Equity is the best Asset class to Invest! 75% should be in Equity!

Summary

The 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

00:00

💼 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.

05:00

🏦 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.

10:02

📉 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.

Keywords

💡Financial Planner

A financial planner is a professional who provides advice and guidance on financial matters, such as investments, savings, and retirement planning. In the video, the speaker emphasizes the importance of consulting a financial planner or having the knowledge to manage one's investments, as it helps in aligning investment decisions with an individual's financial goals and risk tolerance.

💡Risk Profile

A risk profile is an assessment of an investor's willingness and capacity to take risks with their investments. The speaker mentions that where one should invest depends on their risk profile, suggesting that different individuals may have varying levels of comfort with the potential for financial loss, which influences their investment choices.

💡Mutual Funds

Mutual funds are investment vehicles that pool money from many investors to invest in a diversified portfolio of stocks, bonds, or other assets. The speaker discusses mutual funds as a preferred investment option due to their managed nature and the potential for diversification, reducing the overall risk compared to investing in individual securities.

💡Equities

Equities refer to shares or stocks in a company, representing ownership and a claim on part of the company's assets and earnings. The script mentions equities as an investment option, highlighting their potential for growth and the importance of understanding the economic trends that drive their performance.

💡Private Equity

Private equity involves investing in companies that are not publicly traded on a stock exchange. The speaker discusses the high costs and lack of transparency associated with private equity investments, which can make them less attractive compared to other investment options like index funds.

💡Index Funds

Index funds are a type of mutual fund or exchange-traded fund designed to track the performance of a specific market index. The speaker advocates for index funds due to their low cost, simplicity, and the historical performance of the broader market, as championed by John Bogle of Vanguard.

💡Cost

In the context of the video, cost refers to the fees and expenses associated with managing and investing in various financial instruments. The speaker emphasizes the importance of low costs in investment vehicles, using index funds as an example where reduced costs can significantly impact long-term investment returns.

💡Compliance

Compliance in the video refers to the adherence to regulations and rules governing investment practices. The speaker points out that certain investment types, like private equity, may have less regulatory oversight, which can lead to concerns about transparency and the potential for fraudulent activities.

💡Exit Strategy

An exit strategy in investing is a plan for selling an investment to realize its value. The speaker discusses the challenges of exits in private equity and PMS, where the lack of a clear exit path and potential long-term lock-ins can pose risks to investors.

💡Real Estate

Real estate as an investment involves purchasing property with the intent to generate income, appreciate in value, or both. The script mentions the high transaction costs and lack of liquidity in real estate investments, which can make them less attractive for investors seeking quick returns or diversification.

💡Hybrid Funds

Hybrid funds, also known as balanced funds, invest in a mix of both equity and fixed-income securities. The speaker suggests hybrid funds as an alternative to index funds for those who are not keen on the taxation structure of pure equity investments, offering a blend of growth and income.

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