A Guide to Understanding Stock Screeners

This is a guest post by Krishna Kishore who writes a refreshing blog on stock investing at tyroinvestor.com. He readily agreed to write this post, explaining the features of a stock screener, upon my request. 


There are many stock screeners available online like the ones from Google Finance, Reuters, Equity master and paid services from Bloomberg as well. Out of them all, www.screener.in is one of the best and the one that I personally use and recommend because of its salient features.

But why to use it in the first place?

Okay, to understand that let me give you an example.

You got a “tip” from a very good investor. He is very bullish about the stock. Now you wanted to know about the company. What will you do?

 Following are the steps!!

1) Open Moneycontrol.com and type the company’s name.

2) Check the company’s current market price.

3) Click on 3 months, 6 months, 1 year, 2 years to know how the company is doing from past few quarters.

4) Quickly check EPS, PE, Dividend yield, Price to Book etc.

5) Get an idea of the company’s performance (without even knowing what are the products & services that the company offers).

But Krishna, What is wrong in doing so?

Nothing wrong in it but you will be “Biased”. Being in so called “Bull Market”, this can be dangerous to our portfolio. Every stock will make new heights these days. Hence, your mind takes the shortcut to process this least available information to say whether this company is doing great, good, bad or ugly. You start your analysis with a biased mode. We are not sure why that stock went up/down. Is it because of any sectorial momentum, Tailwind or Headwind? No idea, but we will start thinking that the stock price has went up, so something good happened/going to happen to the company (Shortcut processing of information).

Recently I watched a movie called “Drishyam”. The tagline of the movies goes something like this “Visuals can be deceiving”.

This particular tagline with a small change can be aptly suited for markets. “Stock Prices can be deceiving”!!!

But, also at the same time, we do not have enough time on earth to go through Annual reports of each and every company to understand the financial health of it. (Remember in olden days, Ben Graham, Peter Lynch, Buffett and many other legends actually did so)

This is where Stock Screeners comes into picture to serve the purpose.

Stock Screeners gives the fundamental view of the company (not in-depth information) which will be very useful and enough to get an initial idea of its health condition.

As already said I prefer using www.screener.in and now let’s try to understand the functionalities of it.

This is my stock screener page and I am taking example of one of India’s most consistent compounder, “Pidilite Industries”!!!


(Please do register to access all the functionalities and type which ratios you want to have in your page under “Manage Quick Ratios” section)

1) From this screen shot, I can get the following info.  (In order to understand a stock more than just looking at the price, you need to know about the terms stated in the above screen shot)

a) Market Capitalization: Market capitalization is calculated by multiplying a company’s shares outstanding by the current market price of one share. This is used to tell us the size of the company, what are the future prospects of the company to grow further at a good rate.

I highly recommend you to please go through the videos of 2 min each for better understanding for these terms. Fun Learning!!!


b) Book Value per Share: This gives the per share value of a company by calculating total assets minus intangible assets and liabilities.


c) Price to Book Value: This is an important ratio to consider if the company is trading at expensive levels or not. This is mainly used for NBFC’s to compare the stock prices among its peers.


d) Price to Earnings ratio: This is one of the most important ratios to consider. Leaving the technical terms aside, this gives the “Confidence of the Investors on the Company”. High PE says, Investors are expecting the company to generate above average earnings for the longer period of times. Sometimes this confidence turns in “Over confidence” & if it happens welcome to the Bull Market.

Just to give you an example, during the time of Reliance Power IPO, the oversubscription of this went viral and people are ready to pay 5000 (Five thousand) PE for this company. This kind of ratios is highly unsustainable. If you ask me what PE is cheap and what PE is costly. These are mostly considered by Relative valuations and preferably from same sectors.  (Read more about Reliance IPO here)

e) Dividend Yield: This is calculated by ratio between Annual Dividend per share to the current market price.


f) Earnings per Share: The portion of a company’s profit allocated to each outstanding share of common stock. Very important metrics to look for.


Profitability Indicator Ratios: ROE & ROCE

g) Return On Equity: Another major ratio to look for. It tells how much profit a company generates with the money shareholders have invested. If explained properly, ROE alone can be a separate post.


h) Return on Capital Employed: A financial ratio that measures a company’s profitability and the efficiency with which its capital is employed

ROCE = Earnings before Interest and Tax (EBIT) / Capital Employed

i)   Piotroski score: This is an interesting number to know the fundamentals of a company. I have already written an article for the same:  What is the Piotroski Score of Your Stock ?

j)    Price to Free Cash Flow: A valuation metric that compares a company’s market price to its level of annual free cash flow. This is similar to the valuation measure of price-to-cash flow but uses the stricter measure of free cash flow, which reduces operating cash flow by capital expenditures.


There are much more ratios that this Screener provides, but as I told you, for the initial analysis of a company, these is good enough to start.

2) Later, it provides an amazing screen which states the Pros and Cons of the company.


3) In this screen, it provides the information of Individual stock performance vis-a-vis Index along with the shareholding pattern.

Only one small issue is, here we will not know if any of the promoter holdings have been pledged or not. This is critical information in terms of analyzing a company. Promoter pledging is not a good sign while analyzing the current condition of the company. 


Peer Comparison:

4) Relative Valuation is very important for any company. This screen allows us to understand the financials of the company with respect to its peers.



Financials (Income statement: Standalone & Consolidate):

5) As already discussed above, this particular section gives us the first glance of the company’s financials on Quarterly & Annual basis for both Standalone and Consolidated.



As you can see below that some of the terms below are in “BOLD” which states the importance of it. Let’s have a quick understanding of them:

Operating Profit: The profit earned from a firm’s normal core business operations. This value does not include any profit earned from the firm’s investments (such as earnings from firms in which the company has partial interest) and the effects of interest and taxes.


 EBIDTA: EBITDA is essentially net income with interest, taxes, depreciation, and amortization added back to it, and can be used to analyze and compare profitability between companies and industries because it eliminates the effects of financing and accounting decisions.


Profit Before Tax: As the name suggests, it is a profitability measure that looks at a company’s profits before the company has to pay corporate income tax.

Net Income: This is Very Very critical number to look for in the company’s Income statement. Net income is calculated by taking revenues and adjusting for the cost of doing business, depreciation, interest, taxes and other expenses. The measure is also used to calculate earnings per share.


6) The other screen gives the compounded growth of Sales, Profits and ROE over 3,5,10 and TTM periods of time.


 7) Financials (Balance sheet: Standalone & Consolidate):


Let me take a moment and try to explain what is first 2 rows (Equity Share capital & Reserves) of any balance sheet tell us.

screener-9Example: Let’s say company ABC came up with an IPO and wanted to raise 10 crore rupees. It shares are prices at a band of 170-180 rupees with a Face value of 10 each. Total number of issuing shares  is 1 Lac.


Working Capital: A measure of both a company’s efficiency and its short-term financial health.

Formula: Working capital = Current Assets – Current Liabilities

8) Cash Flow statement: Even though Cash flow statements are the critical ones to check where and how the money is flowing in & out. This gives info of Cash Flow from Operations (CFO), Cash Flow from Investments (CFI) & Cash flow from Financing (CFF)


Cash Flow from Operations: The amount of cash generated by a company’s normal business operations. Operating cash flow is important because it indicates whether a company is able to generate sufficient positive cash flow to maintain and grow its operations, or whether it may require external financing.


9) Recent Announcements, Annual reports & Credit Ratings:

This section gives the information on recent activities like AGM, Corporate actions like Dividends, Splits. It also provides us with the latest information of Annual reports and credit ratings for the Debentures or Bonds issued by the company.



Also, another great feature of this is, this allows us to export all the above information into an Excel sheet. It takes all the data from www.bseindia.com.


You can also customize many things and create your own stock wish list.

 Go & Explore the amazing stuff available at www.screener.in

Happy Learning & Investing :)


Do join me in thanking Krishna for a comprehensive review of a stock screener.

Nifty at 10000 in 12 months?

Nifty at 10000 in a year? Before the next budget? Pretty sure most of you must have seen such headlines somewhere.  Here is a layman’s attempt at trying to figure out if these projections make any sense.

Nifty  vs. EPS YoY Growth Rate

First let us look at the way in which Nifty earnings per share (EPS) has grown year on year (YoY). To calculate this, first the EPS is computed (closing price divided by index PE) and then the growth rate is rolled over 1 year intervals.



Notice that the EPS growth rate (right axis) has been quite range bound in the last 5 years.   Looking at past growth rates during rallies, it seems to me that the rate at which Nifty has risen in the past 12 months is not as rapid as one would suggest. The rise is a sight for sore eyes, but one cannot trust sore eyes to make sound judgement.

Nifty EPS vs. Nifty PE



The nifty EPS (left axis) has pretty much increased at a steady pace of about 12% per year since Sep. 2002, barring the period during the 2008 crash and recovery.  More on this here: State of the Markets – April 2014

So I think one can safely project it for the next 12 months, assuming the same rate of growth (red line).

The EPS on Sep. 16th 2014 is ~ 376.

Projected EPS on Sep. 16th 2015 is ~ 397. Let us make it an even 400.

This corresponds to an EPS growth rate of about 6%.

This is perhaps a little too conservative estimate, but let us run with it.

Now if the Nifty touches 10000 on 16th Sep. 2015 for the first time,  the PE corresponding to an EPS of 400, will be 25.

Meaning: close to what experts would call, “extremely high valuations”.

Therefore, if the Nifty hits 10000 in the next 12 months with an annual EPS growth rate of less than 10%, the PE will become dangerously high. Meaning the so called ‘bull run’ will sooner or later come to crashing halt.

If the Nifty has to breach 10000, and  stay there for a decent amount of time,  the PE will have to be much lesser than 25.

If we assume the PE in a year to be about 22 with Nifty at 10000, the EPS has to be ~ 450.

This means that the EPS has to  grow by 20% from what it is today (16th Sep.).

Since the EPS has grown only by 8% in the last year, I am not too optimistic that there would be such a sudden surge in growth.

The current PE is ~ 21 (10Y average ~ 18.9). So even if the Nifty is at 10000, the PE is likely to be much higher than 22 as assumed above.

Let us hope/pray that I am proved wrong and that the Nifty comfortably breaches 10000 in a year and heads further northward :)

Jetpack Subscriptions Widget in a Pop-up Window

This is a one-off post intended for WordPress users and is not related to personal finance.

The post details a simple method of integrating Automattic’s Jetpack Blog Subscriptions widget with a pop-up plugin.

I use Jetpack for handling email subscriptions. I am used to it since my wordpress.com days and therefore felt no need to use another application for handling subscriptions.

When I wanted to install a pop-up window that urged readers to follow posts by email, I could not find any pop-up plugin that supported Jetpack.

The following steps allow a user to integrate Jetpack subscription feature to any pop-up widget that supports WordPress shortcode.

1)     Install “amr shortcode any widget” plugin

2)     Go to widgets page and add the “Blog Subscriptions (Jetpack)” widget to the  “Widgets for ShortCodes” bar (created when above plugin is installed)


3)     Install any pop-plugin that allows html formatting. I chose “Dream Grow Scroll Triggered Box” as it did not affect the browsing experience for readers.

4)     Go to Scroll Triggered Box  setting page.  In the Box html section, removed existing content and insert the text shown within the red rectangle.   You can also insert the same text in a post/page.


5)     Change other settings as desired.

Done! The Jetpack Blog subscriptions Widget should now be visible (and usable!) within the pop-up window. Here is a screenshot.



If you know better ways of accomplishing the same, do let me know.

Choosing Debt Mutual Funds For the Long Term

If my financial goal is 15-plus years away, PPF is an obvious and pretty good choice for a debt instrument while tying to put together a diversified portfolio.  ‘Which debt mutual fund should I choose for the same purpose, if my goal is less than 15 years away?’, is a question that is asked often enough.

The answer had presented itself to us earlier in an earlier post: Debt Mutual Fund Returns: How to expect when you are expecting!


I was quite astonished to see debt funds with high average maturity (typically medium and long-term gilt funds) had a 10 year CAGR comparable to liquid funds!

So why bother taking on volatility that does not pay? Why not be content with simple accrual type ultra-short term funds? As reader Deep pointed out in response to this graph, “no brainer to go for liquid funds as both credit risk and volatility risk are lowest”.

Let us now look at returns of all debt mutual funds categorized as per Value Research Online. The horizontal axis represents the number of mutual funds in each category and is not shown. Data is take from Value Research.

Last 10 year CAGR


Notice that liquid fund returns of all mutual funds are typically the same. So it does not matter which AMC you choose. What a relief! of course, this is just one data point. If we stare at  rolling returns, there will be some variation (see below).

Clearly funds with low average maturity  (liquid, ultra short-term and short-term) are less volatile across AMCs. Many comfortably best the  Debt-Income (including dynamic bond funds), Gilt-Short-term and Gilt-Medium and Long-term categories.

7 year average CAGR

Here is the average of the rolling 7 year CAGR.


Note:  It is unfair to include funds that hold bonds with maturity period greater than the duration over which we calculate returns. Therefore, when the duration is decreased the long-term funds lose relevance. However, I have included them in the graphs for an overall perspective.

Amusingly, this graph (and the ones to come) look similar to the 10Y return graph! The conclusions do not change!

5 year average CAGR

Average of the rolling 5 year CAGR.


Again, you can buy a liquid fund, liquid-plus fund or ultra short-term fund and relax!

3 year average CAGR

Average of the rolling 3 year CAGR.


Bottom Line

The next time an ‘expert’ says,  ‘match the average maturity of a debt fund with the duration of your financial goal’, Let us ignore them!

Let us now look at rolling returns of two funds: a long-term gilt fund and a liquid fund.

Long-term Gilt fund


Notice the progressive decrease in returns.  The 15 year returns are steady but not spectacular. Considering the volatility and associated emotional stress, I don’t think they are good enough.

Perhaps since the economy is supposedly reviving as we speak, interest rates will fall and the gilts will shine again!

However, 10+ years is more than one market cycle. So  what one gains when rate fall, one could lose when they rise again!  I am no expert, but I am willing to wager that this is the reason long-term gilt funds, if held for a long time, fail to impress.

 Liquid Fund

Liquid funds are not angels either! Their returns can vary quite a bit.


Please do not believe any ‘expert’ who says that liquid funds are better than fixed or recurring deposits. There is no guarantee that post-tax liquid fund returns would beat post-tax FD returns, irrespective of the duration. For ‘short time periods, liquid funds are suitable when the redemption date and amount are uncertain.

Why I will not invest in my child’s name

Many invest for their child’s future by opening minor accounts. That is they invest in the child’s name. Here is why I think this practice is unhealthy and offers no great monetary advantage in most cases.

This post is inspired by a thread on the subject at Facebook group, Asan Ideas for Wealth.

First, let us get the monetary aspects out of the way.

Monetary Aspects

Investing in the child’s name while he/she is a minor (less than 18 years of age) has no tax benefits. Tax on interest income or capital gains will have to paid by the parent as per income clubbing rules.

Many invest in the hope that the tax liability passes onto the child once they turn 18 and not yet started earning.

This makes sense only if the child turns 18 before he/she graduates from school. Most kids finish school before they turn 18.  Therefore, a major chunk of the money is likely to be redeemed before they turn 18.

In addition, if one had started investing in equity and debt mutual funds several years prior to school graduation, the tax liability would be minimal and more importantly the same irrespective of who pays the tax.

Either the long-term capital gain is not taxed (equity) or is taxed at a fixed rate with indexation (for debt funds as per current rules!).

Therefore, there is no great advantage in investing in the child’s name.

The tax liability is reduced only if the gain/interest income is taxed as per slab (eg. Fixed deposit), assuming the child starts earning at a lower slab than the parent does.

However, in the case of fixed deposits, tax on interest income is typically (not necessarily!) paid and declared each financial year. Therefore, for the most part of the investment tenure, the parent would be paying the tax.

Of course, anyone who understands the concept of a real return would stay away from fixed deposits.

What about investing in the child’s name for their marriage expenses? Nothing disadvantageous in this case from an operational point of view. Nothing spectacularly advantageous either, for the above reasons.

Why mixing finances? I would like to pay taxes on the gains I make with my money.

Like Father, Like Son

Non-Monetary Aspects

Whether we procreate by design or accident, the moment the pregnancy is confirmed, our responsibilities as parents begin. See, How to plan for your child’s education and marriage for more on the subject.

It is our duty to ensure our children pursue their dreams. We should allow them to perceive their calling when young, and fund their calling (either a college degree or  seed capital for an enterprise) at the appropriate time.

Therefore, we need to invest enough time, affection, attention, and of course money to make this possible, all the while not ignoring our own retirement plans. A tough balancing act!

While from the parent’s point of view the duty is unconditional, it cannot be so from the point of view of the child.

That is the child can (if not should) expect financial support from parents provided,they have displayed enough evidence that they are worthy of such support.

I think as parents we must make this quite clear to them from an early age.

All well to say “I am interested in pursuing X/Y/Z degree”. That interest should be backed by effort, focus and a sense of purpose during school years.

The same goes for those who wish to become an entrepreneur with or without going to college.

If I do not see evidence of effort and a sense of purpose in my children, I will not blindly fund their future.

I did not say that I won’t fund their future, just that I will not do so unconditionally.

By investing for my child’s future in my name, I legally reserve that right over the accumulated corpus.

Trust and love are two different things. I love my son unconditionally. If he turns out be an axe murder, I will do what Mr. Brooks did in the movie, Mr. Brooks  (read  story here).

Trust in certain matters cannot be unconditional. I will not blindly fund a lazy bum. Especially one who shares my DNA.

Most parents believe that ‘good parenting’ would result in a ‘good’ child who will not disappoint them.  Parenting with expectations is beyond naïve.

Also, some believe that investing in the child’s name is a good way of teaching them money management and making them feel responsible. I fail to see any logic such thought processes.

Money management is a skill that must be learnt and honed with practice.

How will investing in a minor account which the child cannot operate independently help in this regard?

Why not keep it simple and invest in our own name?

Quantitative vs. Qualitative Mutual Fund Analysis

What factors should we consider before choosing a mutual fund or evaluating a mutual that we hold? Should we only look at star ratings? Should we consider only returns? Risk-adjusted returns perhaps? Should we track the actions of the fund manager? Should I understand the kind of stocks that he/she has picked or is likely to pick? Such questions drift past our minds from time to time.

In this post let us look at some quantitative and qualitative methods of analysing mutual funds. Obviously, we need both types of analysis before choosing a fund or evaluating a fund holding. The extent to which we use each type depends on our aptitude and experience.

We will also look at the bare minimum knowledge of each type necessary for the newbie investor or the typical retail investor.

Quantitative analysis is the study of easily accessible and perhaps tangible information associated with a mutual fund. This is most often the NAV history, which is compared with its benchmark history in several ways.

Quantitative analysis treats the mutual fund like a black box.  Funds are clubbed together based on the market cap of the portfolio and relative performance is evaluated.

All star ratings fall under this category.

The style of investing (for e.g. Growth stocks or Value stocks – see below) is not explicitly taken into account in the analysis. However the fund categories take care of that to a certain extent. For example, large cap funds typically have majority of growth stocks in their portfolio.

We can say nothing about the future performance of the fund as we only use past data (NAV history).

We can however evaluate past performance in different ways:

  • Absolute volatility (standard deviation) and volatility relative to the benchmark (beta) (see this for more details)
  • Correlate NAV movement with benchmark movement (R-squared). For example, holding two funds with high R-squared wrt the same benchmark is diworsification.

There are many more methods, which we shall hopefully discuss in the future.

We pay so much attention to past performance because pedigree is important to us. We do not want to invest our money in an unknown fund.

Of course, it is important to keep in mind that good pedigree does not mean good performance in the future.

While quantitative methods help build investor confidence while choosing a fund, they are vital while evaluating a holding and for portfolio analysis.

If our portfolio return sudden changes (either positively or negatively), quantitative methods help us to locate the hero or culprit and more importantly, the extent of outperformance or underperformance, as the case maybe.

However, identifying and analyzing culprits (assuming heroes are not analyzed like in the current bull run!) is one thing. Exiting a fund or stopping investments based on this data is quite another.

One should not exit the fund unless we are clear about the investment strategy, the nature of stocks in the portfolio, the market outlook (and of course, when we need the money). The fund managers track record during a market cycle, and the AMCs pedigree in terms of strategy are also important.

Also, while choosing a fund, it is important to understand what kind of fund it is. What is the investment strategy. If an identical fund exists in the portfolio. Will the portfolio become more diversified if we buy this fund.

This is where qualitative analysis helps us make better decisions.



Qualitative analysis is the study of the internal machinery associated with a mutual fund. The nature of the portfolio. The type of stocks chosen. How often the fund manager makes changes. The overlap with the benchmark. What is the strategy of the fund? Has it remained true to its mandate. Has the stock-picking style changed with fund manager (or fund house after a take-over or merger!).The pedigree of fund house.

Both methods use mathematics. The word qualitative does not imply that math is not used!

For example, a fund is classified as a ‘growth fund’ or ‘value fund’ by studying the price-to-earnings (PE) and price-to-book (PB) ratios of the stocks in the portfolio.

Growth stocks are those which are expected to grow at a faster pace than the market. They belong to established companies. They typically have higher PE and PB ratios than value stocks. Value stocks are potential growth stocks. That is they are available at prices much lower than what investors think they are worth.

The simplest qualitative method an investor encounters is the classification of funds on the basis of market capitalization: large cap, mid/small-cap, multicap, large and mid-cap etc.

Within each category the nature of the stocks can be found out by looking the fund style box.

Morning Stars equity style box looks like this. Value Research online also has a similar style box.


Debt fund style boxes have interest rate sensitivity and credit quality instead of market cap and stock type.

Some investors believe they should hold 2/3 large cap funds and 2/3 small/mid-cap funds in the hope of reducing downside risk. This thinking is devoid of logic.

Not only might the funds have significant overlap of actual stocks, they would also have significant overlap in investment styles. So this is just diworsification. Keeping it simple when it comes to portfolio construction is vital to portfolio health (see below).

Many aspects of qualitative analysis require knowledge of the fund portfolio and its history.

The performance of the fund manager can be dissected in many ways. Was his/her success a result of intelligent decisions or luck? Which sectors in the portfolio resulted in the highest gains. Which sectors or stocks led to the biggest fall etc.

This is known as attribution analysis.

Here is a write up on the subject by those who run thefundoo.com.  This analysis is available for premium subscribers (typically advisors) at thefundoo.com. Update: Fundoo CEO, Sharad Singh just announced in FB group, asan ideas for wealth that attribution analysis is also available free from today!

The extent of active management can be determined in various ways. While all of them are in terms of numbers, some require knowledge of the portfolio. Active Share is one such measure. I would therefore classify it as a qualitative method.

To quote investopedia,

Active Share is a measure of the percentage of stock holdings in a manager’s portfolio that differ from the benchmark index.

….managers with high Active Share outperform their benchmark indexes and that Active Share significantly predicts fund performance.

I am more of a quantitative person and don’t know more about qualitative methods. Hope to learn and write more on this in the future.

One of my personal finance influencers, Ramesh Mangal is partial to qualitative analysis.  Anyone who has read his comments in the facebook group, Asan Ideas for Wealth will testify to that.

Here is a qualitative approach to fund selection:  How to Select a Mutual Fund – Expanded Guidelines

Vidya Bala of FundsIndia does a commendable job of balancing both approaches well. As long as one does not tinker with ones portfolio each time she reviews an NFO or makes changes to their ‘select funds’ list, one can learn much from her writings.

Value Research Online offers only quantitative analysis (star ratings). Morning Star India offers both: Star ratings and what they call analyst ratings.

The analyst ratings vary from Gold (best), Silver, Bronze, Neutral to Negative (worst).

The analyst rating is a qualitative analysis in which they evaluate the future potential for outperformance. More about this here and here

Amusingly I once found a five star-rated fund with a negative analyst rating!

While an analyst rating should not be used in isolation, I will stick my neck out and say that I find it much more level-headed than star ratings.

When HDFC Top 200 and HDFC Equity was underperforming (relative to other funds), investors were all ready to quit them. Morning Star analyst ratings urged them to remain calm keep the faith.

When Reliance Growth underperformed, Morning Star analyst research pointed to a change in character of the fund (more large cap exposure possibly because of fund size). If I am not wrong, they downgraded the rating to neutral.

Such a negative review, combined with poor performance (see quantitative analysis here) is enough to exit the fund. NAV is just a number. It is irrelevant to me that funds NAV has climbed to 700.

Unfortunately, like star ratings, analyst ratings is not available for all funds. I am not happy with Morning Star in this regard. They seem to pick and choose funds that they want to qualitatively analyze.

 What should a newbie investor or the typical retail investor do?

Obviously use both strategies. However, there is hardly any need to go in-depth either qualitatively or quantitatively.

Here is a set of simple steps that one can adopt.

1) Quantitative:

2) Qualitative:

  • Once the categories are finalized, the asset allocation according to the risk profile has to be decided. Refer to this if you need help: A Step-By-Step Guide to Long Term Goal-Based Investing
  • Then a suitable portfolio diversified within each asset class must be decided. This helps us identify the class of funds within each category (large cap, mid-cap etc.).

3) Quantitative:

4) Qualitative:

  • If we keep it simple, either choose a single balanced fund or just one large-cap fund and one small/mid-cap fund or just one large and mid-cap fund, we do not have to worry about investing styles of the funds.
  • The pedigree of the fund house is important to an extent (Morning Stars analyst research of any fund from that fund house can be used for this). The tenure of the fund manager is also important.  If a new fund manager has just taken over, should I choose the fund(?), is a reasonable question. Tough to answer though. Some funds are independent of fund managers. The fund house has a clear mandate and the manager usually follows this. Typically such managers are not stars. Some fund houses seem to rely on one person a little too much. Not sure if that is good or bad. Perhaps a star fund house is better than a star fund manager.

I think that should do for choosing a good fund or evaluating an existing holding. Believe me, it is easier that it appears.

Any prolonged underperformance must be taken seriously.  Qualitative methods gain importance during such times since a decision (hold/buy/sell) will have to be taken.

Which is why it is always a good idea to collect the monthly portfolios of the funds that you hold and stare at them from time to time!

Phew! What do you think?

PPF: Before 5th vs. After 5th

A little too much is made of the importance of investing in PPF before the 5th of the month.  How important is this? What if I fail to invest before 5th for a few months? Should I beat myself up about it?

Let us find out using the PPF tracker/calculator recently published.


Annual investment limit: Rs. 1,50,000

Interest rate fixed for the entire tenure: 8.7%

Fixed Monthly Investment: Rs. 12,500 or

Fixed Annual Investment: Rs. 1,50,000

Investing each month

Final Maturity value if all the monthly investments are made before the 5th of the month:  Rs. 45, 04, 384

Final Maturity value if all the monthly investments are made after the 5th of the month:  Rs. 44, 73, 197

Difference: Rs. 31, 187

PPF before 5th after 5thI hope you will agree with me that this difference of Rs. 31,18 7, to be realized after 15 years is trivial.  The person who always invested before the 5th gained about 2.5 times the monthly investment compared to the person who always invested after the 5th.

It hardly matters when you pay the subscription.

Of course, if you choose not to invest the maximum Rs. 1.5 Lakh in PPF    and had invested the money if equity, you will, after a few years of investing, gain or lose Rs. 30,000 (or more!) in a single day!

Of course 44-45 Lakhs after 15 years is not a great achievement either, even if it is tax-free.

But then again, PPF fans are oblivious to such realities.

Investing once a year

There are those who believe that it is best to make PPF investments between April 1st -5th of each financial year.  Let us find out how beneficial this is.

Maturity value if yearly investment of Rs. 1.5L is made before April 5th for 15 years:  Rs. 46,75, 914

If monthly investments of Rs. 12,500 are made before the 5th of the month for 15 years, the maturity value (as seen above) is: Rs. 45, 04, 384

The difference is 1,71, 529 . This is indeed significant.

However, how many  members of the PPF fan club can afford to shell out Rs. 1.5 Lakhs in one shot?

They can always delay the opening of the account by a year, until they have enough to make annual investments and then ensure they invest once a year before April 5th.  How practical would that be  (wrt to the financial goal), is something that each person will have to decide.

Also, the delay of a year should be taken into account if someone wants to compare ‘benefits’.


Maturity value if yearly investment of Rs. 1.5L is made after April 5th for 15 years:  Rs. 46,44, 726

Again, the difference between ‘before 5th’ and ‘after 5th’ yearly investments is only Rs. 31, 187

Bottom Line (for PPF fans)

Forget about the ‘before 5th’ vs. ‘after 5th’ nonsense. Invest what you can, when you can.

Bottom Line (for investors)

There is more to investing than tax-saving and EEE instruments. Invest according to an asset allocation suitable for financial goals.  PPF can certainly be part of a portfolio with investments in line with the asset allocation.

Let us not forget that securing 8-9% growth over 15 years could well result in a negative  real return!



The PPF vs. Equity Debate

On Aug. 25th 2014, the Economic Times carried an article titled, PPF investment can beat Sensex returns over 20-year period. They showed that between Aug. 1994 to Aug. 2014, Sensex returned an annualized return of 9.15% while the PPF returned 10.46%.

Needless to mention this article created a lot of buzz among investors and distributors. Investors panicked and wondered if they were right to have started that SIP a few months ago.

Five days later, the distributor portal CafeMutual carried an article  (Can PPF beat Sensex returns over 20-year period? ) whose sole purpose was to debunk the Economic Times article.

The CafeMutual article pointed out that only one time period was considered by the ET correspondent and that dividends from the Sensex were ignored.

Therefore in order to disprove the ET article three different dividend yields were added to the Sensex CAGR of 9.15% to ensure it is higher than PPF.

Now everyone can rest easy. Equity is the better instrument! So why write another post on the subject?

Fair question. Let us begin by quoting some important lines from the ET article which seems to have escaped the attention of those who found it troubling.

While this study is no suggestion that a PPF is a far better option than equities at all times, it just reinforces the fact that timing is critical in the capital market. Despite the recent rally, Sensex’s annualised return for a period of seven years is only 8.10%, if you have entered at the fag end of the previous rally (i.e., in August 2007).”
“….retail investors who are entering the ring now need to be mindful of the fact that they may not get the kind of returns from equities as seen in the recent past. In some instances, it also doesn’t make much sense being a long-term investor in equities”

Amusingly, the Cafe Mutual article has the following to say:

“…. our attempt is not to prove that equity would always outperform PPF for periods as long as 20 years, since we have also presented only one data point. The idea is not to prove equity as superior to anything else, but to highlight the fact that if some part of the data is ignored (dividends) , a totally different picture may emerge. Equity is a risky asset class and hence one should not expect 100% guarantee of positive returns, whatever the period.”

Then it goes on to state,  “PPF investment can beat Sensex returns over 20-year period – it can, but not this time…” (in the above mentioned period)

Now let us satisfy our curiosity by looking at all possible 20 year CAGR constructed out of Senex returns for all financial years from 1979-80. The period covered is different that considered above, but that should not make too much of a difference.


This chart was constructed with the Excel sheet available at: Understanding the Nature of Stock Market Returns

A notional 2% dividend was added.  It does not matter though. I think it is safe to say that PPF has beat the Sensex over only one 20Y period (the one surrounded by a green rectangle).

So shall we rejoice? Rest easy and assume that our equity  SIPs will definitely beat PPF returns? Shall we emphatically state that equity will beat returns from fixed income instruments?

Not so fast. Do so at your own peril.

Let us you will have to pick a stone, eyes closed, from a box containing black and white stones. Pick a white stone, you win. Pick a black stone you lose. History suggests that white stones were picked more often than black stones.

I cite this fact and persuade you to pick a stone.  Will you pick with the confidence that you cannot lose because most people who have picked in the past have not lost?

Equity investing is not very different.

Notice the spread in the above returns. The maximum return (before dividends) is 20% and the minimum return is 7%.

So clearly the return depends on when the investment begins. It does not matter whether it is a lump sum or SIP. In equity investing, the sequence of returns determines the final returns. This is crudely referred to as ‘luck’ or ‘market timing’.

This is the main message of the ET article: returns depend on when you start investments. Sometimes one can beat PPF and sometimes not. Past performance is irrelevant.

If I were a mutual fund distributor, I will choose to ignore this fact. Since I am a retail investor, I cannot afford to ignore it.

The huge spread in returns observed in the past is the reason why equity investments must be regularly monitored and course-corrected.

It is beyond naive to assume that letting a SIP run in a mutual fund for years will get the job done.

Comparing a fixed income instrument with an unmonitored equity instrument serves only one purpose: It serves as a reminder that volatile instruments must be monitored!

Update: PPF Calculator and Tracker

This is an update to the Excel PPF calculator and Tracker posted yesterday.

Thanks to suggestions from Sundaram Anathakrishnan, Hemanth Chandra, Basavaraj Tonagatti and Deepak Rao the following changes have been incorporated.

1) The logic associated with withdrawal limits  and loan availability has been checked and updated. They are now in sync with this resource sent by Mr. Sundaram Anathakrishnan.

2) The user now has an option to input whether the investment was made before or after the 5th of the month. I forgot all about this earlier!

3) The user can now input the exact month in which the withdrawal is made

4) An extension tracker for  a user who has extended the tenure by 5 years. Two extension blocks are covered.

Please check the sheets and let me know if there are errors and if any more features need to be included.  I would like to thank Karthikeyan Chellappa for making the original calculator (included) from which the tracker was made. It would not have been possible without his effort.

Here is a screenshot of the tracker

Excel PPF Calculator and Tracker


Download the updated PPF Calculator and Tracker (.xls file) (macros to be enabled for goal calculator)

Download the updated PPF Calculator and Tracker (.xlsx file) (macros to be enabled for goal calculator)

Excel PPF Calculator and Tracker

This is a guest post by Karthikeyan Chellappa. He has created an neat PPF calculator which can be used to

1) calculate maturity value for fixed, monthly, Quarterly, half-yearly or annual investment or

2) calculate fixed investment requires for a required maturity value.

He was generous enough not to password protect the sheet.

I have created a PPF tracker by making simple modifications to his sheet.

The tracker can be used for new and existing PPF accounts.

The interest rate and investment limit can be varied each financial year. It also accounts for withdrawals made.

The tracker gives the loan and withdrawals limits for new PPF accounts. (This is based on my understanding of PPF rules. Kindly let me know if you think this is incorrect).

Here is a screenshot of the PPF calculator.



Do join me in thanking Karthikeyan for this ‘open-source’ calculator. Do let me know if additional features are necessary.

I post this with apologies to reader Aditya Maheshwari for taking this long to post a PPF calculator. I was simply too lazy to do it. Thankfully Karthikeyan came to my rescue.

Download the Latest Version of the PPF Calculator and Tracker

Older Versions:

Download the PPF Calculator and Tracker (.xls file) (macros to be enabled for goal calculator)

Download the PPF Calculator and Tracker (.xlsx file) (macros to be enabled for goal calculator)

Thanks to Sundaram Anathakrishnan for pointing out a bug in the tracker sheet.

Anatomy of a Bull Market

The markets are on fire this year. For many, including me, this is the first bull market.  We have all made phenomenal gains and hope the run will continue. However, between early Jun to early Aug 2014, the market went nowhere. All though relative to the long history of the market and relative to any long-term goal like retirement, this period is like a blink of the eye many were concerned!

When the markets moved northward after that they were worried about the ‘new highs’. Soon followed questions like, ‘should I continue investing?’, ‘can I start a SIP now?’, ‘should I book some profit?’, ‘should I rebalance now?’ etc.

If this is a bull market, we have been in one since the middle of 2012. If this is a bull market, I think it would serve us all well if we examined the previous bull run. Hopefully, this will prepare us better.

First let us start at a plot of the Nifty and it PE between 25th April 2003 to 14th Dec. 2007.



Notice the prominent dips as the market moved up. They were mini crashes as they occurred with a month.  Investors who got scared and pulled out during these dips would not have benefited from the rest of the run.

Who could blame them? Have a look at the monthly gain or loss chart



During the bull run, the market moved up by about 10% each month on an average, but there were prominent losses. Over some months, the Nifty lost close to 10% (4 time), 20% (once) and 30%(once).

Now let us look at how the CAGR of a lump sum investment made at the start of the ‘bull run’ would have evolved.



From euphoric triple digit highs the CAGR sharply dropped to settle down around 50-60% range! With each prominent monthly loss, the CAGR dropped down noticeably.

The final CAGR at the end of the period was 56%.

This is how a SIP made during this period would have evolved.



Total investment: 1000 x 55 (months) = 55000

Total Value: 1,53,511

CAGR (final): 46%

This is how the CAGR evolved after each installment of the SIP



The initial high values observed are normal.  CAGR becomes reliable only after 1 year.

Notice that at one point the CAGR dropped to 11%.  Again with each prominent monthly loss, the CAGR dropped down noticeably.


A bull market is no joyride.

The market is likely to correct itself from time to time, consolidate and only then move up.

The corrections would be violent, leading to significant losses. Whether these losses or notional or real depends on the grit of the investor.

I will conclude with two relevant quotes:

“I’m not telling you it’s going to be easy – I’m telling you it’s going to be worth it.” ― Art Williams

“Fasten your seatbelts, it’s going to be a bumpy night” ― From the movie “All about Eve”


Fund Review: Franklin India Prima Plus

From time to time I would like to review mutual funds using Excel tools published. The main objective behind this exercise is to illustrate the mutual fund review process, showcase the utility of the Excel tools and provide alternative investment alternatives if relevant.  If you like the funds reviewed, please consider their place in your portfolio before choosing them.

Fund Name: Franklin India Prima Plus (FIPP)

Type: “Primarily a large cap fund with some allocation to small / mid cap stocks”

Inception Date: 29 Sept 1994 (another Franklin fund approaching 20th anniversary!)

Fund Size: 2660.57 Crores

Benchmark:  CNX 500

Source: Fund Website

Extract from Scheme Information Document:

FIPP is investing for growth of capital primarily through a diversified portfolio of wealth creating companies across market capitalisation ranges.
Wealth creating companies are defined as those, which have the potential to produce returns consistently in excess of their cost of capital. The ability to achieve this is derived from sustainable competitive advantages emanating from intellectual property rights, proprietary technologies, well known brands, sound business strategies, management quality and so on. The intrinsic value of these companies rises with time. The stock market sooner or later acknowledges their unique contribution and rewards investors in such companies.

Investment objective and policies

The investment objective of Prima Plus is to provide growth of capital plus regular dividend through a diversified portfolio of equities, fixed income securities and money market instruments.
Asset allocation pattern

Under normal market circumstances, the investment range would be as follows:

Franklin India Prima plus

The fund managers will follow an active investment strategy taking defensive/aggressive postures depending on opportunities available at various points in time.
The scheme may enter into derivatives in line with the guidelines prescribed by SEBI from time to time. The scheme may take exposure in derivatives up to a maximum of 50% of its AUM. The exposure limit per scrip/instrument shall be to the extent permitted by the SEBI Regulation for the time being in force. These limits will be reviewed by the AMC from time to time. Trading in derivatives by the scheme shall be restricted to hedging and portfolio balancing purposes.

It must be clearly understood that the percentages stated above are only indicative and not absolute and that they can vary substantially depending upon the perception of the Investment Manager, the intention being at all times to seek to protect the interests of the Unit holders. The asset allocation pattern described above may alter from time to time on a short-term basis on defensive considerations, keeping in view market conditions, market opportunities, applicable regulations and political and economic factors. However, if the asset allocation pattern is to be altered for other reasons, as this is a fundamental attribute, the procedure outlined in the paragraph on fundamental attributes below, shall be followed.

Impression: FIPP appears to be an older cousin of Quantum long term equity both in terms of portfolio and investment style.  Let us check its track record.

SIP and Lump sum Returns

Using the Mutual Fund Risk and Return Analyzer, we have (click to enlarge)


A terrific record! However did it come by taking on more risk?

Risk-return Score


Extraordinary! This is better than HDFC Top 200, HDFC Equity and most other popular funds.

Capture Ratio: Measure of outperformance


A Capture ratio is a simple measure of the following scenarios:

  • When the benchmark has given a positive return (> 0), has the fund outperformed it?
  • When the benchmark recorded a loss, that is a negative return (< 0), did the fund record a lower or higher loss?

A Capture ratio higher than the benchmark represents consistent outperformance. See this post for more details.

FIPP has done a pretty good job in this regard. It has good downside protection.

Ulcer Index: Measuring Investor Stress

How stressful was it for investors to stay invested in FIPP? The Ulcer index measures this. Details here.


Notice how the Ulcer index of the fund has been lower than that of CNX 500, its benchmark. This is a terrific performance!

Rolling Returns: Measuring Consistency in performance


This is the rolling 5 year CAGR. Except for a brief period around the end of 2013, the fund has comfortably beat CNX 500.

Computed  with the multi-index rolling returns calculator

Peer Comparison: QLTE vs. FIPP

Perhaps this is not a fair comparison as their strategies are not identical. VR online lists them in the same category so I am curious!

Using the Mutual Fund Analyzer: Fund A vs. Fund B, we have


A score above 50% implies FIPP has done better than QLTE. Thus FIPP has outperformed QLTE in the last4 years. Before that QLTE has triumphed.


The returns comparison also paints a similar picture.

Capture Ratio


Fund A (FIPP) has better downside protection than Fund B (QLTE). This is the reason FIPP has a superior capture ratio.

Ulcer Index

If we go by the NAV movement, QLTE seems to be better than FIPP. However, the Ulcer index of FIPP is lower than QLTE. Especially during the 2008. crash. This implies that FIPP has better downside protection.


Franklin India Prima Plus is a terrific Large and Mid-cap fund. Instead of having separate larg-cap and mid/small-cap funds, one can consider holding just this fund. Due to its dynamic asset allocation strategy, it has the potential to offer better risk-adjusted returns.

How to get kids interested in money management

A few years back, I took my entire M. Sc class to lunch. Don’t remember why. They probably coerced me into it!  As someone who never eats outside, I was clueless about pricing and was trying to get a rough estimate as they wanted to go to a high-end place (relative to the campus cafeteria!). One of the students said, “Why worry sir! Just use your credit card. Swipe karo!” The student was no kid. He was about 22!

Is that how credit cards work?! You swipe and forget about it!? I ask because I don’t own one. Perhaps we should ask those who use credit cards for emergencies.

I think the need to get kids interested in money management cannot be overemphasised. Interested, not teach. You start teaching and they run away.

Here are a few thoughts on this subject. I am a father of a 4.5 year old. So let me not pretend to know much about parenting children above that age.  That said, I am fairly convinced that the following would work.

1) Let them touch and feel money at an early age.  Let them see it change hands. Let us try not to use credit or debit cards in their presence because they should feel a sense of loss when a purchase is made.

2) Sooner or later they are going to want something or the other. Be it a fancy tablet, mobile, i-pod, whatever, if we can’t afford it, let us say a firm ‘no’.

If we can afford it, let us ask our kids to research on similar products available for at least a week.  They would need to first make a short-list, compare features, watch product reviews on youtube, check out the manuals, discuss it with us and then decide. Obviously this applies to big ticket purchases only. One need not research over a bar of chocolate (although it won’t hurt to do so!).

It has to be their call, but an informed one.  The benefits of insisting on this early in their lives will show up when they are ready to plan for taxes and make their first investments.

If we succeed in this regard, we can declare ourselves victorious for all practical purposes.

They will teach themselves the importance of  not making impulsive buys,  of research for product features, of reading fine print etc.

If it is a big-ticket or affordable purchase, we can ask them to wait a few months while we save for it. Start an RD or invest in a liquid fund etc. If the kid is interested, we can ask him/her to use a goal planner and figure out the amount needed.  They will need to worry about interest rates.  They can search for this as well. We can push as much as they are willing to take it.

Even in this day and age of online spending and investing, this little guy has a special place in instilling discipline.
Pink Piggy
3) I am not a big fan of paying kids money for doing chores or even giving them pocket money.

Participating in household chores  is mandatory for all family members and one cannot put a price tag to it.

As regards pocket money, I don’t think it helps in anyway. I think it is a bad idea to give kids some , ‘do whatever you want money’.

4) Budgetting should be a family activity. It was until a couple of years back in my family.  When my kid grows up a bit, I should restart that. Kids should see (hopefully observe; they usually do) how the monthly income is segregated into different compartments (expenses, investments and liabilities). Hopefully, they might ask a nice question like, “why do you invest?”. Perhaps we should also throw in some light jargon like, investing, saving, wants, needs etc to get them curious.

5) What about investing? There is no flaming hurry to teach about equity, stocks, PPF etc. I think it is enough if the parents discuss investments in their presence.

6) The importance of giving is more important than spending or investing.  We will need to regularly engage them and ourselves in charity events, donate to organisations, volunteer if possible.


Debt Mutual Fund Returns: How to expect when you are expecting!

We choose a type of instrument almost solely based on the kind of returns that it can yield.  Thus, our expectation is governed by past history. While there is nothing wrong with this, past returns can vary quite a bit, and depends on the period chosen for evaluation.

While it is a good idea to base expectations on past history, only must also understand and appreciate the uncertainty  associated with the expectation. The uncertainty will depend on the type of instrument and the duration of intended investment.

Regular readers know that I am a fan of the standard deviation and would recall that it can be used to select mutual fund categories suitable for financial goals.

The standard deviation listed by mutual fund portals like Value Research, Money Control, Morning Star etc. are typically based on monthly/weekly returns. While they can be used to represent the expected volatility associated with an instrument, they are not an accurate representation of the volatility or the uncertainty associated with past returns and therefore with future returns.

Why not,

1) consider  past annual returns of an instrument,

2) calculate the arithmetic average (not CAGR which is the geometric average),

3) calculate the associated standard deviation of the annual return,

4) Assume the arithmetic average ~ the expected future return from the instrument, plus or minus the standard deviation.

An example might help:

Let us consider the annual returns of Kotak Liquid Fund (source Value Research online)


The arithmetic mean or average = 7.33%

The standard deviation is 1.91%

So if I wanted to invest in Kotak Liquid, I will expect a return of about 7% give or take 2% (1.91 is approximated to 2%)

That is I will expect a return from 7% -2 % = 5% to  7%+2% = 9%

Calculating standard deviation this way, gives me a better idea of the range over which returns have fluctuated in the past. Although past performance may not repeat in the future, I have a foot hold with respect to expectations.

According to VR online, the fund has a standard deviation of 0.26%. Since this is calculated with monthly/weekly returns, it does not help me much since I am interested in annual returns.

The value of 0.26% when compared with corresponding data of other debt fund categories gives me an idea of relative volatility.

The value of 1.91% calculated with annual returns gives me an idea of absolute volatility.

This is how the standard deviation calculated with monthly/weekly returns evolves with respect to the average maturity of all debt fund portfolios.


Notice that region inside the red rectangle (< 1% standard deviation and < 1 year maturity) is heavily populated.  These are liquid funds, ultra-short term funds, short-term income and gilt funds.

If the standard deviation of annual returns is used instead (below), notice that most of the points are outside the red rectangle.


Thus, if we use the standard deviation of annual returns, we find that even liquid funds are quite volatile.  That is their annual returns can vary by a significant amount.

Higher  the average maturity, higher the standard deviation in both cases.

Amusingly the 10 year CAGR (geometric average) is 7.31%. Not very different from the arithmetic average.

The difference between the two averages is another measure of relative volatility.  The difference will be zero for a fixed deposit. Higher the difference, higher the volatility.

When the difference between the arithmetic average and the CAGR is plotted versus the average maturity in years of all debt fund portfolios, this is how it looks like.

Debt mutual fund returns

 Notice that the difference between the arithmetic average and CAGR is negligibly small for average maturity periods less than 1 year. Beyond that duration, the difference rapidly increases. However, even for the longest maturity periods  (long term gilt funds), the difference is less than 1%.

Therefore, the simpler arithmetic average of annual returns is a pretty good alternative for the CAGR and could be set as the average return one can expect from a debt mutual fund.

The same will not be true for equity funds due to their much high volatility. We will consider these in another post.

The  relative volatility (difference between arithmetic mean and CAGR) shares an interesting relationship with the absolute volatility (standard deviation of the annual return).


Notice how smoothly the curve evolves for all debt mutual funds.  The evolution is faster than a straight line. Thus, the difference between the arithmetic average of returns and CAGR becomes more prominent at higher  standard deviations.

Finally, a look at the CAGR of all debt mutual funds 10 years or older. This would give us an idea while planning for goals.

That does not paint a pretty picture at all!. The long-term return of funds with high average maturity (eg. long-term gilt funds) is comparable to funds with low average maturity (eg. ultra-short funds, short-term funds or even liquid funds)!!

Thus, if one wishes to invest in funds with high average maturity, they should actively manage the fund. That is, they should shift gains (to equity, for example) when interest rates drop, or invest more when the interest rates rise. A ‘buy and hold’ strategy with such funds may not be beneficial.

Ten Questions Every Investor Should Answer

Here are ten questions that every investor should answer. I have inserted links to relevant posts for some questions.

If you are DIY investor or intend to be one, ask yourself these questions. If you have engaged a financial planner, ask these questions to the planner .

If  you have any suggestions that would help us all answer these questions better, I am all ears.

A suggestion: please copy these questions on a word processor and answer them. Include relevant links etc.

Here goes:

1) Have I listed all my financial goals, categorised them as per duration and decided on suitable asset allocation for each goal?

2) Have I determined how much I need to invest for each goal as per the intended asset allocation?

Related posts: A Step-By-Step Guide to Long Term Goal-Based Investing

3) Have I determined how much I can invest for each goal and begun investing?

4) Do I have a plan to tackle the shortfall in the investment amount?

5) Is my portfolio diversified across asset classes and diversified within each asset classes?

6) Am my monitoring my investments month by month? Am I maintaining a schedule?

Related posts: Monthly Financial Tracker


7) Am I monitoring my net  portfolio value and returns for each goal at least once a year? Do I know if I am on track wrt each goal and if not, have I determined the cause? If my goal is to build wealth, am I tracking the CAGR and taking steps to

Related posts: Automated Mutual Fund and Financial Goal Tracker

8) Do I know how to measure risk of an instrument or portfolio? Do I understand the idea of risk-adjusted return? Do I understand the importance of downside protection?

Related posts: 

Simple Steps to De-risk your portfolio

Understanding Risk-Adjusted Return

9) When do I exit a poor performer? Do I look at only returns? Do I look at the nature of the holding and make a call? Am I  tracking the holding month by month (eg, mf portfolio)?

Related posts: Mutual Fund Risk and Return Analyzer

9)  Do I know the importance containing portfolio volatility? Do I know the importance of rebalancing?

Related posts:  The What, Why, How and When of Portfolio Rebalancing With Calculators to Boot

10)  Am I going to be a ‘buy and hold’ investor or am I going to use ‘tactical asset allocation’? If I am going to make tactical calls, have I decided on what basis am I going to act? PE ratio, PEG ratio, FearGreedIndex, GDP? How am I going to ascertain  the ‘state of the market’?

Let me add one more which can be handled down the line.

Mis-buying is independent of Mis-selling

Every so often one hears the passionate refrain, ‘I have been conned into buying XYZ policy by my agent/adviser/relationship manger …., what should I do?, … how can we complain against such mis-selling?’

Do such people deserve our sympathy? Have they been mis-sold a policy or a product? Who is to blame? The buyer? The seller or the regulator?

First, some  reasonably clear distinctions.


The act or rather the science of making an informed decision. Understanding ones requirement, narrowing the category/class of product required and trying to choose one from it.


 The act or rather the art of persuasion. Projecting a product to ensure a potential client gets a “wow experience” as one self-proclaimed ‘financial coach’ put it.


  1. Buying products with a blindfold.

Blindfolded Venus. Photo Credit: Gastev

Examples include,

  • Buying for saving tax!
  1. Assuming a ‘packaged product’ like a ‘child plan’ or ‘pension plan’ will do the job.


 Persuasion with misinformation.

  1. When an insurance or mutual fund intermediary tells a potential client,  ‘this plan is well suited for retirement, children’s education etc. ’, it is selling. They are merely pitching a product. Even if they call it as ‘the best product for ….’, it is still selling. When the buyer wants the ‘best’, why can’t an intermediary suggest one?!
  2. If they use phrases like “guaranteed return”, “assured return” or  any specific feature that is not part of the offer document, it is misinformation and therefore mis-selling.

In both cases, if the investor buys the product without due diligence (meaning, without reading the offer document and evaluating their own need), it is mis-buying.

One can claim that the mis-buying is a result of mis-selling, but that won’t hold much water. If a buyer evaluates the need for buying thoroughly, it is nearly impossible to buy the wrong product.

People end up mixing insurance and investment because they do not recognise the importance of inflation. Are often clueless about how much they need for a financial goal and put tax-saving before goal-based investing.

Thus, mis-buying is independent of mis-selling or misinformation.

If a perfectly legal sales pitch, free from misinformation is not evaluated properly, it is mis-buying.

There is no point blaming the intermediary or ask what is the regulator doing.  The regulator can only lay down the rules. Enforcing them before the sale is not practically possible.

Mis-selling cannot be eradicated. If I were an intermediary, I would probably mis-sell too.  If were an intermediary, I will have trouble deciding where to draw the line when it comes to persuasion.

Mis-buying can only be avoided by getting priorities right:

Listing types of

  • risk (death, health, inflation, loss of income etc.) and
  • future expenses

and understanding the requirements of each

If we mis-buy in haste, we are guaranteed to leisurely repent it, with or without the delusion that it was mis-selling.

With that out of that way, let us consider yet another side of mis-selling/mis-buying.

How would you classify sales pitches like,

  • ‘equity is the only asset class that can beat inflation’, or
  • ‘irrespective of the state of the market, a SIP will always work, since it average risk’
  • ‘equity markets fluctuate but always tend to move up over the long-term’

Does this constitute mis-selling? Well, you will not find the above statements in the scheme information document. That is for sure!

Is it mis-selling or misinformation if a mutual fund distributor genuinely believes the pitch?

Is it mis-buying if the investor concurs with the distributor after reasonable analysis?

I don’t know how to classify this. What you think?

Real Estate Investment Trusts (REITs): Unfit for Goal-based investing

A real estate investment trust (REIT) is like a mutual fund that invests in property. Here is why I think REITs are not suitable for goal-based investing.

I know very little about how REITs work and I have sourced my information primarily from three articles.

If you wish to understand,

  1.  how REITs work, check this illustrated article from the Economic Times: How can you buy property for Rs 2 lakh? REITs to help investors 
  2. why they will not work, read Subra’s post: Will REITs work in India?
  3. the nitty-gritty, read Deepak Shenoy at his brilliant best:  REITs: The New Way To Make Less Money Than Inflation, in Real Estate

I don’t claim to understand everything because I stopped trying when I learnt about two crucial aspects from Deepak and the ET article.

  • “REITs must distribute 90% of the income they get. It can’t be reinvested. Also, if the underlying assets are sold the income generated must be distributed too” – Deepak Shenoy (CapitalMind)
  • Much of the income will be rental income and it will be taxed at 30% before distribution (much like DDT). Deepak quotes, Nishith Desai in this regard. There are also tax rules concerning interest received and capital gains!

REIT seems like a risky debt mutual fund with dividend option.

Even if the dividends were free from DDT, even if real estate in India is well regulated with no black money in it, even if rental yields are attractive, I see no point in investing in REITs.

For the simple reason that there is no ‘growth option. Had there been no mandate to distribute 90% of the income, I would have considered REITs for diversification. I would like to think RE volatility is lower when compared to gold. So instead of the usual 10% exposure to gold that ‘experts’ recommend, one could have a 10% exposure to REITs.

Unfortunately, REITs appear to be a dividend product, with a focus on ‘income’.

When I am in the so called ‘wealth accumulation stage’, where I am creating a nest egg for retirement, and a corpus for my other long term goals, why on Earth, would I choose a dividend-based product?

I have better things to do than to receive dividends and reinvest them.

KISS: Keep it simple and sufficient

Stick to a well defined diversified asset allocation. Invest each month in ‘growth’ oriented products. I cannot think of a simpler way to keep track of a portfolio in every conceivable way.

Not convinced? 

If your goal is ten years away, would you choose an instrument in which you will have to declare gains each year and pay tax on it (like a fixed deposit) or would you choose a debt fund (growth option!) in which gains are taxed on upon redemption?

Investing in an REIT is like trying to fill a bucket with holes!

If I understand the power of compounding, why would I willingly choose to interrupt the compounding with taxes (assuming I am disciplined enough to reinvest the dividends)?!

What about retirees?

Can they invest in REITs to receive periodic (if not regular) income?  The title of Deepak Shenoy’s post answers that, does it not?!

So if you have two lakhs (or more) to spare, you are better off investing in ‘growth’ products irrespective of your age.

What do you think?

Chennai Investor Meet Updates

Details of the investor meet planned at Chennai:

 Date: 1st Nov. 2014

Venue: CPR Convention Centre, Alwarpet, Chennai



My talk will cover  tenets of financial planning, goal-based investing, mutual fund analysis, basic of portfolio management etc.

The event will be partly sponsored by: Sundaram Mutual Fund

Registration Fee: Rs. 500 per participant. 

How to register: If you have already contacted me in this regard or expressed an interest to attend at the FaceBook Event page, no further action is needed on your part. I will keep you posted of developments over email.

If you wish to attend, please use the contact form

The event is jointly organised by Srinivasan Sundararaman of  MoneyKare, Wealth Managers, and myself.

Debt Mutual Funds: Risk vs. Reward

Here is a risk vs. reward analysis of debt mutual funds. This is a companion post to:

All the posts are based on Value Research Online’s fund selector page.

First some definitions.

Average Maturity

A debt mutual fund holds debt securities with differing maturity periods. The weighted average of the maturity periods (taking into account percentage allocation) is known as the average maturity and is typically expressed in years. Higher the average maturity, the more sensitive the fund is to interest rate movements.

Modified Duration

My favorite debt fund metric. See: How to Select Debt Mutual Funds Suitable For Your Financial Goals? 

Measured in years, modified duration is a measurement of a bond’s sensitivity to movements in interest rates. For example, a bond with a modified duration of 5.2 years can be expected to undergo a 5.2% movement in price for each 1% movement in interest rates. The longer the modified duration (in years), the more sensitive a bond’s price to changes in interest rates. Source: Invesco Perpetual

Although VRonline lists modified duration of debt mutual funds in their respective fund page, it only offers an ‘interest rate sensitivity’ score (1: low; 2: medium; 3: high) in its fund selector page. I am assuming this is derived from the modified duration.

Standard Deviation

Knowledge of the standard deviation is the key to successful mutual fund investing.

The standard deviation is a measure of how much monthly returns deviate from their average. It can be interpreted as the uncertainty or the error associated with the expected return.

For example, if standard deviation over a period of 3 years is 1% for a debt fund, and the associated return is 9%, 68 times out of 100, returns would have varied from (9-1 = 8%) to (9+1 = 10%).

So higher the standard deviation, higher the volatility. Higher the uncertainty in the expected return.


Alpha is a risk-adjusted measure of excess returns above the benchmark.

A positive alpha of 1.0 means the fund has outperformed its benchmark index by 1%. Correspondingly, a similar negative alpha would indicate an underperformance of 1%” – Investopedia

Now on to the graphs

Average Maturity vs. Standard Deviation


Both axes are in log scale for clarity. Higher the standard deviation, higher the average maturity. I should have probably switched the X and Y axes since the standard deviation is a result of the choices made while selecting the portfolio. Too lazy to replot!

Funds which investment in long-term debt paper are susceptible to interest rate movements and hence have a higher standard deviation.

Notice the shaded rectangle. This bounds all funds with an average maturity of 1 year and a standard deviation of 1%.

This represents ‘low-risk’ debt funds and can be used for short-term (< 5 years) financial goals. Lower the duration, lower should be the standard deviation and the average maturity.

The standard deviation arises not just from changes in the average maturity of the portfolio. It is also sensitive to interest rate risk, especially at higher average maturities!

Some funds are way off from the rest of the bunch. One such fund is encircled in red. This is a pure debt fund of fund scheme:

ING Active Debt Multi-Manager FoF Scheme

Interest Rate Sensitivity vs. Standard Deviation

The data is bunched into three categories by VRonline: Low, medium and high.

In general, higher the  interest rate sensitivity, higher the standard deviation.

Most funds with standard deviation

  • less than 1%  have low interest rate sensitivity
  • between 1-3%  have medium interest rate sensitivity
  • greater than 3% have high interest rate sensitivity

The demarcation becomes even clearer below.

Interest Rate Sensitivity vs. Average Maturity



Fund with Average Maturity,

  • less than  1 year  have low interest rate sensitivity
  • between 1-3.5 years have medium interest rate sensitivity
  • above 3.5 years have high interest rate sensitivity

Standard Deviation vs. Average Credit Quality

The quality of the debt paper, as quantified by credit ratings (AAA, AA etc.), give an idea about the return potential of the fund and also its sensitivity to interest rate movements.



Notice that the average credit quality is a poor indicator of volatility. Funds with average AAA quality have standard deviations ranging from 0.13% to 7.39%. A huge spread!

Therefore just because a fund has average credit quality of AAA, does not mean it is ‘safe’! The average maturity also matters.

Average Maturity (years) vs. Average Credit Quality



Notice again the huge spread in each credit rating category.

Interest Rate Sensitivity vs. Average Credit Quality


There are a few funds with average credit rating of AAA and high interest rate sensitivity. Tread carefully with those funds.

So if you wish to hold a ‘safe’ debt mutual fund, it should have

  • high credit rating
  • low average maturity and
  • low interest rate sensitivity

Typically ‘banking and PSU’ debt mutual funds satisfy these requirements.

 Alpha vs. Standard Deviation



Typically most debt funds manage to beat their respective indices like equity funds. Higher the standard deviation, more is the spread in the alpha values, which is understandable.

The point encircles in red belongs to Sundaram Gilt Fund. Mr. Raghu Ramamurthy alerted me to the fact that this fund, a short-term gilt fund produced an astonishing return of 19.22% in 2013!!

While I am still trying to figure this out, all I know is that the fund was fully into reverse repo/CBLO holdings  up to the July 2013 crash and then switched fully into short term GOI bonds.  While this definitely contributed to the high returns, I am not sure if this is the only reason.

Monthly Financial Tracker

I wrote a guest post for Avadhut Nigudkar’s website, financewalk.com aimed at financial career aspirants. The monthly financial tracker I have been using for the past 6 years was modified to include the goal analysis sheet from the automated mutual fund tracker

The sheet allows you to keep track of investments for financial goals as well as their progress.

Link to the article: How to Use Excel to Manage Expenses and Investments (Even If You’re a Newbie!)

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