Individual Stock owners would know that even then while the market rallied, some stocks continued to fall. That is the story of stocks. In the long run, they always reach their right price. As Benjamin Graham wisely said, “In the short run, the market is a voting machine but in the long run, it is a weighing machine.”

Sentiments drive stock prices beyond fundamental valuations, but eventually, the true valuation emerges. So, the voting machine showed all green in mid-2024. What happened then in the second half? The weighing machine triggered. Investors started to pay only as per the true weight of the stock. A stock can fly indefinitely on sentiments. It can stretch all the imagination of valuations, driven by sentiments. However, eventually the weighing machine has to come in to decide the right valuation. This is what happened in second half. Sentiments by design are always extreme.

While we saw one extreme in 1st half of 2024, we saw another extreme in the second half. As seen in H2 2024 (July to December 2024), investors started pricing stocks based on their intrinsic value rather than speculative sentiment, reinforcing the ongoing market correction and reshaping investment strategies for 2025.

The Sentiment Trap in Investing

Investors are generally focused on the buy side, choosing businesses based on their potential. The problem is that they are also trapped by the sentiments and end up paying more than the intrinsic value. That is why when the sentiments change, suffering is higher because in the other extreme, prices tend to go lower than the intrinsic value. Most investors may not be able to withstand this trauma of wealth erosion. I have always been of the opinion that investors with limited knowledge of Business Fundamentals should stay away from picking stocks purely based on relative price or tips.

Mutual Funds vs. Individual Stock Investing

Mutual Funds have corrected equally or even worse. But, the stress of falling market is borne by the Fund Manager and investors are insulated. While, they see their Mutual Funds portfolio falling in value, they can continue to hold because they don’t see the prices falling by 50-80% of underlying stocks. In this Market fall, there are stocks which have or will correct by those level of prices. Most PSU stocks which had their golden run of valuations in 2024 have now corrected by more than 50%. An Individual Investor would feel traumatic at these kind of falls and may not now whether to sell or to stay. Many choose to stay anchored to their buying price and as the joke goes, ‘become long term investors’.

As for Mutual Funds, at portfolio level, they are normally aligned with their benchmarks. Most Active fund managers would do some churning and at portfolio level manage to ensure that the fall is not too high compared to their benchmark.

Large Cap vs. Mid Cap vs. Small Cap Stocks

Now, lets look at Large Cap/Mid Cap/Small cap as categories.

• Large Cap Stocks: Some, like HDFC and Asian Paints, did not participate much in the bull run.
• Mid and Small Cap Stocks: These soared in 2024, with the Small Cap Index reaching an all-time high. The prevailing sentiment was that the India story is unstoppable.

Everyone believed that the India story is here to stay. Now, like everything else, the mean reversion has happened and the narrative has shifted to, ‘India story is over‘.

What Triggered the Market Correction?

So, what happened here and how should you deal with it? In the second half of 2024, there were some fundamental issues with Indian Macros. This resulted in poor earnings by many businesses for past couple of quarters. The poor earnings meant changing sentiments and the valuations fell down as Earnings didn’t match the price being paid. So, partly the fall was triggered by declining earnings. A part of it was sentiment.

Looking at the actions taken by Govt and RBI, we can say they are staring at a possible recession in Economy. Normally, Tax cuts and Interest cuts are expansionary policies aimed at giving money in the hands of businesses and People. The expansionary policy can be inferred to suggest that we have a case of slowdown in Economy which policy makers are trying to tackle.

With these actions, we should see a revival in the Economic cycle. Will it happen immediately? May be not. The outcome of these measures will take few quarters to trickle down. But, the markets are always ahead of the economy. Like the fall which happened without any visible signs of recession. The rise will also happen before the actual recovery. the voting machine, i.e. Market will always play ahead of the true state of Economy.

The prices have corrected for most good businesses and there is always a time in the market when the price becomes too cheap to ignore. Every market has a buyer and a seller. When buyer finds a deal profitable, they buy at any fall. When a seller finds a deal profitable, they sell at any rise. Currently, we are seeing sell at rise phenomenon and the sellers are having fun. The Investors will suffer here because they do not have the ability to profit by selling. If you are an investor who bought some stocks, you cannot do much in this downward rally.

All you can do is, wait for your business to outperform and trigger change in business-specific sentiment. That is where knowledge of valuation helps when you can determine whether you paid the right price and if there is a visible growth in sight. If you are stuck with a business that is slowing down or there wont be growth in near term, the price can keep correcting due to negative sentiments. This market fall is a mix of business and macro sentiments. That why, the correction will be deep and also a longer one. There wont be a change in sentiment soon and we may see a long time correction even after the prices have fallen already.

Investment Strategy in a Falling Market

What should you do?

1. For Mutual Fund Investors

If you are a Mutual Fund investor, you should continue to bump up the SIP this year because you are getting good valuation for your units. You would be able to accumulate more units this year compared to last year. When the market turns, you will reap the benefit because you bought it cheap. Do not try to time the market or wait for the tide to turn because nobody knows. Historically, such falls have led to time correction of at least a year. You will have a long time to continue to add at cheap valuation. A disciplined SIP approach ensures that investors take advantage of market correction to buy at attractive valuations.

Read More: How to Build a Diversified Portfolio

2. For Direct Stock Investors

If you a direct stock picker, you should re-assess the business fundamentals and see if you paid the right price and whether your stocks can de-value further. If there is a lot of value erosion and you do not see recovery in business soon, you may have to take a hard call of booking the loss in a particular stock. Since, we are approaching end of financial year, you can console yourself by calling it a ‘Tax harvesting’ Opportunity to offset the profits booked in 2024.

Read More: How to Choose the Right Investment Strategies for Beginners

That being said, for an investor time is the best asset. If you can avoid doing nothing which means you are not in need of money, just do nothing!! An investor who slept entire 2008 wouldn’t even know what happened!!

If time is not on your side, i.e. you put your emergency funds in Equities or you went overboard looking at growth in 2023-2024, you should learn from this. Its the job of a Financial Advisor to guide you on Asset Allocation. It is important to understand your risk profile and take a call according to your situation. A Personal Finance Advisor can help you assess and act accordingly.

Final Thoughts on Market Correction

The current market correction presents an opportunity for disciplined investors. Whether through SIPs in mutual funds or selective stock picking, those who remain rational and long-term focused will benefit when the market cycle reverses. Patience and strategy are key to navigating such downturns successfully.

The post Market Correction 2025: Investment Strategies for a Volatile Market appeared first on Fleek Finance.

Before diving further, lets understand some common terms in use for Mutual Funds.

Benchmark Index: The Foundation of Active Mutual Funds vs. Index Funds

Benchmark Index is a bucket of stocks, created by BSE/NSE and acts as a window to Markets. It tells you broad picture of the market by taking a bucket of 50-100-200 stocks as a sample. This is the foundation for understanding Active Mutual Funds vs. Index Funds. This bucket itself keeps undergoing change with time. Statistically, the index gives you a clear picture of what the real time market sentiment looks like. For example, global audience views India Markets via NIFTY/Sensex indices. The BSE/NSE decides the list of stocks and their weightage in the index composition

If a fund manager were to invest in such a basket, his/her job was relatively easier. In this case, the system decides for them what to buy and how much to buy. This also takes away the risk of ‘Fund Manager skill’ and automates the process. These benchmarks guide Mutual Fund Managers and help investors judge, how their funds are doing against fixed buckets.

Understanding the Cost Differences in Active Mutual Funds vs. Index Funds

Total Expense Ratio (TER) and Its Calculation

The Total Expense Ratio (TER) is the Annual Fee that an investor pays to the Mutual Fund. It covers operating expenses for the Mutual Fund. These expenses include-

• management fees,
• administrative costs,
• marketing expenses, and
• other operational costs needed to run the fund

An investor will not notice these charges because it is built into the NAV. The daily NAV is the fund value minus the expenses.

Formula for Total Expense Ratio:

Total Expense Ratio= Total Fund Expenses / Total Assets Under Management (AUM)​

This means the higher the expense ratio, the lower the investor’s net returns.

Why Do Expense Ratios Vary Across Funds, and Should You Always Choose the Cheapest One?

Some funds invest in special assets where the operating charges are higher. For example, A fund investing in US Markets will have a higher expense ratio, due to higher brokerage and transaction charges. It can be expensive due to Fund Manager skill. This is where the question of paying extra for activity comes in.

What else does the Total Expense ratio include?

Additionally, TER may include a Mutual Fund ‘Distribution Fee’, which is the money transferred to the Distributor. A few years ago, Asset Management Companies started providing ‘Direct Funds’ instead of regular one to take the ‘Distribution Fee’ out. Almost all Mutual Funds come with a direct and regular plan. The Total Expense ratio includes the Distribution Fee in case of regular fund. This is waived off for direct fund because you don’t buy it through a distributor.

What does an Investor get from a Mutual Fund distributor having paid a higher Expense ratio?

Ideally, The distributors should inform the clients about this fee. Some are doing it diligently, others may be not. One also needs to keep in mind, this fee is directly related to AUM. As your fund size grows, the distribution fee also grows.

A distributor must advise you on your portfolio by providing you information on funds you own. Re-balancing by switching of funds in portfolio can help improve the returns. If a distributor does not add this value, you may want to switch to direct funds. A DIY model is very popular these days because of availability of Direct funds and cheaper Platforms. This has it own disadvantages if not done correctly due to un-advised and uninformed decisions. Especially in a market scenario like current one, this can become trickly and a need for Advisor arises.

Index Funds come with Cheaper Expense Ratio due to Simplicity

A fund Manager of Index funds will simply invest in stocks as per the benchmark recommendation. For example, a NIFTY Index fund would contain all the NIFTY 50 stocks with weightage as per the index. Index Funds come with cheaper expense ratio due to their simplicity.

In their Accumulation Phase, Investors should focus on their primary income more than returns on investment. So, a minor increase in Expense ratio wouldn’t matter much. Index fund is advisable sometimes for peaceful investing as well as cheaper cost. It is peaceful because there are fewer parameters to make it volatile. It just goes based on overall market sentiment.

Check out some Index funds and their expense ratio. As you see, Index funds are cheaper in management. Hence, they come with lower expense ratio compared to actively managed Mutual Funds. An active Mutual Fund charges higher expense ratio in the pretext of generating better returns. We will see later that the data suggests only ~20% of the funds in the Mutual Fund universe beat the Index.

Continued under-performance compared to benchmark indices.

Let’s look at some research data. This SPIVA (S&P Indices Versus Active Funds) India scorecard from 2023, presents a gloomy picture for Active Fund Management:

Large-Cap Funds:

a) 1 year period: The S&P BSE 100 gained 23.2% in 2023, and 51.6% of active managers under-performed the benchmark over that period.
b) 3 to 5 years: Under-performance rates were significantly high over the three- and five-year periods, at 87.5% and 85.7%, respectively.
c) 10 years: Active managers produced relatively better results over the 10-year period, with the under-performance rate dropping to 62.1%.

Mid- & Small-Cap Funds:

a) 1 year period: The benchmark for Indian Equity Mid-/Small-Cap funds, the S&P BSE 400 Mid-SmallCap Index, rose 44.0% in 2023, and 73.6% of active managers under-performed the index over that period.
b) 10 year period: The story for longer period is slightly different from large cap segment. Equity Mid-Small-Cap funds fared the worst in the long run, with 75.4% of them lagging the S&P BSE400 MidSmallCap Index over the 10-year period ending December 2023.

Going by the data presented, most active funds are under-performing the benchmark index. So, why do Investors pay Fund Managers extra in the form of expense ratio, in spite of under-performing? Aren’t the investors better off doing Index fund instead? This also makes it simpler for them as there is less to track and less expense too. It is best to take the money out of these funds.

You would now question whether a high expense ratio of a Mutual Fund is justified. If the Fund Manager does not generate higher returns by managing it actively, why pay high?

Do All Mutual Funds Underperform Their Benchmark?

Check the output list below (Based on data till December 2024). We found 22 Mutual Funds, that stand out in terms of returns against their benchmark. We mined through around 150 mutual funds and arrived at these funds which beat benchmark handsomely across different time frames. These funds have a return greater than the benchmark in 1 year, 5 year and 10 years time frame. Alpha here is simply the difference of fund return from the benchmark return.

Notice, the alpha going down for regular funds because of the extra spend as expense ratio, compared to direct funds. Only 22 of the funds managed to positively beat the benchmark index on a longer time frame. This is not to suggest that returns should be the only benchmark to judge the performance. There are other factors too. But, going purely by returns, there are very few who manage to beat the benchmark in a long term basis. This is not to say we should not choose the other funds. With right allocation and rebalancing, many funds can generate better returns.

Should You Choose Index Funds Over Active Mutual Funds?

Advantages of Index Funds

• Lower expense ratio (typically 0.1%-0.5% vs. 1.5%-2.5% for active funds).
• No fund manager risk – purely tracks the market index.
• Less stress – fewer variables to monitor.

When Active Funds May Be Worth Considering

• If a fund has a consistent history of outperforming the benchmark.
• If the extra cost is justified by better risk-adjusted returns.
• The Fund Manager quality based on their track record.

How to Pick the Right Mutual Fund?

1. Eliminate 70% of underperforming funds based on long-term SPIVA data.
2. Choose Index Funds for simplicity and cost-effectiveness.
3. If opting for active funds, pick only those with a strong track record over 10+ years.
4. There are good resources online which measure the risk adjusted returns ratios to assess quality of funds.
5. You may also want to check Portfolio turnover ratio and the asset allocation to understand better.

Final Thoughts: Making the Right Choice with Active Mutual Funds vs. Index Funds

After looking at various expenses in Mutual Funds, some may move to direct stocks to save the cost. Is it that simple? Do we switch to self-medication to avoid paying fee to a Doctor? Are we expecting everyone to become an expert Fund Manager? Do you think, with your skills, you will beat the Index while ~80% of the expert world can’t? If that is not the case, why get into that trap for saving that extra 1% Expense ratio? If cost is a concern, go for cheaper index fund. Alternatively, switch to a better managed Fund which has consistently generated better returns.

Effective financial planning helps investors make informed decisions about choosing between active mutual funds vs. index funds, ensuring long-term wealth growth. By becoming more informed, you can save on the distribution fee by buying direct funds instead of regular. This is another way to improve your returns. That would mean, you should do your diligence and understand which fund to pick.

The post Active Mutual Funds vs. Index Funds: Costs & Performance Guide appeared first on Fleek Finance.

Compounding is a concept which is lost to many because of the shorter time frame of Human mind. We always under estimate long term and over estimate the short term. In my earlier life as a Scrum Master, I saw people under-estimating themselves when giving an estimate for smaller project. If realistically a project takes 3 weeks, the team will say, it can be done in 4 weeks. This would mean a ~30% buffer. They end up finishing it quicker though. On the other hand, we over-estimate ourselves when committing for a longer term project. A realistically 2 years project, will be estimated to 1 year. We don’t have visibility to all the unknowns initially. Hence, we poorly discount the unknown. We are worst at doing long term predictions because we don’t have the ability to logically discount uncertainties from future.

But, we love to predict the long term deliverables. We predict even though we know it will be inaccurate. Deep down, we acknowledge that it will miss the mark by at least 50% margins. But, who likes uncertainty. So, we always start with prediction with low margin of error and as usual the confidence is high.

A case in point is Sydney Opera house construction. It was initially projected to be completed in 4 years with a budget of $7 million. In reality, it took 14 years to finish and cost $102 million—over 14 times the original estimate.

There are many examples where the long term predictions go horribly wrong. The important lesson here is ‘Planning Fallacy’ where we over-estimate our ability to make long term predictions.

Lets stretch this case to compounding in investing. When investing, we are good at predicting 10%-20% upside on a stock. Most of the brokers give you target in that range because that is more believable. If I tell you, a stock is going to be 3 times in 2 years, you will frown at me. Also, the chances are you will book the profits at 20% and call me a clown. While predictors are confident about long term, the prediction buyers are always skeptical. Like we over-estimate ourselves when planning long term projects, we under-estimate the returns when planning investment. Some amount of instant gratification is also playing here. The point here is that we underplay the compounding process like we underplay uncertainty in project execution.

There are very few research analysts who can tell that an investment will compound 3-4 times. They won’t place their bet on long term at the cost of risking their reputation. The short term is always easier to predict. Long term needs patience, delayed gratification and leaving it to chance and luck. Tell me one businessman, who says I will achieve 20% compounding every year for next 10 years. If a business can’t predict, how can an investor do so. Some choose the easier way of focusing on short term wealth. There are very few who can build generational wealth. For that, you have to bet on your winners for the longest term possible enjoying the ‘Joys of Compounding’.

This also explains why real estate compounding works better than equity. This is because we do not make predictions. We just sit through all the cycles and eventually enjoy the ‘Joys of Compounding’. We fail to replicate this in equity because there is a price ticker which rewards prediction higher than uncertainty.

Dealing with long term requires conviction and deeper belief in the projection. The long term has a larger margin of error, but with time on your side, you will achieve compounding. Warren Buffet built most of his wealth from several businesses by combining value investing with patience and delayed gratification.

Experience the joys of compounding once in your life. You will never return to active investing. Instead, you will continue to invest passively.

What is Passive Income and How do we generate it?

So far I was talking about passive investment. Lets look into Passive income now. Passive income is letting your money earn for you while you sleep. This is specially useful during your retirement phase. There are different ways you get there.

1. Real Estate Rental Income

Invest in real estate today and substitute your current cash flow with rental income of future. As you would agree, rents are going to go higher, this is a solid plan in that way. The issue is ability to own multiple properties with large enough rental income. Rental income normally ranges from 3% to 5% of the asset market price. Hence, you need to start early when you can buy it cheap enough. The rental yield doesn’t look good to start with. But, with time as rents go high, it starts looking lucrative. Best case is you don’t have to buy it and happen to own an ancestral property.

2. Dividend Income

Invest in solid dividend paying stocks and live your life through dividend. NIFTY index stocks have roughly 2% dividend yield. This would mean, you have a Equity portfolio of 10 cr. to get an annual income of 20 lac. You will argue, we can buy Coal India. But then, we are talking about a balanced portfolio here. So, first we need to build that size of portfolio to live out of dividend income. Through disciplined passive investing, it is possible. But, it will take patience and time to reach there. That being said, its a volatile asset and market caps can go down.

3. Fixed Interest Income

This is the most stable way of income. Whatever comes, you generate 7%-8% of interest income. A portfolio of roughly 3cr. rupees can help one achieve the same effect as Dividend income discussed earlier. A good systematic withdrawal plan on a debut Mutual Fund can help you achieve this passive income. There are also monthly income scheme available from banks/post office which can do this for you.

Final Thoughts on Compounding and Passive Income

Enjoy the Joys of Compounding by doing Passive investing (mix it with some infrequent activity if you will). Avoid too much activity, its not worth it. Investing and compounding is a slow process. Enjoy the journey, destination will follow with time. One should aim to reach a stage of Passive income to replace the current cash flow in future.

The post The Joys of Compounding and Passive Income appeared first on Fleek Finance.

Wealth Creation is always a subject of experience. Same product may give different results to different people. For example, if we say a Mutual Fund has a CAGR of 15% in last 20 years, it doesn’t mean every investor made that 15%. Depending on the cycle and the time of entry/exit, every investor will have a different outcome. Hence, it is important to take a holistic look and seek professional guidance wherever you don’t have an answer.

While knowledge has become democratized due to internet, this can be a problem many times. Knowing and having the ability to create filtered knowledge is important. If you look up ‘You tube’ or any social media platform, there are 100s of videos, explaining Mutual funds. But, they cannot help you decide which one to invest in. Whether you should invest all in Mutual Funds or diversify? What is the ideal level of diversification? Should you buy gold or real estate? These questions appear simplistic. However, their solution is going to be complex because every individual will have a unique risk profile and unique goals.

Which category of individuals should reach out for Financial Planning or Advice?

There are different kinds of individuals depending on their income and wealth status and risk management profile. Broadly, they can be put into 3 categories:

1. Ultra Wealthy individuals:

Rich HNIs with sufficient money to take care of their present and also future of few generations. Do they need Financial Planning? Of course not. Their focus would be mainly on Investment Planning and multiplication of wealth is their prime focus.

2. Low-income Group:

There are people with income just enough to meet their expenses or literally in the hand to mouth category. Can Financial Planning help them? Certainly not. They should first focus on their income to meet their present cash flow. Once their present is secured, they can plan for future. These are the people working hard to take care of their physiological needs and lowest on Maslow’s hierarchy of Needs. Hence, Financial Planning is not really for them.

3. Mid-income group:

The mid-income category of individuals have surplus cash flow. They desire to utilize their resources effectively to reach a stage when today’s surplus can become tomorrow’s cash flow. This category of individuals can really benefit from right Financial Planning advise. They are generally resourceful individuals as far as their present cash flow is concerned. They are on the edge. They can either rise to 1st or fall into the 2nd category, depending on how they plan it from here. They are either the salaried middle class or upper middle class. They desire to break the chain and move up the ladder. A little professional help can help them achieve their milestones better and with confidence.

Transform Your Financial Planning With Professional Guidance

Financial Planning has some core steps involved before we can arrive at a concrete plan:

1. Understanding Cash Flow today.
2. Understanding the net worth or balance sheet.
3. Taking near term and emergency funds into account. Just talking about it can bring up lot of discipline with Cash Flow Management.
4. Understanding long term goals
5. Preparing for the days when cash flow is gone, i.e. Retirement.

A discussion on these details can be an eye opener for many. There are minor behavioral flaws due to family or neighborhood induced reasons. This can be corrected when you begin these discussions with an experienced Financial Planner. This discussion cannot be about get rich quickly. It is about making maximum out of the limited resources available. The solution can vary for different individuals and situations. It can involve “finding the right job or income.” It may include “cutting down on discretionary expenses.” Another potential solution is “finding the best instrument for investment.” There can be various other solutions. It all depends on the uniqueness of ones situation. This is not just about dealing with money, but also discussing behavior and psychology.

Conclusion:

Financial Planning is a well known concept in many countries and taken very seriously by individuals. However, in Indian context, it is similar to how we avoid going to a doctor and instead depend on self-medication. We try to solve problems based on advice from people around or source information from social Media. We may end up getting into mediocre or risky products without completely understanding how they are going to help. Hence, it is worth reaching out for professional help. This can help get things in your hand and be better prepared for the uncertain future. Are you prepared to sign up with a Financial Advisor? Feel free to reach out Fleek Finance Team to help us plan your better future.

The post From Chaos to Clarity: How Financial Planning Can Transform Your Future appeared first on Fleek Finance.

Investing for Beginners: A Step-by-Step Guide

As you see, humans are not designed for delaying the gratification. Most would want to have it today and immediately and sacrifice is a remote concept. If you do not sacrifice some part of your today to fund your tomorrow, you may have to continue to work forever to fund your lifestyle. The system is designed for you to work forever to earn your living.

A smart individual would learn delayed gratification to fund their future. Once you understand this concept well, you are ready to start your investing journey.

If this is difficult to practice, here are some basics you can try:

1. Force savings

There are disciplined approaches like SIP in Mutual Funds which are known wealth creators. Once you start earning, allocate some part of it for investment irrespective of your expense. So, Income-Savings= Expense instead of Income-Expense = Savings. This is a simple, yet powerful strategy which can help you increase your savings.

2. Avoid Complicating

Most individuals spend too much time thinking where to invest. The financial world is complicated by design to keep investors confused. It is your job to de-clutter it and think straight.

3. Do not over-diversify

Some are confused and not sure about any investment and end up over-diversifying. You don’t need to pick 10 different mutual funds. Just pick 1-3 good funds and more or less they will generate similar returns.

4. Track your expenses

Sometimes, people don’t know how much they are spending. You should have clarity of your income, expenses and your savings goal. One of the best investment strategies is to keep it documented. There are software available to help you with it.

5. Think before making discretionary expenses

Yes, you have a solid cash flow today and you can afford it. But, do you buy just because you can afford it? Think, if you are buying something because of a psychological pressure? Many times, it is FOMO or peer pressure which make us get into discretionary expenses. Avoid using your future cash flow to fund your present by taking a loan for any discretionary expense. Debt is a very bad trap and one should avoid getting into it at all cost.

6. Be open about money problems in family

Never hide your financial status with each other if you are married. As a family, if you brain storm investing, you may find a better approach towards it. Never hide your status with your spouse. If you are not doing well, call it out and reach out to each other for support with managing expenses. Many times, people do not tell the truth to their spouse and they don’t have a clarity on Financial challenges. In the end, you suffer as a family.

Why Start Investing Early

Warren Buffet is a great investor and has made lots of money in his life. Do you know he started investing as a teenager? He loved the art and mastered it. However, he managed to get big only in his early 50s. He is this big because he managed to live long. Most of us may not out-live him or become as great as him because of our limitation in terms of tenure of spending. If we do not start early, we are missing on the compounding factor.

To understand compounding, simply understand the ‘Rule of 72’. Money doubles every (72/rate of return) number of years. So, if you earn at 8% rate, you will double your money in 9 years and at 9%, it will be 8 years and so on. For you to start compounding your wealth, you should have a good base which you can compound. If you do not start early, chances are your wealth creation journey will get delayed.

So, you should start early to enjoy the compounding journey.

Low-Risk Strategies

One should always be prepared for emergency. Once you start your investing journey, you will realize that returns are proportional to risk taken. There are some emergency funds you should always have before you can move to risky strategies. This emergency fund should be invested in Low-Risk assets.

Some Low-Risk assets include Fixed deposits, Government Bonds, Liquid funds etc. there are various debt based Mutual Funds which are relatively low risk and useful. The low risk strategy should be deployed when you are trying to do a goal-based investment.

Let’s say, you want to enroll yourself for a course for which you will need some fund in 2 years. You cannot fund this via an Equity Mutual fund because you don’t know where the markets will be when you need the money in 2 years time. Hence, low-risk strategies are needed in such situation. Simply, look for an FD or a Debt based mutual fund which will ensure liquidity because you can sell it any time you like and also give you reasonable return with minimized risk.

So, depending on your goal, you will need Low-risk strategies also along with investment in high risk assets.

Building a Balanced Portfolio

This is not an easy game and you should talk to a Financial Adviser to get your portfolio reviewed. An overall assessment of your assets/liabilities and cash flow will help a Financial Adviser guide you in making right and balanced approach towards investment.

Investment strategies: Common Beginner Mistakes

1. Over-thinking. Investing is easy and simple. The financial media and influencers are responsible in making you think it is complex. A simple Mutual Fund which gives you 10-12% returns is enough. Just stay invested and do not think much about loss. Loss aversion is a key human trait which makes us risk-averse and eternally confused individuals. There is no risk in this world that is not worth taking. Just do it, chances are you will succeed. If you are cluttered, consult a Financial Adviser like you go to a doctor when you are suffering.

2. Insurance trap. Understand different insurance products and see what you need. A 25 year old with no dependents, does not need a term insurance. But, they do need a health insurance. Similarly, a 40 year old will need to make sure they have sufficient insurance for the entire family. These are minor mistakes which can create bigger problems for future while choosing your investment strategies. Also, do not buy endowment plans. Never mix insurance with investment. Keep them separate and simple.

3. Investing in Equity to meet short term goals: Equity is never a short term asset. Equity assets should ideally be never touch kind of money. But, people juggle with it to meet short term goals. For short term, look for low-risk debt funds.

4. Investing in stocks based on tips from Friends/Relatives: This is wastage of time and money. Unless you are seriously looking to understand stocks and investment, do not waste your time in this. Buy stocks via Mutual Funds. This will give you peace of mind along with wealth creation.

5. Delaying investing and increasing your expenses: Since, as a beginner the amount is low, you tend to think if it is of any value. All big things start small. Never stop small savings. Remember, you are delaying compounding if you delay investing. Make yourself a promise to increase your savings with every rise in salary. Generally, people focus on meeting short term goals and delay starting the investment plan. This is a dangerous trap and should be avoided at all costs.

Unless you realize the importance of investment in your life, you will never appreciate the strategies enough. So, it is crucial to know that the cash flow of today is sufficient to fund your today’s needs. But, tomorrow when it stops or a big expense comes for which your salary is not enough, you need to plan in advance. You need proper investment strategies which are based on data combined with research to achieve your goals, be it short-term or long-term.

The post How to Choose the Right Investment Strategies for Beginners appeared first on Fleek Finance.

EBI Chief, Madhabi Puri Buch and the recent Controversy

Regarding SEBI Chief Madhabi Puri Buch, targeted by Hindenburg some time back and recently by politicians like Pawan Khera over her past compensation from ICICI, it’s crucial to examine her career.

Based on her extensive background detailed in public sources, she began at ICICI Bank in 1989 and later served in various roles, including a lecturer in England and senior positions in multiple companies, including CEO of ICICI Securities from 2009 to 2011. Buch also held executive and director roles at Zensar Technologies, InnoVen Capital, Max Healthcare, and consulted for the New Development Bank (BRICS bank).

Given her qualifications and career achievements, ICICI’s clarification that her payments were related to ESOP vesting rather than salary seems plausible, unless contradicting evidence, such as specific income tax records, surfaces. However, SEBI’s involvement in the recent de-listing proposal of ICICI Securities, which was controversial and arguably detrimental to minority shareholders, raises valid concerns about Buch’s decisions and potential conflicts of interest. We will find out more on this soon.

However, let’s understand that both she and her husband have had an illustrious career before she became the SEBI Chairman. So, if the allegation is of siphoning, it doesn’t stand. If it is about quid pro quo, further investigation will be needed. But, politicians are not saying that. They simply want to spark controversy and keep public engaged by creating mistrust on the organization and the system at large.

As we know, earlier Hindenburg came out with another research claiming inadequate investigation on Adani by SEBI. To understand that, we should get into some details on Adani.

Adani Enterprises: Stock Price Journey and Controversies

Adani Enterprises’ stock price surged from ₹150 to an all-time high of ₹4,000 in 2022. On January 24, 2023, US-based short seller Hindenburg Research published a report alleging malfeasance by the Adani Group. That included cooking books of accounts, over-invoicing of import costs and round-tripping of own money to push up share prices. The stock tanked to 1300 following this report. There was a hint that the price is manipulated and it is a bubble. The stock price has now recovered to ₹3,000 (All rounded approximate figures). This event triggered confirmation bias, where any mention of Hindenburg now brings Adani and Modi into the conversation. This explains the Congress press conference highlighting SEBI chief’s past compensation from ICICI and the clarification from ICICI. These should be seen as related events.

The politicians very well know that the public, often disinterested in the full story, might conclude, “Something must have happened.” They leverage the widespread financial illiteracy, making issues out of minor facts, such as LIC’s <2% allocation in Adani stocks, while ignoring their broader stock portfolio. They rarely follow up, similar to events in the past.

Let’s now look into Adani business performance vis a vis stock price.

Adani Business and Valuations

I am not an investor in Adani Enterprises, but for those observing from the sidelines, here are some insights into Adani’s business and valuations. Adani group has several stocks. But, for simplicity focusing on Adani Enterprises only.

Enterprises boasts a 10% return on capital employed (ROCE) with a capital base of ₹1.1 lakh crore, excluding current liabilities. This means the company is generating an ope

rating profit of ₹12,000 crore on this capital, with sales of ₹1 lakh crore as of FY24. To put this in perspective, sales were ₹40,000 crore in FY20 with an operating profit margin of 6%. Essentially, sales have grown 2.5 times since FY20, the year the stock started its upward trajectory post-COVID. Whether this growth was anticipated by the market or influenced by manipulation, the stock is currently valued at 4 times its sales, compared to <1 times sales in 2020.

Given the sales growth over the past four years, the market might be projecting similar growth rates ahead. If the business doesn’t perform,the price will go South. A company with a 10% ROCE valued at 4 times sales is not necessarily in bubble territory, especially when compared to other companies valued much higher. Current valuation could at best be seen as expensive, calling it outright fraud or manipulation is an exaggeration. If the claim is that the books are cooked, it’s for auditors to respond. Not sure if SEBI has any role here. They can investigate the stock price manipulation at best.

The fact that all Adani stocks have high promoter holding, makes it illiquid and easy to manipulate. But then, this happens with 1000 other stocks. Didn’t we see a PSU stocks rally last year? Most of them have low float and open to manipulation.

Conclusion: Yes, there are suspicions of government support aiding the rise in sales and assets of Adani, and such claims should be thoroughly investigated. Will targeting SEBI chief personally help here? It’s a political battle and should be fought at political level. Maligning the markets and institutions is unnecessary!!

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Understanding Prospect Theory: Risk Aversion and Risk Seeking

The Certainty of Profit

Consider this scenario:

You have two choices: a 100% chance to gain 500 rupees or a 50% chance to gain 1000 rupees.

Both options are profitable, but most people would choose the guaranteed 500 rupees. This is because we tend to be risk-averse when it comes to securing a profit. The thought process is, “Why take a risk when I can have a sure gain?” Prospect Theory explains that in profitable situations, we prefer certainty and avoid risk.

The Uncertainty of Loss

Now, let’s look at a different scenario:

You have a choice between a 100% chance to lose 500 rupees or a 50% chance to lose 1000 rupees.

This situation is trickier. When faced with a potential loss, we often become risk-seekers. We think, “Why accept a certain loss of 500 rupees? There’s a chance I might not lose anything if I take the risk.” This tendency to gamble in the face of certain loss is something we see in many aspects of life—whether in investments, relationships, or other decisions where the fear of loss drives us to take risks.

Conclusion: Embracing Rational Thinking for Better Decisions

Traditional economics would argue differently than behavioral economics. It suggests that it’s more logical to take a risk for a potential gain rather than to risk further loss. If humans were truly rational, we would prioritize maximizing profit over avoiding loss. However, our emotional responses often cloud our judgment. By delaying gratification, you might increase your chances of achieving greater profits. Similarly, when facing a loss, it might be wiser to accept it now rather than gamble and risk deeper losses.

Next time you’re tempted to lock in a quick profit, consider whether waiting could increase your gains. Or when confronted with a loss, think carefully about whether it’s worth taking a risk to avoid it or if it’s better to accept the loss and move on. By striving to think rationally, we can make better decisions as investors—and in life.

Some more real life examples:

1. You bought a ticket to a movie. 10 minutes gone and you realize, it’s a bad movie. Do you suffer through it or book your lost time?
2. People stuck in a bad relationship, anyone?
3. Anyone knows a friend who didn’t join that first job they had, instead went on to become a successful actor or changed career to take a chance? Or do you regret not taking a chance because there was a profit in sight?
4. What is your behavior when choosing term insurance? Premium is a certain loss. Most choose a mediocre LIC policy for a certain profit and avoid term insurance because they see premium as a certain loss.
5. Companies offer CTC. It’s a cost to company and employees love it. If they were to instead say, income to employee, may be they would know the reality, but love it less?
6. McD sells you that burger combo to make it look profitable for you. Consumers love small profit. There is another bias here at play. Will talk about it some other day!!

It’s a very powerful tool used all around us for marketing, product pricing.

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It’s a poignant reminder of how life and science can be intertwined, sometimes with unforeseen consequences.

How Industrial Revolution Shaped Our Corporate DNA

So, why am I talking about Mendel’s Pea Pods genetic legacy or rather genes today? Genes are the carriers of whatever is left in you from your ancestors. The Industrial Revolution led the world to adopt European ways of life, including the education system and job culture we see today—a legacy of our imperial past. This culture has made us great followers, with the Industrial Revolution teaching us to put our heads down, follow the rules, and live the life planned for us. This mindset is so ingrained that we hardly acknowledge the possibility of an alternative life where we buy back our time. An alternate world where we decide what to do with our time instead of renting it out for living. Could it be in our genes holding us back?

If you look at the corporate food chain, the employee is at the bottom, while investors are at the top. Employees are kept so busy throughout their lives that they often fall in love with this system, rarely dreaming of reaching the top of the food chain. It’s uncommon for a salaried individual to reach the top in one lifetime. But don’t genes evolve? We’re witnessing a wave of change in the newer generation of salaried professionals who are challenging the status quo. Companies like Byju’s, willing to fail, and Zomato, writing new success stories, exemplify this shift. However, evolving genetically within a single lifetime requires a significant push. As a society, we need to support those who are on this evolutionary path! We are risk averse by nature and that needs to change.

For every dream that came true, there was someone who said with conviction, it was possible. Genetic Legacy is all about taking risks because the biggest risk of life is not taking a risk!!

Happy evolution!!

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Real Estate vs. Stock Market: Which to Choose?

The sheer exposure of real estate in the human mind space makes it the go-to investment. However, my job is to present logic over unfounded opinions.

How Asset Prices Appreciate:

To understand the difference between real estate and equity, let’s first understand how asset prices appreciate. The basic demand-supply curve tells us that higher demand for an asset with limited supply leads to price appreciation.

Before we delve into details, let’s understand how we represent returns on an asset mathematically.

Returns = interest rate + inflation premium+ liquidity premium+ risk premium+ maturity premium

For example, FD and debt instruments have inflation premium along with RBI determined interest rate. As we will see further, real estate comes with liquidity premium, but limited risk premium.

Understanding Real Estate Investment: A Local Market

Real estate is a a local market. The demand is limited to local buyers or a few investors with stakes in the area. The price depends on local factors, including the extent of urbanization, development, and buyer affordability.

Mathematically, real estate returns can be described as:

Returns = interest rate + inflation premium + liquidity premium

Real estate typically has an inflation-adjusted return and a liquidity premium. The liquidity premium is derived from ease of sale. How easily you are able to buy or sell an asset will define liquidity. The biggest risk in Real estate is the risk of not being able to sell at a desired price, when you want to. This leads to price appreciation due to the liquidity risk. The real estate however, lacks a significant risk premium since it is generally less volatile. Risk premium comes with business risk which is more applicable in Stock Market.

Key Benefits of Stock Market Investment

Equity represents an investment in a business, inherently tied to the risks and uncertainties of that business. Unlike real estate, equity comes with a risk premium due to the volatility and unpredictability of business earnings. Additionally, the liquidity premium in equity is sometimes visible in markets where demand outpaces supply. Liquidity of assets determine the returns. Highly illiquid stocks tend to give better returns similar to high returns sometimes in real estate when the demand is on rise whereas inventory is limited.

Mathematically, equity returns can be described as:

Equity returns = interest rate + inflation premium + liquidity premium + risk premium

As you see, the returns in Equity has an element of liquidity and risk premium. This tends to give better returns most of the times, specially when the business risk is high. The risk premium is what gives equity an edge over other asset classes.

Risk Factors : Real Estate vs. Equity

Understanding the liquidity premium is crucial. In real estate, liquidity premium can turn negative if there’s no buyer for the asset you hold. There are many such stories!! In equity, small-cap stocks often give better returns due to their lower market cap and hence faster reaction to demand changes. Liquidity premium needs to be used to your advantage. It can become a risk if you have to do a distress sell.

Challenges for Equity Markets

Despite the logical advantages of equity, real estate often wins in opinion polls due to several challenges in equity markets:

Infrastructure: The ease of buying and selling in equity is a big disadvantage for wealth creation, leading to short-term holdings. There are limited stories of people holding Asian Paints or HDFC bank for decades, but lots of stories where your grand father bought a land and you are reaping it’s benefits!! Very few tell u that grand father didn’t sell because he couldn’t.

Leverage: Real estate benefits from loans, allowing for larger investments with less cash, unlike equity, which is mostly cash-based. With 10 lac of limited capital, you can dream of buying a 1 crore house with a leverage of 20-30 years at low interest rates!! Equity has no such option unless we want to bring intra day and derivatives in the argument.

Financial Literacy: Many people are unfamiliar with capital markets, reducing demand for equity investments. We have tough time explaining people on treating equity as an asset. It’s seen as a ticket to amusement park where you can buy low and sell high!! Because of this simplistic explanation, people don’t pay attention to details and avoid learning it too. Real estate is relatively easier to learn and the strong belief that it never goes down makes it more popular.

Conclusion: Real Estate vs. Equity

Equity has the potential for significant wealth generation if treated as a serious investment rather than a short-term gamble. Real estate may lag behind equity in returns, but it remains a popular choice due to familiarity and accessibility. However, when it comes to Real Estate vs. Equity and long-term wealth creation, equity holds the edge. This blog is not to argue against buying your dream house. Home obviously is not an investment in real terms, but only an emotional one. Having a house of your own is always a blessing and consider buying one if it’s within your reach.

Happy investing!!

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