you need for living expenses from your existing investments.  The loss you are seeing in your portfolio 'on screen' is temporary.  If you withdraw now that loss will be permanent.

Once the Governments are done with tacking the health issue that is staring in our faces now, they are bound to give assistance to revive the markets as is already being seen with The US Federal Reserve, The Bank of England and our own Reserve Bank of India.

At present of more importance is to take all precautions to stay healthy.

Best Wishes.

Michael Duarte (March 2020)