Reading - July 13

Did an analysis of returns from NSE, BSE, gold and silver over the last 20 years. Found some interesting patterns:

1. How much would Re. 1 become now? - In BSE, Re. 1 invested in 1991 would become 20.07 today, suggesting a return of 16%. In NSE, Re.1 in 1997 will become 6.55 today with return of 14%. Gold (1 in 1991 to 7.3 today, returns 11%), silver (1 in 1991 to 7.31 today, returns 10.5%)
   
2. Average 3-year returns: NSE (15.3%), BSE (14.3%), Gold (11%), silver (11.3%)
3. Average 5-year returns: NSE (15.2%), BSE (12.8%), Gold (9.9%), silver (9.9%)
4. Standard deviation on 1 year returns: 0.39, 0.37, 0.13, 0.26
5. Standard deviation on 3 year returns: 0.15, 0.18, 0.09, 0.14
6. Standard deviation on 5 year returns: 0.12, 0.12, 0.08, 0.10
   
7. Negative annual returns: 5/14, 7/20, 3/20, 8/20
8. Bumper years where return has been >40%: 5/14, 7/20, 7/20 (> 25%), 7/20 (>25%)
9. Disaster years where return has been <-10%: 5/14, 6/20, 1/20, 3/20
   

Gold and USD were historically negatively correlated. Now they are turning to be positively correlated. In future, negative correlation is expected.

Read through Nassim Taleb's philosophy of black swan events. He suggests to create a portfolio of extremely safe assets and extremely risky assets, as 'medium risk' is difficult to measure. Will read his books now.

Mutual Funds: Went through primer on moneycontrol.com. Important points:

1. Asset allocation of a fund can be Equity (growth), debt (income), money market (gilt), balanced, sector specific, etc.
2. NAV - net asset value, computing every day by a fund after deducting all expenses.
3. Expense ratio: Expenses/ total assets under management (and not returns earned).
4. Load: Some AMCs have sales charges, or loads, on their funds (entry load and/or exit load) to compensate for distribution costs. Funds that can be purchased without a sales charge are called no-load funds.
5. Open ended funds: Enter or exit anytime
6. Closed ended funds: Redemption can take place only after the period of the scheme is over. However, close-ended funds are listed on the stock exchanges and investors can buy/ sell units in the secondary market (there is no load).
7. Tax benefits: This is important: a) 100% income tax exemption on all MFs dividends, b) Equity funds - short term capital gain is taxed at 15%. Long term capital gains is not applicable. Debt Funds - Short term capital gains is taxed as per the slab rates applicable to you. Long term capital gains tax to be lower of - 10% on the capital gains without factoring indexation benefit and 20% on the capital gains after factoring indexation benefit. c) Open end funds with equity exposure of more than 65% (Revised from 50% to 65% are exempt from the payment of dividend tax for a period of 3 years from 1999-2000.
8. Fund selection: Evaluate past performance and look for consistency. You can diversify into 3 funds with similar asset allocation. Consider fund costs. s a general rule, 1% towards management fees and 0.6% towards annual expenses should be acceptable. Try and avoid funds that have a sales load, unless of course they have a consistent track record of being a top-performer.
9. Use index funds
10. Stay away from mutual funds whose fund managers change often.