Why should I invest in equities? It’s supposed to be risky.

Equites are the only asset class that beats inflation meaningfully over long term. As you would find from this article, over a period of past 37 years in India, at constant purchasing power, stocks provided close to 20x returns on initial capital, while Gold offered slightly over 2x return, and FDs barely managed to beat inflation. It is essential to allocate  a portion of your long term capital into equities to create wealth.

What are the various options available for investing equities in India?

There are multiple options available to investors:
1. Direct equity investment: suitable for experienced investors
2. Mutual Funds: enables small investors to invest in public companies, leveraging services of professional fund managers
3. PMS Route: suitable for HNIs, minimum capital requirement varies, generally between 25L to 1 Cr
4. AIF: suitable for HNIs. Minimum investment is 1Cr as per SEBI regulation for Cat-3 AIF
5. Combination of the above

Why do I need an Investment Advisory service?

Making money consistently by investing in stocks is not easy. There are various routes available to investors wanting to invest in equities, each with associated costs, pros and cons. Direct investing can be highly rewarding if one has the necessary knowledge, but it takes years to learn. For most individuals who do not have the knowledge or temperament to succeed through the direct equity route, investing through Mutual Funds, particularly through the systematic investing route (SIP) offers the most reasonable option. However, Mutual Funds have their own limitations and associated costs. Costs varies from fund to fund, but for equity mutual funds, expense ratio could be up to 2.5% of the invested capital. For investors wanting to commit more than a few lakhs in equities, alternative options may prove to be more cost efficient and often rewarding. Advisory services tend to handle smaller AUM, hence, their investment universe can include under-researched small cap gems which MFs may have either ignored or can not commit meaningful capital into. It is therefore not unusual to find reasonable advisory services, offering better returns than average Mutual Funds at a lower cost. PMS and AIFs can also be meaningful alternatives, but generally the capital commitment requirements are more. AIF cat-3 funds for example requires minimum capital commitment of 1Cr based on SEBI regulation. In summary, we can say that for investments exceeding 10 lakhs to atleast 1Cr or more, reasonable advisory service can offer a more rewarding alternative to investors at relatively lower cost.

You said Mutual Funds have associated costs. How much do Mutual Funds charge for their services?

Equity Mutual Funds can charge you upto 2.5% of the average weekly net assets for managing your money, while debt funds can charge you upto 2.25% (1, 2). This primarily includes management and advisory fees, in addition to marketing-distribution and other operational expenses. This is stated using the term expense ratio, which is the amount of money you pay your fund each year in percentage terms to have them manage your money. Brokerage charges are in addition to this. Asset Management Companies (AMCs) deduct these fees directly from their clients’ money.

There are websites, entities & individuals offering 100% Free Advisory in Mutual Funds. What is your opinion on them?

They are probably into Mutual Fund distribution business, but they are not Free.  They just don’t charge you directly, instead collect their distributor commission from the AMCs. The AMCs in turn, pay them from your money. Distributors generally receive an upfront fee for fresh investments in the 1st year, and trailing commission 2nd onwards as long as you stay invested. Basically, one can either charge advisory or distributor fees, but not both, as that would result in conflict of interests.

My brokerage sends me FREE analyst reports. In addition, my advisor calls me up every now and then with FREE advice. Why should anyone need a paid research & advisory service in addition?

Once again, there is no Free Lunch. There are 2 types of brokerages – the Full Service Providers, or the expensive ones, and the Discount Brokers, or the cheap ones. The discount brokers generally charge zero to negligible brokerage for delivery trades (anything like Rs 0-20 flat, irrespective of the value), while the Full Service Providers charge more (could be 0.5% for delivery transactions, but varies; check this article for more). Assuming 0.5% charges, you end up paying 1% of assets for a buy-sell transaction. This higher brokerage charged by the Full Service Providers is used to fund their research & advisory costs, aside from other things (so the Free services are all included in the cost).  These brokers therefore, have an interest in having clients execute more transactions, as that helps them earn more in brokerages fees. This practice is in existence despite the regulations, has been acknowledged by industry leaders, and it is generally contradictory to client’s interests. As Charlie Munger, Vice Chairman of Berkshire Hathway famously said – The big money is not in the buying or selling, but in the waiting.

What about Business TV Channels, Magazines, Newspapers – I get 10-20 tips/ recommendations on daily basis. Are you suggesting they are no good?

No doubt there are some good recommendations. But the problem is in knowing which one is. Let’s assume that the markets remain open for 250 days a year. 10-20 recommendations per day would mean anywhere between 2500 – 5000 recommendations per year! Of course you can’t invest in all of them. Knowing which 10-20 stocks are worthy of investment out of this universe of 2500-5000 ideas is as good as doing your own analysis.

Another way to look at it is to try finding someone who has created wealth on sustained basis by investing in tips. I haven’t found anyone as yet, if you do please let me know.

What about index funds. They are inexpensive, and even Warren Buffett recommends them?

Except that Warren Buffet never invested any meaningful money in index funds himself. It is important to understand the context. Index ETFs can be an excellent way to generate market returns a low cost. It is also true that most actively managed Mutual Funds in US fail to beat the market over long term. WB holds 100B+ investable funds, which is similar to the size of US reserves, and it is extremely difficult to beat benchmark returns with such volumes, because it is a mini-market in itself. So, index funds make a lot of sense as it’s inexpensive and generates market returns. However, smaller investors do not have this problem. Further, as pointed out in this article, indexes are fairly easy to beat over long term using simple strategies.

What is your success rate in timing the market ?

We do not claim to possess any skills in market-timing. We believe that ‘time in the market’ is far more important factor than ‘timing the market’ as a determinant of success in long term investments. There is enough independent research data available in public domain to support this claim. Reference to some of these studies have been discussed in our blog.

What is the expected rate of return?

Our investment objective is to beat the market returns over long term. In many cases, our own capital is tied to the same investments as yours, so needless to say, we make our best effort to maximize return on your investments. However, it is to be noted that investment in equity and related securities are subject to market risks, and we can-not/ do-not offer guarantee on success, rate of returns or assurance that the stated objective will be met.

What is your cancellation policy?

Cancellations can be made by either party anytime. Clients can cancel their subscription if they are not satisfied with the quality of research. For the benefits of the clients, it is strongly recommended that they review a Free sample report, as well as go through the free content available in the website to assess the quality, methods, etc. before subscribing. Advisor also has the discretion to terminate subscription of a client, if the expectations of the client are found to be different from what this platform can offer or if they are found to violate stated terms & conditions of the website. In case of an early cancellation/termination for reasons other than violation of terms & conditions, part of the subscription fee may be refunded on pro-rata basis, based on number of reports received vs committed, before issue was registered in writing, minus taxes. For example, assuming subscription fee of Rs 100 for 10 reports, including 10 rupees tax, if the issue was registered after receiving 5 reports, then 45 rupees will be refunded. (100 – 10 (tax) = 90, divided by 10 reports = 90/10 = 9 per report, so 9×5 = 45 rupees will be refunded for the 5 reports not delivered). For any terminations arising due to violation of terms & conditions on part of the client however, no refund will be possible.

Do I receive intra-day trade ideas?

No, we do not provide any intra-day or short-term trade ideas. Research indicates that only 1% of the population who participate in intra-day trading have been able to make profits in a predictable manner. Why do people still practice it? Partly because, brokerage houses sometimes encourage it, as they stand to benefit from the transaction volumes; and partly because speculation if one of the most ancient human instincts.

Do you recommend trades in Future & Options segment?

No, we do not offer any kind of trade strategies in the derivatives segment.