EQUITIES ARE BEST BET IN LONG-TERM!

EQUITIES ARE BEST BET IN LONG-TERM!

Here is interesting piece of analysis and equally significant from an individual’s investment perspective.

Most of the time people ignore equity being high risk and high return investment category. Investment in equities require excellent understanding of stock market, deep study of individual companies, risk appetite, holding capacity (in case share prices drop considerably before picking up). People who tend to invest in equities have a mindset that the money should multiply in quick time without understanding the downside risk.  

How this risk component can be mitigated in such a manner that one can get good returns? There is way out. A diversified Equity mutual fund is one of the options. These funds would try and outperform (some time underperform) the benchmark index. In Indian context, the benchmark indices are BSE-30 (Bombay Stock Exchange) and NSE-50 (National Stock Exchange). The number in the end denotes the number of companies in the index.

How about a portfolio which would mimic the returns provides by the benchmark index? Such funds are called Index Fund. A BSE Index fund would typically copy the portfolio of the underlying BSE index. Index funds came into existence recently. BSE started somewhere in late 70’s.

Let us assume that the Index Fund existed in those times. With this assumption, I have tried to calculate the returns delivered by the BSE. These returns are rolling returns compounded and annualized (CAGR). 

The data used is from 2^nd Jan 1980 to 29^th Oct 2014 period taken from BSE website. The strategy is BUY and HOLD.

So if you invest on 2^nd Jan 1980 and withdraw after 5 years on 31^st Dec 1984 where index changed from 118.16 to 271.87, the CAGR works out to be 18.13%. So on if you invest on 4^th Jan 1980 and withdraw on 2^nd Jan 1985, the rolling CAGR works out to be 18.00%.

So in rolling return analysis, I am assuming you invest on any day and withdraw after 5, 10, 20 or 30 years. This way we take out “Timing the Market” philosophy. So there are instances when you could end up investing at the peak and 5 years rolling return could be massive –ve. Here is how this fares on high level

BSE-30 Data From 2-Jan-1980 to 29-Oct-2014	*-Ve Return Instances	Maximum -ve Return	Maximum +ve Return	Minimum +ve Return
5 Year Rolling Returns	651	-8.08%	56.24%	0.01%
10 Year Rolling Returns	53	-2.72%	34.98%	0.02%
20 Year Rolling Returns	0	NA	21.52%	7.03%
30 Year Rolling Returns	0	NA	18.50%	14.80%

So in 5 year rolling return period, there are 651 instances where you could end up losing money but as you go up and invest for longer term the returns stabilize over longer term. Remember this is BUY and HOLD strategy. If we couple this with cost averaging strategy, then the returns are phenomenal. I will write about that in my next article. 

These returns, in Indian context, are tax free (No long term capital gains tax on equities in India) and are incomparable with other investment avenues.

Here is graphical representation of the analysis.

So you will also agree that  EQUITIES ARE BEST BET IN LONG-TERM!!!

Note: If you want to see the details of analysis done in excel, please feel free to drop me a note on Sudarshan.Rajhansa@gmail.com    

KNOW YOUR EPF (Employees’ Provident Fund Balance)!

EPFO (Employees’ Provident Fund Organization), which manages our EPF contribution and started lot of initiatives. All these initiatives are using latest technology to bring in transparency into the overall operations and provide excellent quality of service to its members. Some of these initiatives are knowing your EPF balance via SMS, EPF Passbook Download, UAN (Universal Account Number) and Online PF Transfer. I am going to write about all of them through by blog with details of these services and how to use them.

Today let me take you through the simple process to know your EPF balance via SMS. What do you need to avail this facility? A mobile number registered in your name, your EPF account number. That’s it, you are ready to go; no registration is required to avail this.

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The EPF Account number should be printed on your salary slip. It will something like MH/37528/111111 [<State Code>/<Establishment Code>/<Account Number>]

1. Go to http://www.epfindia.com/index.html

2. Under “For Employees” Section, click on “Know Your EPF Balance” link

3. This will take you the next page. Click on “Click here” to know your balance link

4. On the next page, from the drop down, select the state in which you PF account is registered.

5. I am selecting Maharashtra to illustrate the Process. After selecting the state, the Regional EPFO offices under that state would pop-up. You need to select the PF office in which your company is registered.  You should get this information from your HR/Payroll department if you don’t have it. I am selecting Malad (Kandivali) for our illustration as shown below.

6. Once you select the EPFO Office, comes the final screen where you need to input your Establishment code, Extension (if available) and Account Number.  As explained in the beginning the establishment code will be part of your EPF Account Number mentioned in salary slip. Extension can be left blank if not available. Input all these correctly. After that input your name as it appears in the PF slip (if you received it sometime). Input the Mobile Number. Do not put +91 prefix. Just input your 10-digit mobile number and check the check box “I Agree”. You are ready to submit now. Hit submit and within few minutes you will get a SMS on your mobile with balance details.

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Note: If you get into any trouble doing this, please feel free to drop me a note on Sudarshan@myvitaminm.com. 

JOB HOPPING AND PF TRANSFER – TO DO OR NOT TO: POWER OF COMPOUNDING!

JOB HOPPING AND PF TRANSFER – TO DO OR NOT TO: POWER OF COMPOUNDING!

These day people hop job regularly. It is not like the good old days where you join a service and retire from the same institution. Flood of opportunities due to globalization and growing skilled population made it easy for both employers to seek a talent and employees to seek opportunities for growth. In doing all these to increase the in-hand-salary, most of us tend to forget about the Employees Provident Fund balance. There is always some big expense round the corner and we decide to withdraw the balance instead of transferring it.

This looks very simple and seemingly very unimportant transaction. But read below to understand that you are going to lose whopping wealth due to your ignorant mind.

Let us take a hypothetical example of a Vicky, who starts working when he is 25 and switches his job every three years for first 10 year and 2 times for next 10 years. After that he settles to remain with one company.  Now assume that he is going to retire when he is 60. Every time Vicky switches his job, he withdraws his EPF in first 20 years.

Let us assume that Vicky is an IT engineer and his starting basic salary is INR 180000 per year. We also assume that he gets 5% increment in basic pay every year for first twenty years and then it remains constant.

We are assuming actually EPF interest for period known and then an EPF ROI of 8.75% (Current EPF Rate) for all remaining years.

Here is how his withdrawals look: Vicky withdraws about a million rupees in total but he does not understand how much this is going to cost him.

	Employee Share	Employer Share	Total Amount Withdrawn
First Withdrawal After 3 Years	Rs.        76,942	Rs.        54,875	Rs.        131,817
Second Withdrawal After another 3 years	Rs.        89,064	Rs.        66,998	Rs.        156,061
Third Withdrawal After another 3 years	Rs.        98,187	Rs.        76,121	Rs.        174,308
Fourth Withdrawal After next 5 years	Rs.     205,909	Rs.     165,785	Rs.        371,695
Fifth withdrawal after another 5 years	Rs.     250,285	Rs.     210,161	Rs.        460,447
		Grand Total	Rs.    1,294,328

Now to understand power of compounding, look at the table below. There are two scenarios in it. First one is that Vicky does not withdraw during any of his job switches but instead Transfers the EPF balance to the new organization he joins. Due to this, he is able to carry forward his balance from previous employer with interest and top it up with the monthly contribution. The time horizon in which Vicky’s money compounds is whopping 35 years.

In the second scenario, Vicky only starts accumulating after 20 years of service as he has withdrawn on previous occasions where he switched his jobs.

Now look at how much Vicky stands to gain if he does not withdraw. This is whopping 4 times more than what he is making in the second case.

	Employee Share	Employer Share	Total
Normal Case-No Withdrawal	Rs.  7,404,064	Rs.  6,071,198	Rs.  13,475,262
First 20 years, Withdraws at every Job Switch	Rs.  1,714,451	Rs.  1,520,247	Rs.    3,234,698

Benefit to Vicky if he does not withdraw.

1. Vicky gets to compound his money for 35 years
2. Accumulates good enough money to cater for life after retirement
3. All money as per current tax laws is TAX FREE

The Message is loud and clear, ALWAYS TRANSFER YOUR EPF; IT’S FOR YOUR OWN GOOD!

Note: If you want to see the details of analysis done in excel, please feel free to drop me a note on Sudarshan.Rajhansa@gmail.com