Equity is the best Asset class to Invest! 75% should be in Equity!
Summary
TLDRThe speaker emphasizes the importance of consulting a financial planner or having personal knowledge when investing. They advocate for listed mutual funds, particularly index funds, due to their lower costs and simplicity, influenced by Jack Bogle's philosophy. The script contrasts these with higher-cost investment options like private equity, PMS, and real estate, highlighting the lack of transparency, high fees, and potential for fraud. The speaker also discusses the challenges of monitoring and exiting these investments, concluding that mutual funds offer better visibility, compliance, and lower costs for the average investor.
Takeaways
- 📈 Investment decisions should align with one's financial planner's advice and risk profile.
- 🤔 There are various investment options like mutual funds, equities, private equity, real estate, and index funds, each with its own set of considerations.
- 📊 The speaker prefers listed mutual funds and index funds due to lower costs and the benefits of capturing economic growth.
- 🕊 Jack Bogle of Vanguard is credited with reducing mutual fund costs significantly, an approach that has influenced other markets.
- ❓ The costs and lack of transparency in private equity investments can be a concern, with high fees and potential for undisclosed deals.
- 🏦 PMS and AIFs also have higher costs and less regulation, which may lead to trust issues with fund managers.
- 🔄 The lack of day-to-day valuation in private equity and AIFs means investors are often guessing the performance until exit.
- 💰 High transaction costs in real estate make it less suitable for quick buy-and-sell strategies.
- 🔑 Mutual funds, especially index funds, offer transparency, lower costs, and ease of monitoring, which can be beneficial for the average investor.
- 🔑 The speaker suggests that for most people, equity investments, possibly through mutual funds or index funds, are a good choice if they can handle market volatility.
- 🚫 The speaker warns that investors need to be prepared for significant market fluctuations and should have the discipline to withstand downturns in the market.
Q & A
What is the primary factor to consider when deciding where to invest?
-The primary factor to consider when deciding where to invest is your financial planner's advice and your personal risk profile.
Why might someone choose to invest in mutual funds over other investment options?
-Someone might choose to invest in mutual funds due to their diversified nature, professional management, and potentially lower costs compared to other investment options like private equity or real estate.
What is the significance of Jack Bogle and his impact on mutual funds?
-Jack Bogle, the founder of Vanguard, significantly reduced the costs associated with mutual funds, making them more accessible and affordable for investors, which influenced the Indian regulator to adopt similar cost-effective measures.
What are the potential drawbacks of investing in private equity?
-The potential drawbacks of investing in private equity include high costs, lack of transparency, the absence of regular monitoring, and the possibility of the fund manager engaging in undisclosed private deals.
Why might an investor prefer index funds over other types of mutual funds?
-An investor might prefer index funds due to their lower costs, simplicity, and the fact that they generally track the market, providing exposure to a broad range of assets with less need for active management.
What are the challenges associated with investing in real estate?
-Challenges with real estate investments include high transaction costs, the difficulty of getting in and out of the market quickly, and the lack of daily price updates which can lead to a false sense of security about the investment's value.
How does the lack of a figure like Jack Bogle affect the real estate market?
-The lack of a figure like Jack Bogle in the real estate market means there is no significant force driving down transaction costs and complexities, leading to higher friction costs and less transparency for investors.
What are the considerations for investing in PMS (Portfolio Management Services)?
-Considerations for investing in PMS include the costs involved, the level of monitoring and transparency provided, the potential for lock-in periods, and the investor's ability to understand and monitor the business performance.
What is the importance of having a long-term perspective when investing in equities?
-Having a long-term perspective is important in equities because the market can experience significant fluctuations over the short term, and an investor needs to be prepared to withstand these fluctuations to potentially achieve long-term gains.
Why might an investor choose hybrid funds over index funds?
-An investor might choose hybrid funds over index funds due to the potential for better returns and diversification, as hybrid funds combine elements of both equity and fixed-income investments, and may offer tax advantages.
What is the role of compliance and visibility in alternative investment options like PMS and AIF?
-Compliance and visibility play a crucial role in alternative investments like PMS and AIF, as they ensure that the investment is being managed according to regulations, and that investors have access to information about how their funds are being utilized and the performance of their investments.
Outlines
💼 Investment Options and Mutual Funds
The speaker discusses various investment options such as mutual funds, equities, private equity, real estate, and PMS, emphasizing the importance of consulting a financial planner or having personal knowledge of investment strategies. They highlight the benefits of listed mutual funds, particularly index funds, due to their lower costs, influenced by the work of John Bogle of Vanguard. The summary also touches on the high costs and lack of transparency associated with private equity, the challenges of monitoring PMS and AIF investments, and the difficulties in valuing and exiting these investments.
🏦 Costs, Compliance, and Monitoring in Investments
This paragraph delves into the cost and compliance aspects of different investment vehicles, such as private equity, PMS, and AIF, where monitoring is often inadequate. The speaker points out the high fees associated with private equity and the lack of visibility for investors. They also mention the challenges of real estate investments due to high transaction costs and the difficulty of buying and selling. The paragraph contrasts these with mutual funds, particularly index funds, which offer transparency, lower costs, and ease of monitoring, although they may not provide the same level of personal involvement as other investment types.
📉 Market Volatility and the Discipline of Long-Term Investing
The speaker addresses the volatility of the market, noting that investors should be prepared for significant ups and downs, including occasional 50% drops. They stress the importance of having the discipline to weather these cycles, especially in equity investments. The comparison is made to real estate, where daily price fluctuations are not as visible, potentially making it easier for investors to maintain their positions without being swayed by short-term market movements. The paragraph concludes by suggesting that mutual funds, particularly index funds, can be a suitable choice for long-term investors who may not wish to actively manage their portfolios.
Mindmap
Keywords
💡Financial Planner
💡Risk Profile
💡Mutual Funds
💡Equities
💡Private Equity
💡Index Funds
💡Cost
💡Compliance
💡Exit Strategy
💡Real Estate
💡Hybrid Funds
Highlights
Investment decisions should align with financial planners' advice and individual risk profiles.
Investment options include mutual funds, equities, private equity, real estate, and index funds.
The speaker prefers listed mutual funds due to their cost-effectiveness and simplicity.
Index funds offer a low-cost way to invest in the market, inspired by Jack Bogle's Vanguard approach.
Private equity involves high costs and potential lack of transparency in fund management.
PMS and private equity lack public monitoring, leading to potential issues with trust and competence.
Real estate investments are subject to high transaction costs and lack of daily price fluctuations.
Gold and jewelry investments have high impact costs due to making charges.
Mutual funds offer transparency and the ability to check transaction prices on stock exchanges.
Private equity deals often underperform compared to market indices, according to the speaker's experience.
The speaker suggests that for most people, mutual funds or index funds are preferable due to their simplicity and lower costs.
Hybrid funds are mentioned as a good option for those seeking a balance between different asset classes.
Equity investments require discipline and the ability to withstand market fluctuations.
The impact of daily price fluctuations is less in real estate compared to equities due to less frequent price updates.
Investors should consider cost, transparency, and personal involvement when choosing investment options.
The speaker emphasizes the importance of having the discipline to sit through long investment cycles.
Transcripts
welcome to subani one question which
people keep asking is uh where should we
invest uh of course where you should
invest depends on what your financial
planner is telling you and uh depending
on your risk profile etc etc uh so it's
fairly obvious that uh you should go
through a financial planner or you
should know how to do it
yourself assuming other conditions
remaining same constant uh and you have
a choice of whether to invest in a
mutual funds or whether to invest in
equities um whether to invest in
equities whether to invest in private
Equity whether to invest in listed
Equity whether to invest in real estate
in Farmland uh Etc PMS right all those
things uh aif uh my choice would
definitely be listed mutual funds and
maybe if you don't want to take the
trouble of changing uh fund a to fund B
Etc and nobody is willing to and you're
not willing to put in time and effort to
learn that maybe just index funds uh why
index funds because my answer for why
Equity earlier used to be very
complicated saying it is the best asset
class it captures the best in the best
of what is happening in the economy uh
the best shares will do well so if you
buy the index you will earn well that is
of course true but over and above that
uh there was one man called Jack bog uh
of Vanguard uh mutual fund uh late John
Bogel here we lost cost him some time
back uh one thing which he did was he
dramatically reduced the uh costs in
mutual funds so much so that uh Indian
uh regulator copied from the US and even
with much smaller volumes uh the cost of
uh buying index funds in India or maybe
even ETF uh is dramatically less than
what you would pay in uh for other asset
classes so let us just understand if it
is private Equity uh we'll first talk
only about cost and then there are other
advantages so when you talk about
private Equity you do not know whether
the fund manager who's managing your
money uh has got a private deal from the
uh other entrepreneur right so your
money is invested so your your private
Equity manager goes and talks to some
other person and says oh sir this share
is available at 125 or 50 and I think uh
if it's worth buying it for 7 years here
is the valuation report blah blah blah
blah blah and he just goes and makes an
investment you have given him money and
after that he does not come back to you
for every transaction so you have just
and what is the fees that you're paying
well you're paying say 220 which means
you're paying 2% fees plus you're paying
uh 20% of the profits above a hurdle
rate or 1 in 30 uh or all those kind of
formula are there there's no one flat
formula there's nobody saying okay it is
1% fees or it is 2% fees so you don't
have that
available uh so private Equity costs are
high similarly in some pms's the costs
are high you have to find out PMS is
also still regulated by sebi but private
Equity is even less regulated by SE and
you don't know how much to trust your
managers and you do not know how much
you trust the entrepreneur on the other
side because we've seen all kinds of uh
mistakes frauds Etc happen so unless you
trust the manager completely and totally
and you know him for a very long time
and you're sure that he's not doing any
private deals it very difficult to trust
the private Equity manager that brings
us to the next one the aif again aif is
on a higher cost uh and in case of an a
you don't even have somebody else also
monitoring that same thing for private
equity and same thing for PMS when you
invest in the PMS let's say there are
500 others who have invested in that PMS
or AF or private Equity you barely know
them so they also don't have enough
information or they also have the same
information which you have so and then
it is up to your ability to understand
what is happening in the business that's
not easy secondly the U there could be a
lot of fluctuation 3 years later you'll
be you could be frustrated saying
nothing is happening in this business
should I get out and uh 4 years later
you could be actually saying wow this is
fantastic can I get more such deals but
the reality is known only when they
private Equity Fund manager exits that
business after 7 8 years 10 years uh at
a good profit then you know it was a
good deal till then you are just
guessing there is no day-to-day
quotation available on how that business
is doing which is good enough so that
there's no great pressure by that
entrepreneur to uh produce something
quarter on quarter but uh somebody has
to be monitoring all that it is assumed
that your private Equity Fund manager is
doing all that and he is a capability to
do it so we are not even getting into
competence I'm only talking about fees
same thing holds true for PMS or your
private Equity whenever uh During the
period when you're are holding there is
not there are not too many people doing
an evaluation now if you take a mutual
fund uh if it's an index fund there is
not really much to monitor you just
seeing whether the tracking error is
more or less or is it too high uh other
than that there is not really much to
monitor if the itself does badly if the
market does badly your index fund will
do badly if it does well you will do
well that's all it's as simple as
that in a in a PMS or private Equity or
AF there is nobody else monitoring so
there will be no headline in the
newspaper saying this fund is not
managed well there is front running
nobody knows whether there is front
running in the private equity in PMs and
a right you don't know uh in any of
those cases you just are hoping that the
fund manager has a good team which is
not doing any of these Hanky Panky
things so second one is on the
compliance thing uh first is on cost
second is on compliance and visibility
available to you and also uh exit
available to you in a private Equity or
you could have a 78 year kind of lock in
and let us assume things don't work out
or the market is not in great condition
so it could be 10 years before the 10th
year you may not get ENT exit at a
decent price and so it's a 10e lock in
so is it worthwhile that's a question
you have to ask yourself what about real
estate well real estate uh had no Jack
Boggle so nobody is there to reduce the
complexities of doing a real estate deal
so you do a real estate deal and I think
the friction cost is 10% which means uh
you buy on a Monday morning and you want
to sell on a Monday evening or say maybe
a Friday evening the gap between buying
and selling will be at least 7 8%
because of brokerage Etc and if you got
it already transferred in your name then
you paid Jam Duty GSG Etc then you're in
much bigger trouble so the cost of
getting in and getting out for something
like real estate is too high so it has
to be a usage asset similarly for gold
uh jewelry if you're going to buy and
sell jewelry then it is not worth it
because of the making charges right so
again the impact cost in real estate
impact cost in Gold uh jewelry is very
high gold if if you want to buy you're
buying ETF it's very different if you're
buying uh jewelry it's very different
even buying coins and biscuits and chain
with very minimum of uh uh working
charges or making charges uh then it's
fine but otherwise it's very expensive
so real estate is difficult to get in
and out uh PMs and aif there is nobody
monitoring it the biggest advantage in
mutual funds even assuming you're not in
an index fund uh the for the fund
trustees Etc who are monitoring it it is
possible to go and check the transaction
at what price it got done on the stock
exchange let us assume he bought it on
the National Stock Exchange at
1213 05 you know at 12305 a contract is
executed the contract is fair the broker
has given it to you and the backing of
that contract is on the NC site you can
go and have a look at what was the price
of the particular share at that
particular time so this kind of backend
feedback is not available on real estate
yes in PMs and uh in private equ sorry
in PMs and aif this is available of
course private Equity deals are subject
to the transaction between your manager
and the promoter you don't know the uh
real story if there is a hidden story
you don't know any of those things so if
you are a common man uh and you're
feeling that oh I'm missing out on all
the private Equity deals and uh a really
PMS you're not really missing much it
doesn't really matter because private
Equity deals I met one I met in a
venture capitalist and I know one
private Equity person who was saying
that uh apart from one or two of his
Investments he has about 12 or 13 apart
from one or two of his Investments all
the others have underperformed the
sensex right uh I mean he was talking
about the dollar Index because he was
investing the dollars into this so he
was actually not performing too well but
luckily for him all his deals were
closed except one which was to be closed
and he was closer to uh retirement so he
says none of them performed so well most
of them underperformed the index so if
this kind of data is available so if
you're getting good transparency low
cost uh and a good range of assets you
could buy not only I mean I am not a big
fan of index fund simply because of the
taxation structure I prefer hybrid funds
right so that that's a good option which
is available so look at all those
options look at Cost look at
transparency look at how involved you
want to be in right once you look at all
that for most people the answer is
equity and the answer is uh maybe index
funds if you don't want to take even
that much of understanding and do it or
uh Equity Funds the problem is we have
all seen mean that um regularly the
market Falls and goes up by 10% that is
regular every year you will see at least
10% up and down every few years 3 4
years maybe 5 years you will see a 20 to
30% uh fall and 20 to 30% gain so that
also happens and once in your lifetime
or twice in your lifetime largely maybe
one just once in your lifetime you will
also see a 50% fall you have to be ready
for all that in equity of course the
same is true in whether it is private
Equity or PMS or aif but I'm saying you
have to be willing to look at that that
is the only problem that you have to
have the ability to sit tight during bad
times but that is true for Real Estate
also but what happens is real estate
price is not thrown at you every day
right so let's say you bought a house
for 2 crores and uh then you keep
telling your wife that it is worth 2
cror even if the neighbor sells it for 1
CR 80 or 1 cr70
you say no no no our windows are painted
orange so his windows were painted green
so he had to sell at a bad price or some
nonsense like that right um but because
the price is not thrown out at you now
if you have invested in say a particular
equity share and that it goes up or goes
down every day it is being uh tweeted
out to you right it is running on a
ticker your wife comes along and says
you bought the share for 100 rupees no
see it is now 930 see you have lost
money right you don't have to hear all
that with uh others because they don't
give you the price on the day-to-day
basis so yes I think if you have the
discipline to sit through long Cycles
which you need for all asset classes uh
you're better off with a mutual fund and
if you don't want to put in the effort
index funds thank you
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