Monday, January 27, 2020

Early days for Investment Trusts, but a viable future ahead

Equity markets are at an all-time high once again and with the economy in the midst of an unscheduled slowdown, there is an increasing desire among investors to reduce portfolio volatility. A simple way to do so is to identify assets with daily return characteristics unrelated to each other.

Theoretically, if each component of one’s portfolio moves independently on a daily basis, the daily volatility of the portfolio should be lower than that of its volatile components. Since in most cases the most volatile component is equity, the attempt has always been to find assets with daily return characteristics unrelated to it.

Traditionally, debt and gold have played this role in a portfolio. Recently, of course, gold has been actively discussed, especially after its sharp appreciation in 2019. However, both debt and gold come with certain long-term return characteristics that may not suit all investors. The overall low returns generated by low-risk debt portfolios, recent experience with credit defaults in higher-risk debt portfolios and the lumpy long-term returns generated by gold are all valid reasons for investors exploring other options. But is there anything else an investor can turn towards to reduce overall portfolio risk? Fortunately, the answer is yes.

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This note was published on moneycontrol.com on January 27, 2020

Borrowing is still a taboo word. Budget needs to rethink

Another Union Budget is near and air is rife with speculation as to what is expected. Against the backdrop of a weak economy, the government has its work cut out.

The first task would be to accept that this is not a run-of-the-mill slowdown and cannot be remedied by ordinary methods. The GDP is expected to grow at 5 per cent in FY20, and for the calendar year 2019, it is possible that India’s growth rate will be the lowest in the last decade. In addition, investment growth is expected to be about 1 per cent, which bodes ill for coming years as well.

Of the many suggestions made in recent weeks, most have encouraged a cautious approach. An approach that seems tentative, even fearful. This approach derives its core not from the experiences of the past, but from the fears that have prevented India from participating in global and regional development episodes for decades.

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This note was published on moneycontrol.com on January 23, 2020

Monday, January 6, 2020

Can passive funds lead to wealth erosion?

In the first part of this note, we dealt with the nuances that passive funds introduce to the investment market and why they are preferred by institutional investors. We also discussed why incentives for individual investors differ from those of institutions and the contention that lower costs ensure better performance is a fallacious one.

In this part of the note, we discuss the factors which contribute to relative performance and the role that ETFs can play in the portfolios of different categories of individual investors.

The relative performance of an actively managed fund vis-à-vis the index depends largely on the constitution on the index itself and the performance of choices made by the fund manager. For example, as of December 8, 2019 the weight of Reliance Industries and HDFC Bank in the BSE Sensex is 12.42% and 12.00% respectively. In contrast, no actively managed fund can invest more than 10% of its portfolio in any single stock. Therefore, all actively managed funds are under-weight these two stocks because of the composition of the index itself.

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This note was published on moneycontrol.com on January 4, 2020