Everyone knows that investing in equity is risky. However, the risk taking abilities of investors vary. Some don't think twice before investing everything, including the kitchen sink, in equities.
And yet there are the risk averse others who cannot bear losing even a rupee of their capital. Most of us are somewhere in between.
But what if one could invest in equities with the guarantee of not losing capital? In other words, what if you could have your cake and eat it too? I know, most of you must be thinking such a thing isn't possible--- such a Utopia doesn't exist.
Through this article, I will introduce the readers to precisely such a Utopia. And I am not even talking about the capital guaranteed schemes that are soon going to be launched by various mutual funds.
These schemes apart from being close-ended will invest a large proportion of funds in fixed income instruments, thereby making the return comparable at best with a well-to-do MIP scheme.
Instead, I am referring to pure unadulterated equity pleasure without taking a single iota of risk as far as loss of capital is concerned. To know how, read on.
Here's what must you do. Invest Rs 6 lakh (Rs 600,000) in the Post Office Monthly Income Scheme (POMIS). POMIS gives interest at the rate of 8% p.a., which means per year you would receive Rs 48,000.
As it is a monthly income scheme, the interest per month works out to Rs 4,000. Now, this is fully taxable. Assuming you are in the 30% tax bracket, the net balance after tax left with you would be Rs 2,800.
Now, enter into an SIP (Systematic Investment Plan) with this amount of Rs 2,800. POMIS is a six-year scheme. So basically, you would invest Rs 2,800 per month for six years.
At the end of six years, you would receive the market value of your mutual fund investment and also the capital amount of Rs 6 lakh invested in POMIS.
Consequently, while you have kept your capital intact, you still have taken on equity with all its associated risk.
To see how this strategy can actually work out, we ran some numbers. Say, you started your POMIS account in September 2000. The monthly interest was invested in Franklin Templeton Prima Fund on an SIP basis.
By adopting this simple structure, at the end of six years, the investor would have received around Rs 9.45 lakh (Rs 945,000) just on account of the mutual fund investment. Add to it the capital amount of Rs 6 lakh of POMIS and the total investment would net a cool Rs 15 lakh (Rs 1.5 million). And this is after tax and without an iota of risk.
So who needs capital guaranteed funds?
Anyway, the point that I continuously make through my write-ups is that mutual fund investing is all about the long term.
We have seen how an SIP of Rs 2,800 per month has grown to a phenomenal Rs 9.45 lakh. However, the key here is that the investor kept up his investments for all of the six years, month after month, year after year.
How many of us have invested in a mutual fund six years back? And more importantly, how many of us still remain invested? The answer would most probably be none.
The reason in all probability is because we invest and disinvest based on what happens in the world around us. In other words, we react to world events.
Though I am not much of a crystal ball gazer, here's what I think will happen in the next six years:
The US Fed will raise interest rates. The US Fed will lower interest rates. Oil prices will rise and oil prices will fall. Commodity prices will fall. Commodity prices will rise. FIIs will intermittently pull out of Indian markets only to fall over themselves to get in once again. (Did someone say that this was smart money?) There will be terror strikes. There will be political upheavals, both nationally and internationally.
These things have taken place before our times, during our times and will take place after our times also. For, that is the way of the world. In the meanwhile, your personal net worth will solely depend upon how you react or more appropriately don't react to these events.
In another piece, we will discuss the reasons one should sell one's mutual fund. But none of the same appear in this article.
You want to win in the markets. Take the following words of Calvin Coolidge to heart: "Nothing in this world can take the place of persistence. Talent will not; nothing is more common than unsuccessful men with talent. Genius will not; unrewarded genius is almost a proverb. Education will not; the world is full of educated derelicts. Persistence and determination alone are omnipotent."
A six-year SIP was persistent enough. And look how much money it made.
The author is the Director of A N Shanbhag NR Group, a Mumbai based tax and investment advisory firm. He may be reached at sandeep.shanbhag@moneycontrol.com.