One needs to first dwell upon the current investment experience of Indian retail investors to evaluate if or why Samedh Investment Advisory? It is a known fact that when most Indian retail investors reflect on their investment portfolio, they realize that the return generated from their long-term Real Estate investment overshadows everything else. Real Estate investments require a lot of capital which is either arranged by investors by taking a loan or accumulated over a period of time by depending on Gold (INR) / Bank Deposits. What separates these investments from others? Can their success be replicated with other investments as well? Is it possible to improve upon the return generated by Indian retail investor from these investments? The answer to these questions would lead to answer of the main question.
What separates Real Estate supported by Gold and Bank Deposits investments from others?
The answer lies in the nature of these investments and attitude of Indian investor towards these investments.
1. Nature of Investment in Real Estate, Gold and Bank Deposits
Both Real Estate and Gold have generated incredible returns over long term for Indian investors. The average annualized return generated by growth in value during 25 years from 1988 to 2013 is 10.7% for Gold (INR) and 11.8% for Residential Real Estate in Delhi. Besides growth in value Residential Real Estate has also generated an average rental yield of 2.0%, taking total annualized return to 13.8%. Average Indian retail investor may not be keeping track of the actual return percentage but the wisdom of superior returns from these investments has been passed along from one generation to the other. Bank Fixed Deposits have offered diversification in the portfolio generating safe average annualized income yield of 8.6% in 20 years from 1995 to 2014 (3-year fixed deposit).
2. Attitude of Indian Investors towards Investment in Real Estate and Gold
Real Estate and Gold are physical assets fulfilling both investment and utility need of Indians. The need for house, shop or land is fueled by growing Indian population. Gold is required for gifting jewelry on marriage, the planning for which is started as soon as a child is born. The determining factor for making investment in Real Estate and Gold is availability of sufficient capital. This makes investment in these assets independent of market cycle, driven by availability of investible surplus rather than market hype. Bank Deposits are used as safe investment to accumulate capital which eventually may be used for purchase of Real Estate or Gold. Most Indian retail investors follow buy-and-hold strategy which allows them to generate overall average return of 12.0% spanning the three assets.
Can the success with Real Estate or Gold be replicated with other investments as well?
The experience of average Indian retail investor with Equity has been the opposite of that with Real Estate and Gold (INR). Benchmark Equity Index Nifty 50 has generated an average annualized return of 11.5% by growth in value in 23 years from 1990 to 2013, apart from an average dividend yield of 1.5%. However the benchmark has also demonstrated higher volatility (risk) than both Real Estate and Gold (INR) during this period. The attitude of average Indian retail investor towards equity has been completely different from that towards Real Estate or Gold (INR). Equity being a financial asset does not have a utility need in household. Investments in equity have been made by retail investors mostly to make quick speculative gain at times of market hype. Average Indian retail investor has been attracted to leverage available in Future and Options market for speculative trading, as validated by high equity derivative volumes in India. Investments made in cash segment have also been driven by greed in bull market at high levels, demonstrated by higher retail turnover at all-time-high levels of market. These are subsequently liquidated in despair succumbing to fear prevailing in bear market at low levels. Thus average Indian retail investor has had a bitter experience with investment in equity. People who have been able to invest in Equity with same attitude as adopted towards Real Estate or Gold (INR) have been able to traverse the market much better. They have bought into quality Equity Scripts or Equity Mutual Funds at regular intervals (mostly through SIP) and held on their investments thus generating market returns.
Is it possible to improve upon the return generated by Indian retail investors from investment in Real Estate or Gold?
An improvement upon simple buy-and-hold strategy in Real Estate or Gold (INR) would require both generating higher annualized return as well as containing overall portfolio volatility (risk). At Samedh, the belief is that meeting these twin objectives is possible by paying attention to two key aspects of investment portfolio:
1. Making Investment Transactions based on Market Pricing Cycle
Markets tend to price investment products based on prevailing market sentiments, which are mostly fueled by future expectations from the investment product. Markets sometimes overrate and sometimes underrate the unpredictable future. They gradually come to terms with reality after every phase of exuberance or despair. Thus market sentiments demonstrate a cyclical pattern, fluctuating around “Fair Value” of the investment product as shown in figure below.
The duration of complete cycle varies from one investment product to other and also between different cycles of the same investment product. The average duration can be determined from historical trend by calculating the period between two market pricing peaks with an intermediate bottom or period between two market pricing bottoms with an intermediate peak . For example Indian Stock Market Benchmark CNX Nifty has peaks with intermediate bottoms in years 1994, 2000 and 2007 and can be said to have cycle duration of 6-7 years. By comparison Gold price in USD has peaks with an intermediate bottom in 1980 and 2011 indicating a 31 year cycle duration.
An approach where investment in an asset is made near bottom levels of its market pricing cycle and liquidated above average levels promises to offer return close to its long-term buy-and-hold strategy with low down-side risk. Such an approach also frees up capital to invest elsewhere between above average and near bottom market pricing levels. However timing the exact peak or bottom is not possible, so the line-of-action would have to be to buy when markets are at statistically low historical levels and sell when markets are at statistically high historical levels.
2. Following Asset Allocation based on Market Pricing Cycle
Overall portfolio volatility can be contained by diversifying investment across asset classes demonstrating low or negative price correlation with each other. An asset allocation strategy where percentage allocation of an asset class is based on market pricing cycle of individual asset class automatically increases allocation at lower levels and reduces allocation at higher levels. Such a strategy offers generation of higher annualized return as well as containment of overall portfolio volatility.
Samedh Investment Advisory can help investors generate adequate returns from their Financial Investments
There are several different approaches adopted by seasoned investors to generate return from their investments. But the average passive retail investor does not have either knowledge or time or both to be able to generate overall portfolio return higher than 12.0%, achieved by simple buy-and-hold strategy based on real estate. Many fail to generate even this much. Further an investor cannot construct an optimum investment portfolio by depending completely on physical assets like Real Estate or Gold. An optimum investment portfolio should have a balance of physical and financial investments, based on market conditions. Most passive retail investors need support of quality advisory to generate adequate return from their financial investments by devoting little time of their own.
Samedh Investment Advisory has been launched with the objective of bringing quality financial investment advice to Indian retail investors at affordable price. The advisory intends to leverage its understanding of market pricing cycle of leading benchmark indices to advice appropriate asset allocation and investment transactions on quarterly basis through Samedh Dynamic Mutual Fund Portfolios (SDMFP).
Samedh Investment Advisory considers it imperative to quantify all its commitments, and the same are mentioned below.
Quality Financial Investment Advice
A quality advice should offer the following:
1. Generation of Adequate Return: A quality advisory should be capable of helping investors generate adequate return from their financial investments over long term. Investment model proposed by Samedh is capable of generating an average annualized return of 16.0% for 3 year investments. This figure is based on evaluation of the investment model with long-term data series of various benchmark indices. Thus at Samedh the target is to generate an average annualized return of 16.0% for investors who follow the advisory for 3 years. This implies 4.0% additional return over 12.0% return generated through buy-and-hold investment strategy spanning Real Estate, Gold (INR) and Bank Deposit.
2. Containment of Investment Risk: A quality advisory should be able to generate higher return for investor without making him/her take undue risk. Risk is measured as Standard Deviation of the annual return generated by an Asset Class and compared with Average annual return, to identify the range of values between which annual return is expected in future. At Samedh, it is preferred to further quantify risk in terms of probability of getting a negative return (sub-zero return or capital erosion). This probability is calculated using 3-year Average Annualized Return and Standard Deviation of month-end benchmark index levels and assuming a normal distribution of return values. The possibility of generating negative return defines the true meaning of risk for retail investor. A 3-year period is used, as that is the minimum duration for which investments are suggested by the advisory. Standard Deviation and corresponding risk of negative return for asset classes decreases with increase in holding period, so the risk is less for a holding period of 5 years as compared to a holding period of 3 years.
The table below provides the relevant information for the various asset classes based on performance of their respective benchmark indices.
|Asset Class||Asset Class Category||Benchmark Index||Average Annualized Return (Growth)||Average Annualized Return (Income)||Standard Deviation (3 Yr)||Probability of Negative Return (3 yr)||Remarks|
|Growth||Residential Property in Delhi NCR||Residex (Delhi NCR)||11.8%||2.0%||6.8%||4.1%|
|Equity India||CNX Nifty 50||11.5%||1.5%||13.9%||17.5%|
|Gold (INR)||Gold (USD) * INR/USD||10.7%||–||8.6%||10.7%|
|Income||Bank Deposit (3 Yr, AAA)||G-Sec (3 Year)||–||8.6%||2.48%||–||3-Yr AAA Deposit expected to yield stated return in 3 years|
|Liquid||Saving Bank Balance||Government Regulation||–||4.0%||–||–|
The various asset classes can be placed in a grid to get a view of risk-return profile of the asset classes. For the same, three categories each are defined for risk and return as below:
|Return Categories||< 6%||6% – 12%||> 12%||Average Inflation (CPI) between 2005 and 2013 has been 8.5%. Investments with lesser return are not able to beat inflation.|
|Risk Categories||< 6%||6% – 12%||> 12%||Based on possibility of getting negative return on making investment for 3 years|
The target position of Samedh Dynamic Mutual Fund Portfolio (SDMFP) in Risk vs Return matrix is shown in the figure below:
The target standard deviation for Samedh Dynamic Mutual Fund Portfolio (SDMFP) is 10% for 3 year investment. This would imply 6% possibility of a negative return for 3 year investment. This, along with the targeted 16.0% annualized return over 3 years, when achieved would make the advisory stand out among all financial investment options available to Indian retail investors.
3. Holistic Financial Advisory: A quality financial investment advisory should address 100% of the financial investment portfolio of investor. It cannot be a partial solution advising investment(s) without a view of overall financial investment portfolio. Financial investments include Financial Assets like Equity, Debt, Gold ETF etc but exclude Physical Assets like Real Estate, Gold Jewelry etc. Physical Assets have been excluded for following reasons:
- Physical Assets are bought for utility purpose and are not managed like financial investments
- Physical Assets, like property, have large ticket size and allocation to them cannot be as per a specified percentage. In future, Real Estate Investment Trusts (REIT) may allow investors to overcome this shortcoming.
- Physical Assets like property do not have a credible long-term data available on monthly basis to analyze their cycles
- Physical Assets require time of investor for physical management of asset which may be undesirable
4. Continuous Hand-holding: A quality investment advisory should guide the investor on on-going basis. It cannot be a point solution where for e.g. an investor may be advised to buy a stock today without a clue as to how much should be invested and for how long. Instead the investor should be guided on managing his/her complete portfolio on continuous basis.
Affordable Financial Investment Advisory
Samedh Investment Advisory has been launched in April 2014 and can currently be subscribed to free-of-cost.