Power of equity is the least understood

Film actor Rajesh Khanna bought a bungalow in iconic Carter Road in Mumbai for Rs.3.5 lakhs in 1970. His heirs sold it recently for Rs.85 crores. The property has multiplied by 2428 times or an annualized return of 19.38% over 44 years.
Samudhra Mahal in Mumbai is another expensive property. A flat purchased in 1970 at Rs.700 per sq.ft was sold at Rs.1,18,000 per sq.ft in 2013. Money multiplied by 168 times in 43 years. This works out to an annualized return of 12.66%
In 1963, Godrej paid Rs.1 lakh to buy his first house, a 2916 sq.feet apartment at Usha Kiran, Carmicheal road, in Tony South Mumbai. In 2011 he sold it for Rs.25 crore. Money multiplied by 2500 times over 48 years or an annualized return of 17.70%
In Dalal Street, Mumbai, a sq.feet was Rs.100 in 1980. After 34 years, it sells at Rs.27,000 per sq.ft. Money multiplied by 270 times in 33 years. This works out to an annualized return of 17.90%.
The first three properties can be bought and owned by cream or elite of the society who are worth at least tens of crores, mostly hundreds of crores.

A financially middle class person could have bought the property in Dalal street , with whatever money available at  disposal. You can buy it even now.

A Virtual Property
The last property is Sensex, which can be owned from anywhere in the world.  A sq.feet is a metaphor for one unit. If dividend yield is also included (assuming 2% CAGR), Sensex would have delivered 20% annualized returns over last 34 years, higher than the most expensive prime properties in the country.

Returns far superior to Sensex

Many mutual funds and stocks have delivered returns far superior to Sensex.
Power of equity is least understood in this country.
You have to just withstand notional loss (Don’t book the loss. That is ,do not sell at rates lower than the cost price) in portfolio during bear markets, not to worry about daily price movements, you can make much better money than what can be made out of the best of real estate deals.
Give at least the same importance to equity as you give to real estate.
You don’t mind holding real estate for 20 or 30 years. Do the same for equity ignoring bull and bear markets, notional profits and losses.
Many of you must have been investing for last a couple of years. Keep the course for at least another 15 to 20 years , ignoring market fluctuations. You would be amazed at the fortune created for your retirement or to pass on to your children.

Is risk synonymous with volatility?

When an investor wants to understand risk, must  look at volatility?

The term risk has different meanings for different people.

Ask an investor what comes to mind when talking about risk management, he will state that he does not wish to lose his money, or will want to know as to how much the return can potentially drop by.

Throw the same query to a finance professional and he will tell you that standard deviation is the measure of risk. So what he is saying is that risk is not defined as the likelihood of loss, but as volatility, which is determined using statistical measures of variance such as standard deviation and beta.

(Standard deviation is a measure of absolute volatility that shows how much an investment’s return varies from its average return over time. Beta is a measure of relative volatility that indicates the price variance of an investment compared to the market as a whole. The higher the standard deviation or beta, the higher the risk.)

So while professionals often use volatility as a proxy for risk, it does not measure what an investor intuitively perceives as risk.

Volatility as sudden price movements

It is more helpful to think of volatility as sudden price movements. Volatility encompasses the changes in the price of a security, a portfolio, or a market segment both on the upside and down. So it’s possible to have an investment with a lot of volatility that is moving one way: up (not always down).

Even more important, volatility refers to price fluctuations in a security, portfolio, or market segment during a fairly short time period—a day, a few weeks, a month, even a year. Such fluctuations are inevitable and come with the territory. If you are in for the long haul, volatility is not a problem and can even be your friend, enabling you to buy more of a security when it’s at a low ebb.

The most intuitive definition of risk, by contrast, is the chance that you will lose your principal investment and won’t be able to meet your financial goals and obligations. Or that you will have to recalibrate your goals because your investment kitty comes up short.

Having said that, it is easy to see how the two terms have become conflated. If you have a short-term horizon and you’re in a volatile investment like stocks, it could be downright risky for you. That’s because there is a real risk that you could have to sell out and realise a loss when your investment is at a low ebb.

The same investment with a long-term horizon throws up a completely different scenario. The very same stocks may not be all that risky if you bought them at bargain rates when compared to their intrinsic value and intend holding on to them for many years. However, you will have to contend with volatility which comes with the territory.

In 2008, the global crisis drove securities prices to especially low levels actually making them less risky investments. Indeed, Seth Klarman, one of the world’s most respected value investors, believes that risk is not inherent in an investment, it is always relative to the price paid. So in the midst of volatility and extreme uncertainty of 2008, the risk of investing in equity actually dropped.

The volatility did not really affect the long-term returns of an investor

Reactions to volatility are very often emotional. Investors buy and sell on reaction, or rather overreaction, to news and speculation without any significant consideration to long-term returns. Recall the sell-off of not just 2008 but even 2011 when volatility went through the roof. Now look at where the market is today. The volatility did not really affect the long-term returns of an investor who assesses risk in terms of long-term failure to meet a pre-determined outcome. Those who ignored the volatility and stayed are better off because of it.

Given this backdrop, defining risk as volatility runs counter to common sense. Do not assess risk and construct your portfolio based on the volatility of the ride. Investment risk is the possibility of suffering losses and its potential magnitude. Another indication of investment risk is the maximum drawdown from a previous high – peak to trough.

Have a long enough time horizon, you will be able to harness volatility

Invest in equity mutual funds via a systematic investment plan

So how can investors focus on risk while putting volatility in its place? Come to terms with the fact that volatility is inevitable and if you have a long enough time horizon, you will be able to harness it for your own benefit. Secondly, invest in equity mutual funds via a systematic investment plan, or SIP, to ensure that you are entering the stock market in a variety of environments, whether its feels good or not. Finally, diversifying your portfolio among different asset classes and investment styles can also go a long way toward muting the volatility of an investment that’s volatile on a stand-alone basis.

These moves will make your portfolio less volatile and easier to live with.

How NRIs can invest in Indian mutual funds

Bank accounts

One of the first things you need to do is to set up a bank account in India to facilitate movement of your money. Investors can either set up non-resident (external) rupee account (NRE) or a non-resident ordinary rupee account (NRO) with a bank.

An NRE account is preferable because it gives you the flexibility of repatriating your proceeds out of India without any restriction.

In other words, if you wish to invest in India from your overseas earnings, you need an NRE account. Financial planners also recommend NRE accounts for those who are not sure of how long they’ll stay overseas and where chances of them settling abroad, eventually, are high. However, you need an NRO account if you are an NRI, and get receipts in India, like rent.

Are there any restrictions?

NRIs from most countries can invest in India through MFs available here.

U.S.Based NRIs

For US-based NRIs though, it gets a bit tricky. Most US-headquartered fund houses that operate in India do not accept money from a US-based NRI because there is a rule laid out by the US securities market regulator, Securities and Exchange Commission (SEC), which says only those fund houses, globally or locally, registered with SEC can accept US NRI or citizen’s money. In light of that, lot of AMCs in India have chosen to not accept funds from investors residing in the US. This also means that US-based fund houses that operate in India such as Franklin Templeton Asset Management (India) Ltd, Morgan Stanley Investment Management Ltd and so on also don’t accept NRI money that come from those in the US. Some Indian fund houses, though, still accept money from US NRIs, but they are essentially those that don’t have any business interests in the US and therefore don’t need to interact with SEC. Says a Mumbai-based financial planner who requested anonymity: “This is not an Indian rule, but is a US government rule. That is why we invest our NRI clients’ investments in pure Indian-domiciled fund houses.”

Most other NRIs can invest in any MF schemes available in India.

Your options , if US based.

 Lots of MFs based in the US have India-dedicated MF schemes, even those who have Indian subsidiaries. Often, these MFs fall back on the research that their Indian subsidiary provides. For instance, Franklin India Growth Fund, a MF scheme available for the US citizens in the US, invests in companies that are based in India. “Such schemes are managed in the US and are actively managed. But they use the experience and research inputs that their Indian offices give because local talent always helps”, said the Mumbai-based financial planner quoted earlier.

Apart from international fund houses available in the country where you stay, that invests in India, you can use your NRE or NRO accounts to invest in MF schemes domiciled in India.

How to invest in Mutual Funds from India?

In order to invest in mutual funds, you will have to open either one of three types of bank accounts because all investments must be in Rupee. These three types are:
- Nonresident external rupee account (NRE) - the money can be sent back to your country of residence and the account can be opened with local or foreign funds.
- Nonresident ordinary account (NRO) - is a rupee account and the amount cannot be repatriated.
- Foreign Currency nonresident account (FCNR) - it is same as NRE but deposits can be made in US Dollar, pound, yen, Euro. It has a maximum tenure of five years.
- When you invest using a cheque, you will require a certificate from the bank clarifying the source of the funds. Alternatively, you can also provide a foreign inward remittance certificate.
- In order to ensure smooth management of your mutual fund, an NRI can give the power of attorney to someone to manage these funds. He can also have an Indian nominee or an Indian joint holder.
- Redemptions are made in Rupees either by check or direct transfer to your account.
- Tax is deducted at source for NRI investors unlike the Indian investors. If your country of residence has the DTAA (Double taxation avoidance agreement) with India, you will not have to pay tax after repatriation.

Retirement Portfolios: Adding Crucial Alternatives

We've all heard about the wisdom of not putting all your eggs in one basket. In traditional investment theory this means holding a range of different kinds of assets in your retirement portfolio. If you hold fewer securities, there is a greater risk that a decline in one of them could adversely affect your whole portfolio. By diversifying your holdings into assets that may perform independently of each other in different markets, you spread out the risk, or volatility, of the overall portfolio.
Investing in assets with different cycles of performance is aimed at preventing "positive correlation," or the risk that your assets move in tandem and perform similarly. Traditionally, asset classes such as stocks and bonds would be negatively correlated, meaning they generally have moved in opposite directions and provided returns accordingly.
But following the 2008 financial crisis and the subsequent low-interest-rate environment, asset classes that used to provide diversification have been exposed to many of the same factors that push them in similar directions.
But you can still diversify by considering what's called "alternative" investing, which involves a wider range of strategies which were, until recently, mainly available to institutions and very wealthy investors.
Alternative investing is based on the premise that it's possible to buy a basket of investments with different risks that may perform independently of each other. These could include assets such as commodities, or involve strategies that aim to take advantage of differing economic outlooks in various parts of the world.
This kind of diversification seeks to provide alternative sources of capital growth and income with low correlations to public markets. Gaining access to such liquid alternatives is now possible for the average investor through mutual funds and exchange traded funds.
This gives more investors the opportunity to move away from the traditional stock/bond makeup of the typical retirement portfolio.
Consult your financial advisor about alternative investing.