Why Just Chasing Returns can be Harmful to Your Goals?

Why Just Chasing Returns can be Harmful to Your Goals?

When you are planning your long term goals, your obvious assumption will be to maximize returns. That is because returns have a compounding effect on your wealth. Over a longer period of time, this advantage gets accentuated. Check out the illustration below.



CAGR Return

Monthly SIP

Total Outlay

Final Value

Wealth Ratio

Equity Fund

25 years



Rs.15.00 lakh

Rs.94.88 lakh

6.33 times

Equity Fund

25 years



Rs.15.00 lakh

Rs.113.57 lakh

7.57 times

Equity Fund

25 years



Rs.15.00 lakh

Rs.136.36 lakh

9.09 times

Equity Fund

25 years



Rs.15.00 lakh

Rs.164.20 lakh

10.95 times

Equity Fund

25 years



Rs.15.00 lakh

Rs.198.26 lakh

13.22 times

You can see how the wealth ratio jumps up sharply with every percentage increase in returns. It is not surprising that most investors tend to chase returns quite aggressively. While that is understandable, it needs to be remembered that such actions can be harmful to your long term goals. While high returns can make a difference, there are four key factors to consider.

1. First reference point must be quality of returns

Quality of returns is all about sustainability. For example, you can enhance your returns over a 3 year period by latching on to a fad like banking funds, commodity funds or IT funds. But such cyclical and thematic stories do not sustain and tend to lose value as aggressively as they gain. The whole logic of quality of returns stems from diversification. If you want to reach your goals with a greater degree of assurance, quality of returns matter. At the short end, liquid funds have better quality of returns than liquid-plus funds. Similarly, income funds have better earnings quality than credit-risk funds.

2. Second reference point must be risk entailed

Once quality of returns is managed through diversification, the second step is to focus on risk. Is risk not handled by diversification? That is just part of the risk. The biggest risk in reaching your goals is the maturity risk. For example, you cannot take the risk of G-Sec funds or credit risk funds for your short term needs over the next 1-2 years. Here liquid funds will best meet the criteria. For medium term goals up to 5 years, liquid funds may be inefficient and equity funds may still be risky. The best way to reduce volatility is to focus on income funds, MIPs or balanced funds with focus on blue-chip equities. At the long end beyond 7-8 years, the biggest risk is not taking sufficient risk. Here the focus must be on making money grow with calibrated risk. That means; diversified large cap funds, index funds and multi-cap funds are acceptable, not sector and thematic funds.

3. Third reference point must be liquidity

High returns are great but if liquidity cannot be made available when required then the very purpose of goal planning is defeated. For example, when you plan for your child’s future over the next 20 years, you must plan liquidity for milestone payments in between. The same applies to your retirement goals. You cannot suddenly realize that you are retiring in a bear market and so investment values are down 20%. That planning and gradual shift to debt and liquids must begin in advance.

4. Fourth reference point must be tax efficiency

For your plan to effectively move towards your goals, you must focus on tax efficiency. Taxes can shave off a big part of your returns and actually make your goals out of context. For example, if you had started equity fund SIP in 2014, you would have been in for a shock in 2018 when long-term capital gains were taxed. That would straight away shave off 10% from your target corpus. Similarly, you need to make a tax efficient choice between dividend plans and growth plans. Dividend plans on debt funds attract 29.12% tax (inclusive of cess and surcharge). You would be better off structuring withdrawals in the form of systematic withdrawal plans (SWPs).

Reaching goals is all about optimization

The moral of the story is that just chasing returns to reach your goals can be awfully counter-productive. A better way is to optimize your goals. That actually means 2 things.

  • Define your target return and minimize your risk for the given level of return

  • Define the risk you are willing to take in terms of volatility and calibrate your return expectations accordingly

This is the basic framework for you to reach your goals. If you take care of liquidity and post-tax returns, then you are surely in business.

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Short Term Trading or Long Term Investment Amidst Volatile Market

Short Term Trading or Long Term Investment Amidst Volatile Market

Indian stock markets are currently in a state of flux. Domestic growth is slowing and earnings growth has not been up to the mark. NBFCs have been facing liquidity problems. On top of that, the global trade war is a reality, China is slowing down and oil prices have spiked sharply. That brings us to the million-dollar question; should you focus your online trading strategy on the short term or the long term? Should you focus on making the best of the volatility or should you focus on building your long term quality portfolio. You must focus on 3 separate segments with a different approach for each segment.

  • Short term F&O driven strategy to capitalize on volatility

  • Medium term strategy based on the next 1-year outlook

  • Long term strategy that combines your financial plan with value bargains

a) Short term F&O driven strategy

The idea of this strategy is to capitalize on the short term trends in the market. For example, a sharp spike in oil prices (as we saw this week) is negative for oil marketing companies, paints companies and automobiles. You can trade these stocks via futures or options. For example, you can ride the oil price spike by either selling futures or buying put options on OMCs and auto stocks.

For example: Another trend in the last few months is a sharp rise in the price of gold. Now, how do you play gold through equities? You can play gold through jewellery stocks due to better value of gold inventory. You can also play these trends through gold financing companies. Gold prices normally tend to spike when uncertainty spikes. For short term, you may not bet on the direction of stocks but just focus on relative outperformance.

b) Medium term strategy for the next one year

This is the medium term approach with a time frame of one year or so. What do you cover in this strategy? Firstly, you focus on stocks that have corrected more than they deserved. For example, the consumption weakness led to many frontline FMCG stocks correcting sharply. They could be good medium term buying ideas. Similarly, the problem in NBFCs and HFCs is restricted to companies with a maturity mismatch. But, in the process, many quality NBFCs without maturity mismatch have also corrected sharply. This gives an opportunity for medium term investors. Thirdly, the government has been specifically encouraging sectors like export-oriented units, low cost housing, auto manufacturers, food product companies etc with GST and other funding sops. These could again be stocks to play in the medium term.

For the medium term, you can also look at some allocation shifts in your strategy. For example, you can focus on gold as an asset class as it is most likely to benefit from uncertainty in the markets. Also, within the gamut of debt mutual funds, credit risk funds look the most vulnerable. As a conscious strategy you can look to shift out of credit risk funds and into income funds for the next one year.

c) Long term strategy for allocation and value picks

This is the most important part of your strategy you need to focus on. Firstly, what about your overall allocation? Remember, market volatility should not make a big difference to your broad allocation. The financial plan is designed with in-built safety checks so that profits get automatically booked at higher levels and value stocks get bought at lower levels. That discipline should be sustained and the allocation should not be tampered just because of the market volatility.

Finally, we come to the more important question of long term bargains. Here, the focus will have to be on mid cap stocks – especially the ones that have managed to hold value even in these tough market conditions. They could present pockets of value. Secondly, there are the blue chips you always wanted to buy but found the stock too expensive. If the volatility gives bargains, it is time to open your shopping baskets.

At the end of the day, it will boil down to breaking down your strategy. You may realize that this volatility is actually a blessing in disguise!


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5 Factors to Look at While Selecting a Stockbroker

5 Factors to Look at While Selecting a Stockbroker

Today, there is an abundance of stockbrokers offering their premium services to individuals wanting to accumulate wealth through the financial markets. As such, it is vital to choose a good stockbroker who understands the investor’s financial goals and guides him/her towards substantial returns.

Investors of today have two choices when it comes to stockbrokers: the traditional stockbroker and the discount brokerages. Traditional brokers charge a certain percentage as a fee, which differs with the type and size of the transaction. These brokers also send out trading tips and research bytes to the clients.

Discount brokerages, on the other hand, offer the standard services but at a fixed (flat) cost, i.e. regardless of the type and size of the transaction. They, however, do not offer any trading expertise, i.e. they do not give out trading or stock tips nor do they provide any insights into a trade. As such, they are suitable for those who prefer to self-educate themselves and take independent decisions.

Considering these, an investor has to carefully think about his/her requirements as well as exercise caution when choosing a stockbroker.

Here are five factors that would help a new investor in selecting a stockbroker who understands the financial goals of the investor.

  1. Credibility

    It is vital to perform a thorough background check on the stockbroker before entrusting them with your life savings. Finding out how many years the stockbroker has been in business, how it has performed in the past, what do the clients say about the firm, and any other relevant questions. This will help the individual to know more about the broker.

  2. Minimum Balance

    Investors need to maintain a minimum balance in their stockbroking account, and hence, it is vital to inquire about the same. This amount varies from broker to broker, hence, investors should choose a broker who not only provides the best services, but also has a low minimum amount threshold so that it does not tax their monthly budget. Other than the minimum amount, there should also be ease of access when it comes to depositing and withdrawing funds. Typically, brokerage houses have tie-ups with local banks which lets investors access their funds at any time. Withdrawals normally take three days to reach the client’s account.

  3. Technological Expertise

    Brokers who constantly update their platforms with the latest technology are able to give a unique advantage to the investor. There are also able to match the evolving needs of the investors and educate them on new features and solutions. Choosing a broker who consistently provides a stable and steady platform to their clients is a must.

  4. Availability

    A broker should be available during stock market hours to execute orders without any lag or delay or to address any issues that may arise on their electronic platforms. An investor should also check the speed and the stability of the website/mobile applications, especially during peak hours, to ensure that the pages load quickly and easily as even a split second can lead to the investor losing out on a profitable trade.

  5. Transparency and Capability

Transparency and capability are also important parameters when looking for the perfect stockbroker. There are many ways in which brokers charge their clients. Hence, the client has to ensure that all charges involved are mentioned in a lucid and transparent manner while opening an account. This will help you avoid any hidden costs that brokers might impose later. Apart from this, a broker should also have strong business policies that maintain the quality of the business.

When it comes to the capability of the brokers, investors should make sure that the stockbroker and his team have a strong background and passion for trading in order to have a hassle-free experience. When the team is able, it largely influences the business practices and delivers a profitable outcome to its investors.

Choosing the right stockbroker is vital to trading as the investor is entrusting their life savings into the former’s care. If a stockbroker or his brokerage satisfies the above-mentioned criteria as well as provides real-time customer support, add-on financial services and, as a bonus, is interested in enhancing the client’s knowledge of the markets, then engaging with them is a wise decision.

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How to Buy Stocks Online: A Step-By-Step Guide?

How to Buy Stocks Online: A Step-By-Step Guide?
by 5paisa Research Team 04/10/2019

Online trading has picked up in a big way in the Indian markets. To buy stocks online, the following steps are essential to understand how to go about the process.

1. Choose your online broker carefully

The first step to buy stocks online is to select your online broker. You have a choice of discount brokers and full service brokers and you can select one based on whether you want pure execution or are you looking for research and stock tips as well. Also check the follow-up services provided by the broker and the back-up order placing facility like call-n-trade, before making your choice.

2. Opening your trading and demat account

If you want to trade in equities, trading account and Demat account is a must. While online trading account is for executing transactions, the demat account is for holding shares when you take delivery. The process of account opening is quite simple and you need to provide basic documentation like proof of identity, address proof, cancelled cheque and PAN card. Once your account is activated and you reset your password you are ready to trade online.

Know: Difference between Demat Account and Trading Account

3. Next step is to fund your account

Whether you want to buy stocks online for short term or long term delivery or intraday; you need to fund your trading account. You can either fund the account through NEFT or IMPS or UPI. The online broker will permit you to place orders only after your account is adequately funded.

3. Screen stocks you want to buy before placing the order

One advantage of online stock buying is that you can read research reports, screen stocks on parameters like profitability, ROCE, ROE, among others and execute orders seamlessly. Many brokers also offer you the “call to action” facility. You can read the report or stock tips and directly execute the order from that place with a few clicks.

4. Select the price and select the right type of order

Once you are ready to place the order, you can take the help of online technical charts to identify the best level to enter the stock and also put stop losses accordingly. Try to get the best price possible. Take care of how you place the order. For example, if the market is volatile, try to place a limit order so that you can get the price of your choice or better. Alternatively, if you are buying in a falling market, use a market order to get the best possible price.

5. Once the order is placed, do the follow up work

Once the order is placed, your job does not end. Check with the order book if the order is reflecting properly. To check the status of execution, you must refer to the trade book. Only executed orders are shown in the trade book whereas the open orders are shown in the order book. Before the order is executed, if you are unhappy with the price, you can always cancel the order or even modify the order price and quantity. The discretion is entirely yours. Once the trade is completed, cross check with the contract notes in the evening and also do a weekly reconciliation with the demat account and the ledger account.

6. Finally, take care of security of your online trades

There are quite a few critical things to take care here. Firstly, ensure that your password is safe and as complicated as possible. Avoid writing down your password anywhere. Secondly, use dual authentication for your trading account and make it a point to log out of your trading account when not in use. Thirdly, you cannot let your hardware be compromised. Avoid downloading software and games from unknown sources. Update the anti-virus and anti malware regularly. Lastly, avoid using your online trading account at cyber café or via public wi-fi. They are not secured and can endanger your personal data and wealth.

These basic steps to buy stock online can go a long way in enhancing and enriching your online trading experience.

Check the latest guide on: How to invest in stock market for beginners

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How to Invest in Mutual Funds in Indian Markets?

How to Invest in Mutual Funds in Indian Markets?

When you get down to investing in mutual funds, there is a problem of plenty. With more than 40 AMCs, over 2000 schemes and with each scheme having a growth or dividend option along with a Regular Plan and a Direct Plan, you can imagine how complex it gets. Your screeners on the website can help you up to a point but you still need to narrow down to the scheme that best suits your needs. That is where this process will come in handy. Before you make your choice of fund, go through the following process.

Narrow down to funds based on AUM

A small fund with a corpus of Rs.100 crore may be the best performer but the fund business may be hard to sustain for them. Such funds are best avoided if you have a long term perspective. You must ideally stick to larger funds that have been around for over 15-20 years in the business. Such funds and fund managers have gone through cycles in business. Also, a higher AUM reduces your expense ratio as it gets spread over a large corpus.

In equity funds, prefer diversified funds over thematic funds

The whole idea of investing in mutual funds is to get the benefit of diversification. Don’t let go of this benefit by selecting thematic funds. The last thing you want is the fund manager to introduce concentration risk into your portfolio. This rule applies to equity funds and to debt funds also. While equity funds must diversify across sectors, business models and quality; debt funds must diversify across quality, tenor, duration etc.

Select funds that are consistent as they are more predictable

Two funds may have given the same CAGR returns over 5 years but you must look at the consistency. A fund that has given annual returns around the CAGR is better than the fund that has given super returns in 2 years and negative returns in 2 years. When you buy an inconsistent fund, timing becomes too critical. If you get in one of their super years, you may be disappointed at the end of 5 years. That is why consistent funds are a lot more predictable and reliable.

Is it the fund manager skill that is rewarding you?

An equity fund manager has to be better than an index fund manager. At the same time you cannot have a fund manager with the risk appetite of a seafarer. But how do you verifiably measure this? A simple method is the out performance of the fund returns over benchmark index. But that tells you only one side of the story. If the fund manager has outperformed by taking on too much risk then the fund manager is not working hard enough. Sharpe ratio and Treynor ratio can calculate risk-adjusted returns. You can also use the Fama coefficient to measure whether the fund manager is generating returns out of his stock selection skill or through pure luck.

Check our SIP calculator and Lumpsum calculator before planning your mutual fund investment

Cost efficiency is the next thing to look at

Expense ratios on equity funds range from 2.50% to 2.75%. If you can save on these costs it can make a substantial difference to your returns in the long run. When you calculate the cost of the fund, include all relevant costs and that includes the TER as well as the exit load. Some funds may charge a lower TER but have a higher exit load. Such funds can become very expensive when you exit before the 1 year period.

Mutual fund must fit into your financial plan

In fact, your activity must begin with a financial plan and these mutual fund investments must fit into the plan. The question you need to ask yourself is, “Is this fund good enough for me”? Look at every fund from the perspective of your own goals; your return requirements, your risk capacity, tax status and liquidity needs. It is only when you apply this litmus test that the effort of navigating through a plethora of mutual funds actually becomes meaningful for you.

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Do’s and Don’ts of Stock Market Investing for Beginners

Do's and Don'ts for beginners

With a trading account and demat account you are ready to trade. But if you are a beginner in the stock markets, then that is not all. You also need to keep a tab on some major do’s and don’ts before you venture into investing in the stock markets. Let us look at 10 such key dos and don’ts for investors.

10 important do’s and don’ts for investment beginners

Do’s are about doing the right things in the market when you are starting off on your investing journey while the don’ts are the ones to avoid. Here are ten such important dos and don’ts for investing beginners.

  1. Do your research before investing? Remember, research of a stock is not a rocket science and it is all about getting your research process right. Get comfortable reading the balance sheets and income statements of a company. Also read the Management Discussion and Analysis (MDA) of the stock you are planning to invest in.

  2. Start with your goals in mind. You must be clear about how much risk you are willing to take and how much risk you can afford to take. Your equity portfolio should be within the limits defined by your allocation. Always start with a plan.

  3. Don’t put all your eggs in one basket. That is age old wisdom and applies to investing as well. In technical parlance it is called diversification where you effectively spread your equity investments across sectors and themes so that your investment performance is not dependent on any one stock or sector.

  4. Take a long term view and cultivate that habit in the very beginning. It is futile to time the market. Not only that it is hard to consistently get the tops and bottoms of the market right but it hardly makes any difference to your eventual returns.

  5. Try to invest consistently and regularly instead of putting a large corpus in a stock of your choice. The advantage of being regular is that it instils discipline in your investment and also gives the added benefit of rupee cost averaging. That means; over time your average cost of investing comes down.

  6. Even through equity is about the long term, try to get bargains. Even if you are convinced about the long term prospects of Infosys, it makes a lot of business sense to buy at Rs.650 than at Rs.750. Quite often, a market correction creates salivating bargains. Use such corrections to add quality stocks at low prices.

  7. Divide your equity portfolio between core holdings and satellite holdings. Your core holdings are your long term investment portfolio and you don’t sell these stocks at every correction. On the other hand, the satellite portfolios are more of a trading portfolio where you look out for short to medium term opportunities in the market. Have a separate approach to both these types of stocks.

  8. Don’t ignore trading costs. Even if you are a long term investor, take at a close look at your costs. Your cost is not just about brokerage costs but there are a number of other costs too. There are statutory costs, exchange charges, demat AMC, DIS charges, demat and remat charges etc. All these need to be added to calculate your effective cost. Nowadays, it makes a lot of sense to opt for low-cost discount brokers who can give the same execution at a much lower cost.

  9. As a beginner, remember that quality always wins in the end. When we talk about quality we are talking about quality at a number of levels. Look at quality of earnings; more of the earnings must be coming from the core business. Look at profitability; the company must be earning more margins than the peer group. Take stock of asset turnover; it tells you how efficiently the business is using assets. At a qualitative level, prefer companies that have high standard of disclosure and transparency. Large caps or mid caps, this quality approach always works in your favour.

  10. Make effective use of technology and if you are a beginner then you better get used to it early. Ideally use the online trading platform; it gives you a lot more control over your trades. Also, if possible you can download the app on your smart phone which allows you to trade on the run. Get used to reading electronic contract notes and ledgers; they are a lot more convenient and environment friendly than printed stuff.

In an effort to chase stocks, investors tend to forget that investment success is a lot more about discipline than about skills or flair. It is in your hands to make your investments work in a systematic manner.