25 January 2015

Case Study - Combining HDFC Top 200 & Recurring Deposit – Part 4

This is the fourth and final part of the SIP Case Study which made use of HDFC Top 200 as the chosen fund. In previous post, I had evaluated the impact of considering the interest accrued on Market Crash Fund. You can read that analysis here.

In this post, I am evaluating the impact of changing the trigger point to one which is dependent on P/E Ratio of the index rather than NAV of the mutual fund (HDFC Top 200 in this case).

So after much deliberations and reader feedbacks, I came up with the following scenario to evaluate:

Scenario 1:

Investment of Rs 10,000 will be split between MF SIP & Recurring Deposits on basis of following conditions:
  • If index PE between 17 and 22, SIP=Rs 5000 and RD=Rs 5000
  • If index PE>22, SIP=Rs 0 (i.e. SIP stops) and RD=Rs 10,000
  • If index 15<PE<17, SIP=Rs10,000 (i.e. SIP doubles) and RD=Rs 0
  • If index PE<15, SIP=Rs 10,000 and RD=Rs 0; and Market Crash Fund (MCF) is utilized as follows - As soon as PE goes below 15, accumulated MCF is split into 3 parts. First part is deployed immediately and remaining two over the next two months.

Simple speaking, MCF Trigger point will be at 15PE. At this point, money accumulated will be split into 3 parts and deployed over next 3 month. SIP investments will stop if PE>22. SIP investments will double if PE<17.

The graph below shows the amount invested in SIP and amount added to MCF for all months starting 1996. I have also added the index PE for the day to show the correlation between the PE and amounts going into SIP and MF (as explained in scenario above).

Correlation between Index PE & SIP+RD Amount (monthly basis)

As usual, the above ‘complex’ scenario was compared with a simpler one below:

Scenario 2

Investing Rs 10,000 every month, without any regard for markets movements, PE levels or for that matter, anything.

Note – Since the chosen fund - HDFC Top 200 started in 1996, I required index PE data starting from 1996. But problem I faced was that index PE data is available starting only from 1999. Hence, from 1996-1999, I chose SIP+RD (Rs 5000 each) irrespective of index or PE levels.

Final Results of Analysis

In first scenario, the total money outgo (put in SIP, used from Market Crash Fund and money still lying in MCF) is Rs 23.1 Lacs. Of this, Rs 12.8 lac is invested as SIP, whereas around Rs 5.5 Lacs was invested in parts, at regular intervals, as and when a trigger points were reached. The money currently available in MCF is around Rs 4.8 lacs, where interest has been considered @ 8% per annum and has been calculated and added to MCF after completion of 12 months. Wherever trigger point is reached in less than 12 months, interest has been ignored for that 12 month period.

There is no change in second scenario and the entire Rs 21.8 lac is invested as SIP of Rs 10,000 every month.

I have chosen the SIP investment (& PE) dates as the first trading day of the month (whether 1st, 2nd, 3rd or 4th…)

So results are as follows:

This time, the pure MF SIP (Scenario 2) delivers Rs 2.46 crores. And a combination of SIP+RD (Scenario 2) delivered Rs 2.47 Crores. If we were to include the money currently available in MCF, it would be Rs 2.52 Crores.

SIP Vs RD Monthly
Scenario 1 & 2 Comparison

So…let see what it means…

It might seem that SIP+MF combination has beaten the pure SIP this time. But in reality, it’s not true. Why?

I have not considered the penal charges & tax implications of liquidating the MCF (via RDs). Though it might not be significant, it still brings down the returns over a period of almost two decades. Another thing to note here is that I have considered interest on RD as 8% calculated yearly. This itself can fluctuate depending on prevalent interest rate scenarios during the last 20 years.

But most importantly, this outperformance of Rs 1 lac (or Rs 6 lac if you consider the accumulated MCF), requires you to monitor PE ratio all through these 20 years and be ready to calculate how much to invest (if PE breaches 15 on lower side or 22 on upper side) every month. Also the charges of starting / stopping RD, and for that matter SIP is also something which needs to be taken into account.

By the way, if you are interested in having a look at the exact numbers, click on the image below:

MF SIP and RD Analysis Since 1996
Full Analysis

Final Comments

So this analysis has once again proved (like previous parts 1, 2 and 3) that, for average investors, it is more than enough to continue investing as much as possible every month in a good diversified mutual fund. They should not pay much attention to ups and downs of markets and whether markets are overvalued or undervalued. No need to put your money regularly in a Market Crash Fund (MCF) solely for purpose of investing in MF when markets are down.

PE Ratio of Index & Amount Accumulated in Market Crash Fund

But if you are lucky to have some surplus funds when markets are trading at low valuations (around PE15), then make it a point to invest. Don't be afraid. People around you would try to convince you not to invest. They will try to tell you that markets will go down further. Please don't listen to them. Even if it goes down (even upto PE12), remember that it will soon revert back to mean (17-18) and then you will be happy that you invested during the downtimes.

What Will I Do?

Personally, I do maintain a Market Crash Fund (MCF) which is funded by interests, dividends and any surplus income which I generate. And I use this fund for buying direct stocks (as and when I feel that stocks I like, are trading at low valuations). I generally don't use this MCF for MF investments.

So what will I do going forward? 

The above analysis clearly shows that there is not much point in taking such an approach. And that is because the additional returns generated by this approach do not justify the efforts put in last two decades. But when not buying individual stocks, I might still use my personal MCF to buy MFs in lumpsum. But I will do it only when I am not absolutely sure of which stocks to buy… but I am pretty sure that markets are grossly undervalued and should be invested in.

20 January 2015

Boring Tuesdays – Three Things to Read Today - 6

Hi Friends

Many of you have been sending links to interesting articles and ideas. I thank you all for your mails, as I now have a really long (& ever increasing) list of such articles. And in past few weeks, I have received numerous requests for sharing these articles on more than one day of the week. I wanted to know what others think. Please do let me know by means of comments…

In the mean time, I share with you three very interesting articles to read today…

Article 1

If you just have time to read one article today, then you need to read this superb one by Parag Parikh – Equities Can Scare You, But Won’t Kill You.

Article 2

If you ask me who my role models are, you will hear names like John D. Rockefeller, Warren Buffett, etc. All these are billionaires. But Mike Piper makes a valid case why he (and many others) should not have Billionaires as role models. Interesting read.

Article 3

You won’t know about an Indian named Divesh Makan. But Mark Zuckerberg does. And so do many other billionaires from Silicon Valley, who want him to manage their money. Read the real story about how this Unknown Indian manages Facebook’s Zuckerberg’s Billions.

That’s all guys…

If you missed the last two posts of Boring Tuesdays series, you can read them here and here.

And if you find some interesting articles which you want to share, please copy+paste the link to that article in comments or drop a mail to stableinvestor@gmail.com. Don't worry if your comment is not visible as soon as you post it. Anti-Spam filters detect hyperlinks in comments (which you are sharing) and automatically park it for my review. I will eventually be notified about your comment. :-)

18 January 2015

Case Study - Combining HDFC Top 200 & Recurring Deposit – Part 3

This is the third part of the SIP related Case Study where I compared the performance of following 2 scenarios:

Scenario 1: Investing regularly (Rs 5000) & periodically making lumpsum investments when markets are down. This lumpsum amount would be an accumulation of an additional amount of Rs 5000 every month (+ annual interest@8%), which will be used at one-go when markets are down (at a pre-decided trigger point).

Scenario 2: Investing regularly, double the regular amount (Rs 10,000) over a period of 20 years in a decent, well diversified mutual fund.

The part 2 of the case study was more about reader’s reactions... where many of my assumptions were questioned. And I was glad that readers were very vocal about it as it pushed me to do further analysis. If you haven’t read the feedbacks, I recommend you do it right away here.

In this part (3) of the study, I test a few other scenarios.

Please note that I initially started this study to prove that there ‘should be’ a structured solution, which could make use of following two facts – (1) It doesn’t make sense to stay out of markets at any time – Why? (2) It seems more logical to invest ‘more’ when markets are down.

But as I progressed with my analysis, it started becoming clear that it might be better to stick with simple SIP of mutual funds rather than thinking too much about investing more using a market crash fund. I am using the word ‘might’ as its still possible that people might be using a similar approach and making profitable investments when markets go down. 

But for average investors, it might be a sensible to stick with SIPs.

But nevertheless, I will complete what I started….

Re-Analyzing To Include Interest Component of RD (Market Crash Fund - MCF)

In first scenario, the total money outgo is Rs 21.9 Lacs. Of this, Rs 10.95 lac is invested as SIP of Rs 5000 every month whereas rest is invested in lumpsum at regular intervals as and when a trigger point is reached. The interest on RD has been considered @ 8% per annum and has been calculated and added to MCF after completion of 12 months. Wherever trigger point is reached in less than 12 months, interest has been ignored for that 12 month period.

There is no change in second scenario and the entire Rs 21.9 lac is invested as SIP of Rs 10,000 every month.

After inclusion of interest component, there was expectation that second scenario would be trumped by first one. But still the second scenario seems to have an edge. And this time, the MF+RD combination delivers Rs 2.23 crores whereas a simple MF delivers Rs 2.43 Crores. (without interests, the SIP+RD number was Rs 2.14 Cr)

Trying Out 75%-25% Split for SIP+RD Scenario

A reader had suggested that I should also try out a scenario where SIP+RD combination is more skewed towards SIP. So I tested a scenario with 75%-25% SIP+RD combination. But here also, there were no earth-shattering differences in results. A SIP+RD of 75%-25% resulted in a corpus of Rs 2.33 Cr, which falls short of Rs 2.43 Cr of simple 100% SIP.


I think a lot of effort has already gone in analyzing these scenarios :-) But I will like to try out one more scenario. And that is of changing the trigger point to one which is dependent on P/E Ratio of broader markets rather than fund NAV. I will be analyzing this scenario in 4th and last part of this case study. My tentative scenario for evaluation is as follows:

MCF Trigger points will be at 15PE. At this point, money accumulated will be split into 6 parts and deployed over next 6 months (if PE remains less than 18). For pausing investments in regular SIP when 22PE is achieved, the money which was supposed to flow into SIP will be added to MCF. Once markets go down below 22PE, regular SIP will commence. But trigger point for MCF deployment will remain at 15PE.

Let me know if this scenario sounds fine to you all….or if something more needs to be added here.

PS - I know I am complicating things. But lets just finish what we started. :-)

16 January 2015

How A Father Convinced His Daughter Not to Sell Her Stocks in Panic

I was reading an interesting Q&A session on Vanguard's site about investing, when I came across this small but remarkable example of how to explain anyone about benefits of long term investing. An investor named Rick Ferri shares his experience about how he tried to convince his daughter about not selling her stock portfolio (or funds) when markets started falling.

Father Daughter Investing

And rest of this post is copied from that interview:


My daughter had saved up a couple thousand dollars, and we had invested in the total market fund.

And it went down.

She started panicking and wanted to sell. 

I said, "I'll make a deal with you. I will guarantee all of your losses 10 years from now if you split all of your gains with me 50/50."

And she thought about it, and she said, "No, I'm good."

I got her to think long-term, and she's never forgotten that. I think that was a good lesson.


PS - I think this example is indeed a very convincing way of making someone realize about the benefits of staying invested for long term. What do you think? How do you convince others about the benefits of long term investing?

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