Thursday, February 13, 2020

DO SMALL CAP FUNDs MAKE SENSE ?

The deluge of Small Caps NFO is sure to make investors look at the Small Caps with lots of curiosity.
Especially with the sluggish return the Small Cap space has generated in the past 2 years.
In fact, the Small Cap has been battered for the past 2 years.


Majority of Wealth Managers opine that Small Cap generate higher alpha in the coming years, especially post the SEBI recategorisation.
Small Cap universe is large and majority of them are NOT covered by analysts.

Small Caps tend to RISE MORE in a rising market and similarly FALL STEEPER in a flat/Bear Market.
Thus, timing the entry/exit in Small Caps is imperative to maximise returns.
And a SIP investment would make sense, unless one is sure of the market trend in near term.




CHECK THE ABOVE IMAGE : 

This the performance report as on yesterday when the Small cap index is still down by 35% from Jan 2018 Peak!!!

Power of Small caps especially when we are addressing the long term goal.

Small is not SMALL when it comes to giving returns....


No compromise on any other funds.


VOLATILE JOURNEY :|
Equities themselves are volatile and Small Caps more so.
The journey could be very very painful. Especially when there is a sell off in Equity Markets, its the Small Caps which not only bear the maximum brunt but also the first to get SOLD off.
Small caps are for investors who prefer HIGH RETURN and dont mind the accompanying HIGH RISK AND HIGH VOLATILITY that comes with the Small Cap space.


IS IT A GOOD TIME TO INVEST IN SMALL CAP NOW:

The data definitely says so.
The Small Cap PE is now at 37.6 (feb 2020) down from the highs of 100 in Jan 2018.

The average discount of Small Cap Index with Large Cap Index is 15 but now its at a unbelievable 34%.
Definitely attractive.

Hence, its not without reason that 2 NFOs on SMALL CAPs have hit the market.
ITI SMALL CAP FUND
IDFC EMERGING BUSINESS FUND

IN fact, IDFC is coming out with an NFO after 10 years.



POSITIVES : 

The good thing is that majority of Small Caps are owned by Domestic investors and FIIs selling would have little or no impact.
Small Caps are typically under-researched, mostly undervalued and underowned thus providing the opportunity for maximum gains.
Hence, the stock picks become the MOST important factor when it comes to Small Caps in particular.



NEGATIVES

1. Small Caps are not only highly volatile, but they also suffer from low volume and less liquidity.



Although, Small Caps tend to be very volatile, they can give your portfolio a much needed 'alpha' adding to the overall returns. The volatility associated with small caps tend to get evened out over a period of time. SIP Investment would be the BEST method to maximize your returns from this Fund.

If you can DIGEST the accompanying High Volatility and ready to see RED in your portfolio for 2-3 years at a stretch, then Small Cap space is for you.


It would be unwise to ignore Small Caps just because they are volatile. Use the SIP route to diminish the Volatility and actually make it your friend to get good returns.
In fact, Small Caps are a must in ANY portfolio and should form anywhere between 5% to 20% depending on each case.

Small Caps gave a return of as high as 60% plus per annum in 2015/2016 but saw deep correction in 2108 and 2019.
in fact, in 2018 & 2019, while Large Caps were UP by 15%, the Mid Caps were DOWN by 15% and SMALL CAPS EVEN WORSE.....DOWN BY 31%.

In fact, it is this particular data that Mutual fund companies are showing investors and telling them Small caps are cheaper now than anytime before.






OUR TAKE : 



We always advocate against TIMING THE MARKET.
But sometimes, it does make sense to make use of anomalies that Equity Market keeps throwing up.
The Small Caps have been butchered for the past 2 years where even top quality companies kept hitting new lows.

We also have always suggested to look at the MUTUAL FUND route towards equity exposure especially when it comes to under-researched SMALL CAP space.
Hence, you can consider going for Small caps as such.


Although 1 year is a very small period....
In 2019, Axis Small gave return of 37% where as HDFC Small Cap gave a NEGATIVE return of 1%.
What this data reveals is that its always makes SENSE to take guidance from an Advisor.

Dont become #paisawiserupeefoolish and lose your hard earned money by investing DIRECTLY without proper guidance.


Do contact your Advisor who will be in a better position to judge your Risk Appetite and invest accordingly.



This amazing data shows how SMALL CAPS HAVE BOUNCED BACK after major falls. 
The BOUNCE has been sharper, larger, and BIGGER. 
So if you are intending to investing in a small cap, and if you do see a fall....just STAY PUT. 

The reversal will happen quicker and it will happen in a BIG way. 



BEFORE INVESTING IN SMALL CAPS (OR EVEN EQUITIES) KNOW THIS......
By nature, we try to avoid pain. But nothing worthwhile is ever achieved without going through pain.
Markets may not give any returns for three years and give 3 year returns in the 4th year.

INVEST IN SMALL FUNDS ONLY IF YOU ARE READY TO SEE NEGATIVE RETURNS FOR AT LEAST 3 YEARS 

Go for small caps but preferably via SIP mode and make sure that the investment is  for pure long long term only.

YOU ARE STRONGLY ENCOURAGED TO TAKE THE GUIDANCE OF A COMPETENT FINANCIAL ADVISOR WHO WILL BE IN A BETTER POSITION TO GUIDE YOU ON THE FUNDS/ASSETS TO INVEST.

Regards,
Srikanth Matrubai,
Author "DON'T RETIRE RICH"



You can invest through this link
http:/http://https://cams.co.in/9OF7sINa5Gs/

You can subscribe to my TELEGRAM channel Become Wealthy by following the habits of what the Wealthy do. Join my Channel WEALTHY HABITS and change your habits and have only WEALTHY HABITS. http://t.me/joinchat/AAAAAEh49fBN2bkUQnFKIQ If you have already downloaded Telegram App just type https://t.me/WealthyHabits and JOIN

Also visit http:/http://https://t.me/WealthyHabits/

Tuesday, February 4, 2020

MOVE AWAY FROM DIVIDEND STOCKS

BETTER TO MOVE AWAY FROM DIVIDEND STOCKS TO GROWTH OPTION OF EQUITY MUTUAL FUNDS


Dividends are now taxed !!!!

Mutual fund schemes do not pay ANY KIND OF TAXES including Dividend Taxes.
So, for a Highest Tax Bracket individual, its better to own a Mutual Fund than a Direct Equity.




The Dividends in the hands of investors was TAX FREE (upto Rs.10 lakhs in case of Direct Equities and UNLIMITED in case of Mutual funds)
But the Union Budget of 2020 has changed the dynamics.




The companies which earlier used to pay Tax on Dividends are no longer require to pay the same and instead the Dividends that are received in the hands of investors are taxed ACCORDING TO THE TAX SLAB OF THE INDIVIDUAL.

I know of numerous investors whose expenses is taken care solely by the Dividends they receive.





For example, one Mr.SN whom I know since 2002 receives about Rs.55 lakhs of dividend annually.

For him, earlier the entire dividend was TAX FREE.
But, about a couple of years back, the tax was applied for dividend above Rs.10 lakhs...

Now, the entire dividend is TAXED.

Mr.SN, who till as recently as 3 years was paying NIL tax is now required to pay upto 42% TAX (since he comes in the Highest Tax Bracket).
So...out of his 55 lakhs....he is now required to pay Rs.14,43,000 as per the Old Regime.
As per the New Regime his tax outgo would be Rs.14,58,600

3 years back - NIL TAX
last 2 years - Rs.11,31,000 tax
This year onwards - 14,43,000

Now....suddenly his NET income (income in hand) is down by a whopping 30%.
Large enough percentage to stump all financial plans and put his future in jeopardy.

Whats the options for him now?

Well Investing in Mutual Funds which yield him the same percentage of Dividends would be much better option for Mr.SN.

Why ?
Mutual funds that receive Dividends from Companies that they invest in, ensure that the NAV of the fund goes up (NAV = value)

A fund, most preferably a PSU Fund or a Dividend Yield fund, would be a safer and much better option for HNI investors like MR.SN.







CAVEAT : 

Do not invest in Dividend option of a Mutual fund scheme. 
Mutual funds will also deduct 10% TDS before distributing the dividend affecting the overall returns to you.
So, if you are supposed to get a dividend of Say Rs.20,000 the actual amount that will be credited to your bank will be 10% less...that is only Rs.18,000.


Investing in GROWTH option and opting for a Systematic Withdrawal Plan or a Redemption as and when required would be much better option.

So, in the above example, if Mr.SN invests in a Mutual fund GROWTH option and withdraws Rs.55 lakhs, then he would be paying a Tax of Rs.5,40,000 only

INCOME = 55,00,000
Exempted 1,00,000
Net = 54,00,000
10% on this is 5,40,000

Straightaway a huge saving from paying Rs.14,43,000 to just Rs.5,40,000 a saving of more than Rs.9 lakhs.....




Either way.....we have always advocated the GROWTH option as the best option as a Dividend in Mutual fund is YOUR OWN money coming back to you and not profit as such.

Of course, you are encouraged to take the help of a competent Financial Advisor who would guide on the right option.
the ultimate goal is NOT TO SAVE TAXES
BUT TO MAXIMISE RETURNS and have a Peaceful Retirement.
\

All the best
Srikanth Matrubai
Author of DON'T RETIRE RICH


You can subscribe to my TELEGRAM channel Become Wealthy by following the habits of what the Wealthy do. Join my Channel WEALTHY HABITS and change your habits and have only WEALTHY HABITS. http://t.me/joinchat/AAAAAEh49fBN2bkUQnFKIQ If you have already downloaded Telegram App just type https://t.me/WealthyHabits and JOIN

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