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Investment Insights

IDFC AMC

Performance of Sensex

By: Punam Sharma

Sensex Performance over various holding
 

  • Over a longer period, Sensex returns have always been positive. To verify this, we have calculated rolling returns* for different holding periods (1, 3, 5, 7, 10, 15 and 20 years) starting from January 1982 till December 2012.
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  • Chart below shows the minimum, maximum and average returns over different
    holding periods.
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Sensex performance

 

  • From the above chart, we can see that as the holding period increases, chances of
    negative return diminish.
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  • 1 year holding period gives maximum and minimum 265% and -56% returns
    respectively while a 20 year holding period maximum and minimum returns are 26% and 7% respectively.
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  • With increase in holding period, risk** associated reduces.
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  • Chart below shows return-risk profile over different holding periods.
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Return-Risk Profile

 

  • Table below shows various returns, downside risk probability^ of getting negative returns and probability of getting returns below the risk free return #.
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  • Downside risk probability diminishes and becomes nil with increase in holding period Holding period of more than 10 years give only positive return.
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  • Also chances of getting less than the risk free rate reduces over a longer period of time.

 

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IDFC AMC

Systematic Investment Plan

By: Punam Sharma

What is SIP?
 

  • Systematic Investment Plan (SIP) is an investment strategy where an investor invests a fixed amount in a fund at a periodic interval.
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  • SIP can be made daily, weekly, monthly or quarterly.
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  • Suppose an investor had started an SIP*since last 20 years, he would have invested 2, 52,000 and value of his investment as on today would be 9, 96,629 a return**of 11.7% CAGR
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Where to Invest?
 

  • An investor can choose to start an SIP in either Large Cap, Midcap or Diversify.
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  • We have taken Sensex for Large Cap, CNX Midcap for midcap and BSE200 for diversified and assumed SIP of 1000 done on 1stof every month.
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  • Chart below shows investment value of SIP done for last 5and 10years in Large Cap, Midcap or Diversified.
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5 years SIP

 
10 years SIP

 

 
How long investor should do SIP for?
 

  • SIP can be done for any period of time.
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  • Table below shows minimum, maximum, average return for SIP done for a period of 3, 5, 7 and 10 years. To calculate same, have taken rolling SIP investments starting from January 1982 to December 2012 and SIP done 1st of every month.
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SIP Performance

 

 
When to do an SIP?
 

  • SIP can be done daily, weekly, monthly (have omitted quarterly here).
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  • Table below shows average returns of SIP done over last 5 years.
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  • It’s observed there’s hardly 20bps difference in returns between choosing to invest in daily, weekly or monthly SIP
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  • Chart below shows SIP return for SIP done on any day of the week and month over the last 5 years.
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  • From the chart above, it’s observed there is minimal difference in returns (Range: 7.16%p.a. -7.50% p.a). Investing mid week i.e. Wednesday gives marginally higher return than other days of the week.
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  • Similarly, SIP done any day of the month gives almost same return with marginal difference (Range: 7.12%p.a. -7.70% p.a).
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  • There is marginal dip in returns by investing mid month and the beginning of the month.
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  • We can conclude that investing either weekly or monthly or daily or any day of week or month gives almost same returns over the period of time

 

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IDFC AMC

Systematic Transfer Plan

By: Punam Sharma

A 5 year STP almost never loses money. Learn capital protection the STP way with ReWISE

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IDFC AMC

Asset Allocation

By: Punam Sharma

What is Asset Allocation?
 

  • Its diversification of one’s portfolio among different asset classes such as bonds, equity, cash, commodities, real estate in order to minimize risk and maximize return.
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  • Different assets perform differently in different market and economic conditions. In other words, returns from different asset classes do not always move in tandem.
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  • Asset allocation minimizes risk.
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  • The best asset allocation is the one which maximizes return with minimum risk in line with investors profile and objectives.
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  • Key to asset allocation is to choose the right asset class to invest in and allocating the right percentage of the total investment to each asset class.
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1 year Rolling Return* Minimum Maximum Average Risk**
Gsec -8.3% 31.6% 9.4% 8.4%
Equity -53.0% 95.7% 17.1% 33.5%
Gold -9.2% 54.6% 17.1% 14.0%

 
Relation between Asset Classes
 

  • Asset returns can be directly correlated (move in same direction) or are inversely correlated (move in opposite direction).For example, one asset class could give positive return while another asset class could give negative return in the same period of time. These two asset classes are inversely related.
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  • Gsec# and equity are inversely correlated.
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  • Correlation coefficient^ of Gsec v/s equity is -0.44. The chart below shows the relation between Gsec and Equity returns.
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Asset Allocation of the two Asset Classes
 

  • Chart below shows risk-return profile of different combinations of asset allocation in Gsec and Equity.
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Learning’s from the Graph
 

  • Investing only in Gsec, gives a return of 9.4% with risk of 8.4%.
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  • By increasing allocation to equity to 15 % the risk actually reduces with an increase in returns. An 85:15 (Gsec: Equity) ratio gives us 10.5% return with lowest level of risk of 6.7%.
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  • Increasing equity allocation a little further to 25 % has the same risk as a 100 % G sec investment but a 2% higher return. A 75:25 (Gsec: Equity) ratio one gets higher return of 11.3% and risk of around 8%.
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  • Choosing right asset class to invest is alone not sufficient. One needs to also decide the right % to allocate to each asset class in order to get maximum return with lower risk.
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Adding Gold as asset class to Gsec and Equity
 

  • We have considered a 2 asset model. By adding another asset class viz. gold risk could reduce further.
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  • Tables below show the risk return relation difference between using diversification of the Gsec: Equity combinations and Gsec: Equity: Gold combination.
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