7 investment lessons from Rakesh Jhunjhunwala

Follow these principles if you want to become a billionaire like him.

Rakesh Jhunjhunwala is a qualified CA and has chosen trading in stocks as his profession. Many consider him as the Indian version of Warren Buffet.

He is also sometimes referred to as 'The Golden Hand' of Indian stock market. People believe that everything he touches (invests) turns to gold.

Such is his popularity that there are people who track his portfolio and invest in the same companies that he invests.

So, what's his secret of success? What are his investment strategies which have made him a billionaire? Let's see what we can learn from him.

Buy for long term

Though he is investing in the stock market, he is not a short term trader. He invests in stocks for the long term. And this strategy has paid off for him. Some of the stocks he owns have multiplied his wealth over the years.

Had he sold them the moment they appreciated by 10-20 per cent, we wouldn't have been talking about him now.

Belief in India's growth story

He is one of those guys who believes strongly in India's growth story. He says again and again that Indian economy will keep growing. So, be a part of it.

The only way you can be a part of a growing India is to invest in its stock market. If you are investing in debt instruments like fixed deposits or bonds, you will not be able to reap multifold returns by any means. 

Search for value

Rakesh Jhunjhunwala believes in value oriented companies. He has his team who helps him in finding companies which offer value in the long term.

If the stock prices of these companies are higher now, he tends to wait a bit, but finally gets his hands on them.

Before buying a stock, he closely studies its management style, growth potential, competitive nature and many more factors.

One cannot create wealth through free advice

In an interview given to Mumbai Mirror, he has said that one cannot make wealth through borrowed advice.

You need to do your own research before making any investment. Free advice can actually cost you later.

If you blindly follow someone's free advice, you might not be paying them anything now but you will realise later when those investment turn out to be duds. That loss can be a lot more than the fees that you pay for an expert's advise.

Invest only in what you know

He invests only in companies whose business he can understand.

He does not opt for complex businesses.

'Keep it simple' is his strategy when it comes to investing.

Consistency

If it's done once, it could be a lottery. But if it's done again and again, we call it consistency. This is what Rakesh Jhunjhunwala is known for.

He consistently invests in the stock market irrespective of the conditions. The quantum or strategy of investing can differ based on those conditions but he has never left his belief that stock market will always deliver for you if you do everything right.

Success comes from failure

It's not that he has not tasted failure. Some of his investments have also been duds.

He believes that success springs out of failures. If you fail, instead of crying over it you should know why you have failed. Did you not read the business well? Were the markets hit by some bad news?

These are some questions whose answers he wants you to search.

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Ethical Investing Tutorial

 

By Amy Fontinelle

Introduction

What is ethical investing? The definition depends on your personal beliefs. Ethical investing is highly subjective because each individual investor has different ideas about what constitutes ethical behavior by a company, and different priorities that they want to support with their investment dollars.

Broadly speaking, however, ethical investing is a way of earning returns in the financial markets by supporting companies that are creating positive change in the world, or, in some cases, that aren't creating positive change; but aren't making the world worse, either. Ethical investors want to reach their financial goals in ways that coincide with their values. Their investing decisions are usually part of an overall strategy for ethical living that includes making values-based decisions about work, housing, transportation and shopping, among other concerns.

A Niche Style Gains Popularity

Ethical investing is still a niche investment style, but it has gained popularity.

According to the Forum for Sustainable and Responsible Investment (US SIF), "From 2007 to 2010, social investing enjoyed a growth rate of more than 13%, increasing from $2.71 trillion in 2007. Nearly one out of every eight dollars under professional management in the United States today, 12.2% of the $25.2 trillion in total assets under management tracked by Thomson Reuters Nelson, is involved in socially responsible investing." Furthermore, socially responsible investing "encompasses an estimated $3.07 trillion out of $25.2 trillion in the U.S. investment marketplace today." These figures were as of 2011.

Ethical investing isn't just for individual investors. Institutional investors also practice ethical investing. After all, many institutions, such as universities, are largely supported by individual donors, and the donors want their funds used in ways they approve of. Institutional investors are actually "the largest and fastest growing segment of the socially responsible investment (SRI) world," states US SIF. (To learn more, see our Introduction to Institutional Investing.)

Active Investing

Ethical investors are heavily involved in their investment decisions. They take their roles as part-owners of the companies they hold shares in seriously. They read annual reports and prospectuses, vote proxies and submit shareholder resolutions. They care who manages a company and who sits on its board. They are concerned about corporate transparency and accountability. They also want to know how companies are behaving with respect to the environment, social issues, human rights and workers' rights. Some ethical investors care about all of these issues; others choose to focus on just one or two. It's often difficult to find investments that meet 100% of an ethical investor's values and financial goals.

From a financial perspective, ethical investing has historically been considered a subpar investment style. However, it isn't true that socially responsible funds consistently underperform. Social investors don't have to sacrifice investment gains in the name of doing good. But, just like any type of investment, there are winners and losers in the ethical investing universe. It takes thorough research to find the investments that meet both ethics criteria and have the potential to meet desired performance goals.

Unethical Investors?

Of course, the idea that some investors are "ethical" doesn't mean that individuals and institutions that don't pursue ethical investing are unethical. Many people don't have the time, or the confidence, to make the active investment decisions required of ethical investors. Others simply don't like investing and want to put minimal effort into it. Chances are that these people are putting at least some of their money toward ethical causes whether they intend to or not. Investing for your family's future? That's ethical. And if you simply put your money in a Standard & Poor's 500 Index (S&P 500) fund, you can't help but have funds invested in a number of good companies.

What's more, people who consider themselves ethical investors often have to make compromises. A company that produces an ethical product might have some questionable business practices. A company that performs well on environmental issues might not perform well on social issues. A company that donates a percentage of its profits to the community might use sweatshop labor. Ethical investors are faced with the challenge of not only uncovering these complex issues, but deciding where to draw the line with their investments. Sometimes they will even invest in companies they are unhappy with and use shareholder activism to force the companies to change.

Even people who aren't particularly interested in the social, environmental, humanitarian or governance issues, that ethical investors support, can benefit from incorporating ethical investing principles into their investment strategies. Companies that treat people and the environment with respect are less likely to find themselves distracted by or burdened with lawsuits. Companies that have a positive image in the public eye are more likely to generate high sales levels. Ethical business practices can generate better profits and better returns for investors, especially in the long run. As Amy Domini, founder and CEO of ethical investment firm Domini Funds, puts it, "To pollute, to discriminate, to violate basic human rights, is just not good for business."

Ethical investing goes by a number of names, which will be used interchangeably throughout this tutorial. The most common is socially responsible investing; others include morally responsible investing, impact investing, mission investing, sustainable investing and triple bottom line investing (the triple bottom line being people, the planet and profits). (Learn more in Socially Responsible Stocks: Do Good Deeds Punish Profits?)

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How to READ a MUTUAL FUND FACTSHEET

Most asset management companies usually publish monthly reports (also called fact sheets) that contain critical information related to the portfolios, at times a roundup on debt and equity markets from the fund manager and performance details of the schemes managed by the AMC.


The idea is to help investors (both existing and potential) to track the performance of the mutual fund schemes so as to take an informed decision. To that end, factsheets serve as an investor's guide.


To be sure, factsheets were always meant to be the investor's guide. However, in many cases, they are not upto the mark leaving much scope for improvement and even standardization. We highlight the most critical reference points for the uninformed investor based on data that is more or less standardized across AMCs.


For ease of reference, we have divided the article in two parts, the first part discusses how to assess the equity fund factsheet and the second part discusses the debt fund factsheet.


A) Equity fund factsheets


Stock allocation


Thankfully, factsheets of most AMCs highlight the portfolio composition well enough, although there is scope for standardization. For an investor who wants to invest in equity funds, the factsheet can offer some critical insight into the fund management style/approach.


To begin with, consider the top 10 stocks in the portfolio to determine the level of diversification. In our view, a diversified equity fund should have no more than 40 per cent of net assets in the top 10 stocks. This should help the fund negotiate volatility more effectively than its concentrated peers. For instance, Sundaram BNP Paribas Growth Fund is a fund we like for its disciplined investment approach (no more than 5 per cent of assets in a single stock) that ensures that its top 10 stocks are well-diversified.


Sometimes, a fund could be well-diversified across the top 10 stocks, but investments in a single stock could be so high so as to offset an otherwise diversified portfolio. A case in point is HDFC Capital Builder (a well-managed value fund), which was done in during the market crash in May last year due to unduly high investments in a single stock (Hindustan Zinc).


Also look at the fund's portfolio over several months to get a sense of the consistency in the fund manager's stock picks. Too much churn in the stock picks (new names every other month) indicates that the fund manager could be punting rather than investing, thereby adding to the trading cost, which ultimately eats into the returns.


Sectoral allocation


Just as you evaluate the stock allocation, it is important to consider the sectoral allocation of the equity fund. Diversified equity funds should be well-diversified across stocks and sectors. A fund could be well-diversified across stocks, but may pay the price for not diversifying well enough across sectors.


For instance, Sundaram Growth Fund, a fund we admire for superior diversification across stocks, learn the hard way during the last market slide that diversification across stocks is as important as diversification across sectors. The fund had unduly high investments in infrastructure-related sectors.


The crash proved particularly harsh for the fund, as it had failed to diversify across other sectors. So like stocks, being diversified across sectors is just as important; unfortunately, it often takes a sharp dip in the stock markets to highlight the importance.


However, funds like HSBC Equity Fund, which pursue the top down investment approach, have concentrated sectoral allocations, which suit their investment style. These funds need to be evaluated differently from funds that pursue the bottom up investment style.


While calculating the sectoral allocation, the investor must combine like-natured sectors to understand the level of sectoral diversification. For instance, most equity funds list Auto and Ancillaries sectors distinctly; given the similar nature of these sectors, their allocation must be combined.


Another problem relates to the categorization of companies across sectors. Different equity funds categories the same company across different sectors. There is no standardization. While AMFI (Association of Mutual Funds of India) has introduced certain standardization processes in this regard, the same is not adhered to across the industry.


Asset allocation


Stocks and sectors apart, there is another detail that must catch your attention and that is the asset allocation. The asset allocation table tells you how the fund's net assets are diversified across stocks, current assets/cash. An equity fund's allocation to cash should be noted.


Among other reasons, this could be because the fund manager is not comfortable with market levels at that point in time. This fact can be established easily by browsing through the previous month's factsheets. If the fund manager has been in cash for some time, it means he does not find enough stock-picking opportunities at existing levels.


Being in cash could work in the fund manager's favor if the market crashes, like it did for Sundaram BNP Paribas Select Midcap May 2006. But a higher cash allocation works against the fund during a rising market, when being fully invested is what counts. Sundaram BNP Paribas Select Midcap has also witnessed this scenario, which explains its relative underperformance over the last few months.


Other data points


In addition to the points listed above, there are some data points that must be marked by the investor.


Portfolio Turnover Ratio


Put simply, this ratio tells the investor how much churn the portfolio has witnessed. This ratio is calculated based on the number of shares bought and sold by the equity fund over the review period. A high Turnover Ratio (vis-a-vis peers or other equity funds from the same fund house) indicates that the portfolio has seen above-average churn.


A high churn by itself does not necessarily imply that the fund is good or bad, however, it must be in line with the fund's investment philosophy. A growth fund can have a high turnover ratio (although that's not necessarily a good thing as it adds to the trading costs and therefore eats into your returns).


However, a value fund should typically have a lower churn as the fund manager would usually be investing in the stocks over the long term.


Important as it is, the Portfolio Turnover Ratio is yet to be given due importance by the fund houses (maybe they are afraid of 'exposing' their fund managers). How else, do you explain the fact that fund houses either don't reveal the Portfolio Turnover Ratios or when they do reveal them, it is not standardized thereby robbing investors of the opportunity to compare them across fund houses.


Expense Ratio


This ratio underscores how expensive your equity fund really is. A high Expense Ratio (regulations cap this at 2.50% for equity and debt funds) indicates that your mutual fund investment is expensive. As per regulations, fund management expenses, which form the largest chunk of the expense ratio, must decline with a rise in Net Assets. So larger equity have more scope to reduce their Expense Ratios.


Again, fund houses are not very enthusiastic about sharing this important detail with investors. However, they do declare this ratio every 6 months, which is only because regulations demand that they do so.


Fund manager information


It always helps to know who is managing your fund. Not that we have any particular fund manager in mind, rather we recommend that investors do not get infatuated by any fund manager in particular and look for investment teams instead. Over the long-term, it pays to have your money managed by a group of fund managers, rather than one star fund manager, who could quit the fund house any time and take the performance with him.


So keep an eye on the fund manager details, typically, there should not be many external changes in the fund management team. When the same names manage your money, over a period of time there is stability in the fund management process. Thankfully for investors, majority of the fund houses do provide the fund manager details.


B) Debt Fund Factsheets


Like their equity fund counterparts, debt fund factsheets offer enough insight to the debt fund investor. For this, investors have to keep an eye on at least three aspects:


Average Maturity


For debt fund investors, this is perhaps the most significant detail to look out for in a debt fund factsheet. Since the Average Maturity of a portfolio for a particular month in isolation does not tell the investor much, he must go back several months to see how the Average Maturity of the portfolio has moved in order to understand the fund manager's view on debt markets.


To give investors an idea - if the fund manager has been maintaining a higher Average Maturity for some time, it means that he expects interest rates to fall over time. On the other hand, if the Average Maturity of the portfolio is lower, it means that the fund manager is cautious about interest rates. Ideally, investors must read up on peer factsheets to understand the consensus on interest rates and if your fund manager has a differing view, you must try to understand why.


Credit Rating Profile


Debt funds invest in securities with varying credit ratings. In the Indian context, most debt funds do not take on undue credit risk - i.e. they invest primarily in securities that are highly rated. Investors should mark the credit rating profile of the debt fund. A large chunk in AAA/Sovereign paper (which is the highest rating) implies that the fund is taking lower credit risk. On the other hand, a higher allocation to AA+/AA paper underlines the fact that the fund manager is taking credit risk.


Asset Allocation
Like with equity funds, debt fund investors must consider the asset allocation of the fund under review. This should help him understand the investment approach of the fund manager and the risk he is taking. Debt funds invest mainly in corporate bonds and government securities, both of which carry varying risk. Investors must make a note of the assets invested across both these segments.


Then there are floating rate funds that invest predominantly in floating rate paper; in practice however, many are predominantly invested in cash/current assets for lack of adequate floating rate instruments.


Likewise, monthly income plans invest a portion of assets in equities (the maximum limit on which is predetermined), investors must check the equity allocation over the last several months to understand the kind of risk the fund manager is taking (on the equity side) and whether he is adhering to the ceiling on equity investments.


Source - Rediff

How to Invest Without Fear

A safe investment sounds like a paradox, considering the jaw-dropping losses investors suffered during the global financial crisis. Be it stocks, bonds or real estate portfolios, the crisis swept across all asset classes, giving investors sleepless nights. Although experts are of the view that the worst is behind us and the scepticism seems to have waned, one still needs to be careful about where he invests. Dhirendra Kumar, CEO of Value Research, insists that there is no such thing as an 'invest and forget' approach.

Only bank deposits and small savings schemes could qualify for this tag. These are perhaps the least favoured currently owing to the reduced rate of interest on fixed deposits and the cap on investment in some small savings schemes. In fact, the rate of interest offered on deposits is unlikely to beat inflation in the future. For instance, if you fall in the 30 per cent tax bracket, an interest of 7 per cent per annum earned on a one-year deposit translates to a 4.9 per cent post-tax return, which is just under the inflation target of 5 per cent set for this year. The other disadvantage of banks is that only up to Rs 1 lakh of your deposit is insured by the government.

If you want to earn more, you could consider corporate fixed deposits, which, in the past two years, have offered better rates of interest. However, this comes with an additional risk. While small savings schemes carry the sovereign tag, you can invest only up to Rs 70,000 in the Public Provident Fund (PPF). Also, the interest earned on your investment in the National Savings Certificate (NSC) is not exempt from tax, which brings down your effective rate of return. The advantage of such investments is that they are the lowest on the risk spectrum. However, as most of us want some good returns as well, it may be prudent to opt for investment avenues that offer better riskadjusted returns and perform decently in a down market. Ultimately, it's this perfect combination that is going to allow you to get a good night's sleep.

So, is there any such investment? Kumar suggests that investors look at income funds from a longer term perspective for a fixed income portfolio. Most income funds have an exposure to AAA-rated bonds with no suspicious investment in their portfolio, he says. In the long run, these funds fetch better returns than other short-term funds. However, he adds, investors might be saddled with capital loss in case of a sharp rise in interest rates. Generally, these funds have managed interest rates with dynamism. The maturity of the underlying portfolio of income funds has ranged between one year and 15 years within the same fund, which clearly proves their claim.

One could also invest in arbitrage funds, which primarily generate income by capitalising on the mis-pricing between the cash market and derivatives market. Every purchase in the cash market is matched by a corresponding sale for the same quantity in the futures market. As arbitrage funds do not take any directional calls, these too are low on the risk spectrum and offer attractive tax-free returns of 6-7 per cent annually. The tax treatment for these funds is the same as for equity-oriented funds.

In the future, the biggest concern for investors will be to beat inflation. While investing in equities is considered riskier than in bonds, in reality, inflation could eat into the returns of a fixed income portfolio even as equities offer a hedge against inflation, says Parag Parikh, chairman, Parag Parikh Financial Advisory Services. This does not mean that you should blindly invest in stocks and equity funds at the cost of your risk tolerance. Buy stocks or funds that offer you returns commensurate with your risk appetite, but make sure there's some cushioning if the markets become negative.

Take dividend yield funds. These are known to be less volatile during a downturn because they invest in defensive sectors. They refrain from high-growth, high-PE and momentum stocks. Instead, they invest in high cash flowgenerating companies with low volatility in earnings. This offers them some cushioning when the stock markets plunge.

Source: Money Today.
Reproduced From Money Today. © 2010. LMIL. All rights reserved by them.

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