INVESTING MANTRAS. Layman s Guide. To Time-Tested INVESTMENT. cover WISDOM. An Investor Education Initiative by

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1 INVESTING MANTRAS Layman s Guide To Time-Tested INVESTMENT WISDOM cover

2 The Science Of Wealth Creation If you have been viewing the stock markets over the past five years from the sidelines, you might be wondering how anyone still has the stomach for investing. Markets have swung, which can be quite disconcerting. But these up-anddown market cycles are normal. Historically, leaving your investments alone has proven a smart investment strategy in most circumstances. But if you re starting to have doubts, it s a good idea to brush up on your understanding of the markets and determine your motivation for investing in the first place. The stock market allows everyone the opportunity to participate in the economy by investing in businesses. Investing in the stock market is one of the best ways to create wealth. It is not, however, a sure thing. The generation of wealth does not come without risk. The reason for fluctuations in the stock market is that it reflects the rise and fall of the companies that participate in it. When the economy is prospering and companies are doing well, the stock market generally reflects that. When the economy is faltering, like it has been recently, the stock market reflects that as well. The following pages are modern day tenets which will help you understand capital markets better, break myths about stock markets and show you the best way to investing through mutual funds. Understanding how the stock market works can help you make good investment decisions and ensure wealth creation over time. We hope you benefit from them. Different Asset Classes ARE For Different Reasons There are four main asset classes, each with different levels of risk and return-equities, debt, gold and real estate. Asset allocation is a way to describe what proportion of money is invested into each class within an investment. Investments can go down as well as up and these ups and downs can depend on the assets you re invested in and how the markets are performing. It s a natural part of investing. It is for this reason that a diversified portfolio of investments is suggested, which helps balance risks and rewards. Invest ONLY In What You Know There is infinitely more that we don t know than what we do know. If we invest only in what we know we are concentrating investments and not diversifying. And worse, just because we know something does not mean it is able to produce good returns - for anybody. For instance, the great Warren Buffet missed on Microsoft in the 1980s because he did not invest in technology because he said, he did not understand it. 1

3 EQUITY INVESTMENT is for those Who Can Manage It Actively TIME in the market is IMPORTANT not TIMING There are various ways to invest in equity; there are several types of mutual funds, which are not only tax efficient, but also match your risk appetite with the investment objective. For instance an Exchange traded fund (ETF) is low cost and matches an index that it invests in, if you can take some risk and select a good performing fund, the professional fund management expertise could help generate additional returns over the benchmark. Equities areliquid Equities can be volatile in the short term, but historically have proved to be a wealth creator if invested over a longer time frame. Testimony to this is the fact which shows that in the last 15 years even if one invested every year at the peak index level he still made an annual return of %. Hence, Time in the market is more important than Timing the market. Source: SENSEX returns (XIRR) for investment on market peaks from January 1998 to December THE MARKETS are the same as They Were In The fixation to material assets is high. But, equities are a pleasant change from this mindset. Unlike other investments like real estate or gold, equities are not steeped in physical assets, they are liquid and available to you when you need it. Change is the only constant. For example, in January 2008 when the Sensex was at 20,251, the PE was at 21.4X, whereas in January 2013, when the index touched 20,039, the PE was at 14.35X. PE is the value of the stock markets. The markets were effectively 33 per cent cheaper. Hence, though the market levels seem the same, the underlying drivers are different. Thus, it is the valuations that are important to look at, rather than the market levels. 3 Source: Kotak Securities. PE is one year forward PE.

4 Share Price Of A Company does not reflect THE ONLY ITS CURRENT BUSINESS PERFORMANCE Rs 10 We always feel that if the stock price of a company is going up, it s because the company is doing great today. Not necessarily so. The share price of a company generally reflects its future business potential and not only the current status. For example, if the company announces a new product launch which investors feel would do well and would increase the prospect of the company in future, they will buy more shares and thus the share price will increase. However, in future, if the product does not do well due to certain factors, the demand for its share will go down and thus the share price will decrease. Similarly, if the company is doing well today but has taken a huge loan for some acquisition which investors feel will not fare well in the future, they may start selling its shares, bringing down its price. MYTH Many investors believe that a mutual fund scheme with Rs 10 NAV (in case of NFO), provides a better investment opportunity than a scheme with NAV of say, Rs 100. This is a wrong approach to invest. For an investor, the potential growth of the underlying security is what that should matter. For instance, a scheme with Rs 100 NAV going up to Rs 150 is any day better than the Rs 10 NAV going up to Rs 12. In the first instance, the growth is 50 per cent and in the next it is just 20 per cent. Moreover, a fund that is old, will have a performance history to provide an idea about its track record and past performance. After all, it is the value of the underlying asset in a mutual fund that determines the growth of the NAV and not the denomination of NAV. You are part owner with an EQUITY INVESTMENT Select Funds WITH CONSISTENT ALPHA GENERATION The difference between savings and investments is that, when you save you are actually lending to someone, whereas when you are investing, you part take in the business in which you invest. A fund that does well during select market periods is not the best way to invest. Look for a fund that is consistent over market cycles and beats the benchmark. Peer comparison is important, but should not be the only driver when investing in a fund. 4 5

5 De-Risk Your INVESTMENTS with ASSET ALLOCATION SAVE and INVEST with DEBT FUNDS More often people use thumb rules to decide the equity-debt allocation depending on the age of the investor. The most common rule is to subtract one s age from 100 and allocate that much to Equity. Asset allocation is not perfectly correlated with age, it has a lot to do with the risks you can take and your goals. For instance, for a financial goal that is 20 years away, you should consider investing only in equity. However, if you have a financial goal which is a year or little over that away, stick to only fixed return debt instruments. There are several types of debt funds available depending on the securities they invest in, the tenure that they hold securities for and liquidity. This makes the debt option suitable to save, invest and a combination of the two. For instance, a liquid fund is good to park money temporarily to save. A short-term fund option does both, while income funds, gilt funds and MIPs, which have a dash of equity exposure are all good for investing from short to medium-term. Gold Returns only reflect the demand and supply dynamics in THE BENEFIT OF INVESTING IN MUTUAL FUNDS 6 INDIA The Indian penchant for gold is well known. However, gold prices depend on global demand and currency parity a point often missed by retail investors. Thus it not only reflects the actual demand for the metal, but also the currency fluctuations. For example, if the rupee depreciates against the dollar, the price of gold would increase in India, even if the international price of gold does not change in that time period and vice versa. Do invest in gold, as long as you foresee the need for the metal in the future such as a marriage in the family. However, if it is wealth creation, gold is best suited as a part of your overall asset allocation. By sticking to some basic time-tested principles, investing in mutual funds will help you not only get exposure to equities, it will also take care of several of your concerns, such as professional management and active management. Diversification Owning a variety of assets that will prosper in different market and economic conditions, is always sought after. The most efficient portfolio, manages to post the highest returns with the lowest risk, because it is well diversified. Diversification does not simply translate into greater numbers. Diversification across market capitalisation and sectors will ensure a good exposure to every element of the economy. 7

6 Select stock picking Many investors make the mistake of doing too much to their investment portfolio. Mutual funds invest in well researched and analysed select stocks, thereby, you own a unit in the underlying stock or business. Discipline Mutual funds are managed by professional money managers who invest and exit investments depending on the market conditions, which can help aid a healthy portfolio. SIP These are simple and straightforward an idea. You invest a fixed sum regularly in an equity fund, regardless of market conditions. Over a long-term, you end up buying more units when the markets are down and fewer when the markets are up. Your average price of acquisition is generally lower than what it would have been had you tried to time the market by trying to predict and anticipate its movements. Instead of trying to time one s investments, one should regularly invest a constant amount. Mutual funds offer all these benefits in a single stroke. You should capitalise on the easy manner in which this product works and benefit from investing in them. For further details contact Registered Office Kotak Mahindra Asset Management Co Ltd 36-38A, 3rd Floor, Nariman Bhawan, 227, Nariman Point, Mumbai Tel: Fax: Services Team Kotak Mahindra Asset Management Co Ltd 6th Floor, Kotak Towers, Building No:21, Infinity Park, Off Western Express Highway, Goregaon - Mulund Link Road, Malad (East), Mumbai Tel: (Board Line) Fax Number: Call Centre: (Toll Free) Corporate Office Address Kotak Mahindra Asset management Company 6th Floor, Vinay Bhavya Complex, 159, CST Road, Kalina, Santacruz (East), Mumbai Tel: (Board Line) Fax: Call Centre: (Toll Free) 8 Also contact us at Delhi (011) /01/02 Kolkata (033) /12 Chennai (044) / Pune (020) /96 Ahmedabad (079) /41 Hyderabad (040) /41 Chandigarh - (0172) / assetmanagement.kotak.com Mutual Fund Investments are subject to market risks, read all scheme related documents carefully

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