Amazing assertion by Dhirendra Kumar of ValueResearchOnline, some months ago -

"We've all heard the old saying that experience is the best teacher.
While that is no doubt true, there's a complication to this truth - bad experiences are a good teacher, while good experiences are bad teachers.
New investors who have only seen good times have not attended the classes of that good teacher."

After the good experiences of 2020 and 2021, 2022 may well turn out to be the class of the good teacher for equity investors.

Because in a bull market, it is said, many investors think their IQ has gone up by 20% if not more. Especially those investing directly.

It is a fact that bull runs attract investors in droves while bear markets witness an exodus. Witness the record number of demat accounts opened post lockdown.

It should actually be the other way round. However inexperienced investors tend to chase stock market headlines and invariably, suffer at the hands of experienced players.

Whether shares or mutual funds, investors need to understand that a longer duration of their investment, among others is an important aspect of generating good returns.

The short term lure of lower cost by way of direct investing, for inexperienced investors, will harm them in the long run.

Trying to save on advisor fees, for a less knowledgeable investor, may actually harm them in the long run. Think about buying medicines directly from the chemist, just to save on doctor fees.

I have seen such investors asking for investment advice on social media from strangers. Because it is for free. Would they ask advise from strangers thus, for their physical health?

Investing in the market through an advisor may well be the best thing an investor may do for her long term wealth creation goals. Since a good advisor may caution against selling in panic and buying while the markets are too high; in other words MANAGE INVESTOR EMOTIONS.

Perhaps, some hard lessons are in store for many do-it-yourself investors in 2022.

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Published: Thursday, 15 April 2021 16:59

So one of the things about life beyond 40 (in my case 45; I am 51 now) is that one comes to understand her personal finances better.

If not understand the nuances, at least come to terms with it, get a broad idea of where one is going to end up by retirement, which college can the kids be sent to, how many vacations a year, which set of wheels to buy next, is the medical insurance adequate and so on.

Not that this may change many of us.

If I’ve been trying out every new fine dining that opens up, I shall most likely continue to do so – maybe less often.
If I’ve been squirreling away every extra rupee, that is likely to continue.
And if I change my car every other year, I shall.

The corollary is, if I have been postponing things because of my ‘busyness’, it is unlikely I will do anything about it as well. Learning to play the guitar. Join a cookery class. Yoga. Travel. Meditation. X. Y. Z.

By this age we build up a fair idea of ‘what works for me’. Our belief systems are pretty much cast.
I will save money because I understand why.
I will not save money because no one can take it to the next world.
I have to have a vacation every year.
Cooking is not my cup of tea.
These are nothing but priorities we create, and with age invariably become a slave to.

There are no right or wrong answers, for life beyond 40 or 50 or whatever. Our parents, schooling, society, friends, neighbourhood, education, financial standing – all these determine my value systems, and the path I chose for myself.
And therefore, a lifestyle that seems miserly to you may make perfect sense to me, since you may never have experienced deprivation the way I did.

Life is uncertain; there is an element of risk and luck in all our endeavours. As we grow older, it does not become any easier. As long as there are no extremes we consciously chose – drugs, gambling, investing most of our money into risky assets and the like – we will probably do ok in the financial sense.

The fact that you and I chose to be a member of this group* is an indication in itself that we are reaching out to peers - an acknowledgement perhaps that none of us is an island in herself. You may know things about finance that I do not. I may want to discuss my concerns with a group such as this in an anonymous manner since I do not wish to be judged by my social circle.

Beyond this, however, each of us will probably take different paths to satisfaction and fulfilment. And why not?

(* This was originally published to a Facebook group.)

SEBI has required, wef Dec 1, 2021, that mutual funds classify all debt schemes in terms of a potential risk class matrix.

While the Risk-o-Meter stipulated by SEBI reflects the current risk of the scheme, SEBI felt the need for disclosure of the maximum risk the fund manager can take.

Hence, MFs need to classify their debt schemes in terms of the a) maximum interest rate risk and b) maximum credit risk the scheme can undertake.

Investors will have to be informed, in case there is any deviation from the disclosed PRC that results in an increased overall risk of the scheme.

OUR VIEW
This will help investors in identifying and choosing an appropriate debt fund. However, as can be seen below, the SEBI guidelines will not classify debt funds as risky or moderate or low risk; rather the ‘credit risk’ as well as the ‘interest rate risk’ will be furnished to the investor.

In our view, ‘credit risk’ should be more of a concern for investors since the safety of the principal itself is in question here.

On the other hand, ‘interest rate risks’ while also relevant may involve only volatile returns to the investor.

EXAMPLE PROVIDED IN THE SEBI CIRCULAR dated June 7, 2021

For example, if an open ended Short Duration Fund wants to invest in securities such that its Weighted Average Macaulay Duration is less than or equal to 3 years and its Weighted Average Credit Risk Value is 10 or more, it would be classified as a scheme with ‘Moderate Interest Rate Risk and Moderate Credit Risk’. The position of the scheme in the matrix shall be displayed by the AMCs as under:

 * The parameters mandated by SEBI for ‘credit risk’ and ‘interest rate risks’ are detailed in the relevant SEBI circular, i.e., SEBI/HO/IMD/IMD-II DOF3/P/CIR/2021/573 dated June 7, 2021. 

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Published: Monday, 23 November 2020 08:00

Often I am asked that if equity mutual funds (MF) have generated returns of 15% or more in the medium and long term whereas bank deposits have lagged far behind, is it because MF's have an inherent element of gambling?

To them, and others, I say this : there are broadly two reasons for the exceptional returns.

The first is that it is a professional manager that invests your money, after due diligence and research.

Secondly - and more pertinently - these returns are a reward for the volatility investors suffer in the short term - and that is logical. Imagine you had a superb business idea and started your business. Would it not be reasonable to expect to breakeven and thereafter earn good returns – but only after a few years? Or would one expect instant returns - in a few weeks or months? The same logic applies to say, a property purchase. On the other hand, bank deposits suffer from no such volatility; and hence offer predictable (and lower) returns.

This is actually what the caveat ‘MF returns are subject to market risks’ alludes to.

So to summarize - the short answer is that the higher MF returns are a reward for the volatility investors bear in the short term, during which your money is invested in superior businesses by professional MF managers.