Mutual Fund - Divine Investments

Why Relying Solely on CAGR Can Be Deceptive When Evaluating Fund Performance

Category Mutual Fund

Investors often look to a fund’s historical performance as a key decision factor. One popular metric that stands out is the Compound Annual Growth Rate (CAGR), which provides an easy-to-understand annualized growth rate of an investment over a specific period. However, relying solely on CAGR to evaluate a mutual fund’s potential can lead to misguided decisions, as this metric can mask underlying volatility and recent performance trends that may skew perceptions. While CAGR can be useful for presenting an overall picture, it may obscure critical details, particularly when a fund’s recent strong performance boosts its long-term CAGR, creating an illusion of stability or consistent high returns. ### Understanding CAGR: A High-Level Metric CAGR is calculated using only the initial and final values of an investment over a specified period, disregarding any year-to-year fluctuations. The formula for CAGR is as follows: CAGR = (Ending Value / Starting Value)^(1 / Number of Years) – 1 For example, a fund that grows at rates of 10%, 15%, 13%, and so on over individual years can report its overall CAGR, offering a single growth rate that represents the “smoothed” average annual increase. This might seem like a reliable summary, yet the actual performance across each year is hidden. When volatility is high, this smoothing effect becomes misleading, especially if the fund’s recent gains have significantly raised its long-term CAGR. ### The Impact of Recent Performance on CAGR Consider a mutual fund with a history of volatile returns. It might have generated returns as follows : Calendar Year Midcap fund - Large AMC * 2024: 25.81% * 2023: 44.47% * 2022: 12.29% * 2021: 39.91% * 2020: 21.75% * 2019: 0.20% * 2018: -11.20% * 2017: 41.66% * 2016: 11.35% * 2015: 5.81% * 2014: 76.63% * 2013: 9.64% * 2012: 39.62% * 2011: -18.31% * 2010: 32.13% * 2009: 94.40% * 2008: -51.51% * 2007: 31.19% This has resulted in a CAGR of 20.7% over 15 years. This figure, though impressive at first glance, conceals the ups and downs across the years. A closer look reveals that recent strong performance, especially in the last two years, has significantly inflated the fund’s long-term CAGR, making the fund appear consistently high-performing even though it experienced periods of underperformance. In this way, a recent upward trend can mask years of lackluster or even negative returns. ### Why Focusing Solely on CAGR Can Be Misleading Relying only on CAGR for investment decisions can be problematic for several reasons: 1. **Ignores Volatility and Risk**: CAGR provides a “smoothed out” growth rate, eliminating the highs and lows in the investment’s actual returns over the period. This can be particularly deceptive for funds that have experienced high volatility. For investors with lower risk tolerance, choosing a fund based solely on a high CAGR could expose them to more risk than anticipated, as they are not informed of the fund’s fluctuating performance in previous years. 2. **Masks Recent Performance Influence**: When a fund performs exceptionally well in recent years, the overall CAGR over a long period (e.g., ten years) can appear elevated. This can be misleading, as it implies sustained strong performance across the entire period. Investors basing decisions on this “enhanced” CAGR might overlook past underperformance and assume a consistency that doesn’t exist. 3. **May Not Reflect Market or Sector Dynamics**: CAGR doesn’t account for external factors like market conditions or sectoral trends that may have influenced the fund’s performance. For example, a technology-focused mutual fund may have experienced substantial gains in recent years due to sectoral growth, inflating its CAGR without providing investors with insight into how it would fare in a downturn. 4. **Fails to Align with Investment Goals and Risk Tolerance**: Different investors have different investment goals and varying levels of risk tolerance. By not showing annual fluctuations, CAGR might attract investors seeking steady growth, which could lead to misalignment with their actual risk tolerance if the fund is inherently volatile. ### Avoiding the Pitfall of Solely Using CAGR: Factors to Consider To get a well-rounded view of a fund’s performance, investors should go beyond CAGR and consider a combination of metrics and qualitative factors, such as: 1. **Annual Returns**: Examining year-by-year returns allows investors to see how the fund performs in different market conditions. By understanding periods of outperformance and underperformance, they can make more informed decisions. For instance, an investor can identify years where the fund struggled and consider whether these periods align with their own investment timeline and risk tolerance. 2. **Fund Manager Expertise and Consistency**: A fund manager’s track record can provide insights into the fund’s consistency and ability to adapt to changing markets. Experienced fund managers with a history of navigating market volatility may offer a better chance of delivering stable returns, despite high annual fluctuations. 3. **Sectoral Composition**: A fund’s sector exposure can reveal a lot about its risk profile. For example, funds heavily invested in a single sector, like technology, may yield higher returns during periods of sector growth, which could inflate CAGR, but could underperform in downturns. Diversified sectoral composition often suggests a fund’s resilience against sector-specific risks. 4. **Fund Allocation Across Market Caps**: Evaluating the fund’s allocation across large-cap, mid-cap, and small-cap assets is also crucial. Funds with more allocation to small- and mid-cap companies might experience higher returns during growth cycles but also bring additional risk, which CAGR alone would not indicate. This segmentation can reveal a fund’s exposure to various market cap trends, helping investors match their investment preferences more closely. 5. **Alignment with Personal Risk Tolerance**: CAGR doesn’t reflect the day-to-day fluctuations that impact an investor’s comfort level. By evaluating a fund’s standard deviation, beta, and other volatility metrics, investors can ensure that a fund’s risk profile aligns with their tolerance, reducing the likelihood of panic selling during downturns. ### Use CAGR as a Starting Point, Not the Only Metric While CAGR provides a convenient way to summarize a fund’s overall performance, it is only one piece of the puzzle. A fund’s apparent long-term success may be influenced heavily by recent good years, masking past volatility and potential risks. When making investment decisions, especially for long-term goals, it’s crucial to adopt a broader perspective. Factors like annual returns, manager expertise, sector diversification, and alignment with personal risk tolerance add invaluable insights that CAGR alone cannot offer. In short, investors should view CAGR as a high-level indicator, not a definitive metric. A diversified analysis combining both quantitative and qualitative factors is essential for a well-informed investment strategy. By going beyond CAGR, investors can avoid the allure of “smoothed” returns and make choices that more accurately reflect their financial

The Power of Smart Beta: A Comprehensive Guide to Factor Investing

Category Mutual Fund

In the ever-evolving landscape of investment strategies, smart beta funds have emerged as a compelling alternative to traditional passive and active investing. By leveraging the potential of various factors, these funds offer investors a unique opportunity to enhance returns while managing risk effectively. **Understanding Smart Beta Funds** Smart beta funds, also known as factor-based funds, employ rules-based methodologies to select securities based on specific characteristics or factors. These factors can include: * **Value:** Investing in undervalued stocks with a potential for appreciation. * **Momentum:** Targeting stocks that have exhibited strong price momentum and are likely to continue their upward trajectory. * **Quality:** Focusing on companies with solid financial fundamentals, such as strong balance sheets and consistent profitability. * **Low Volatility:** Selecting stocks with relatively stable price fluctuations, aiming to minimize downside risk. * **Dividend Growth:** Investing in companies with a history of increasing dividend payments, providing a steady stream of income. * **Size:** Targeting small-cap or mid-cap stocks, which may offer higher growth potential compared to large-cap companies. By systematically applying these factors, smart beta funds seek to capture the potential outperformance of certain market segments while mitigating the risks associated with traditional market capitalization-weighted indices. **The Advantages of Smart Beta Investing** * **Enhanced Returns:** By exploiting market inefficiencies and capturing the potential of specific factors, smart beta funds can potentially deliver superior returns compared to traditional passive investing. * **Reduced Risk:** By focusing on factors like low volatility, smart beta funds can help investors mitigate downside risk and protect their capital during market downturns. * **Improved Diversification:** Investing in multiple factors can provide a broader exposure to different market styles, reducing concentration risk and enhancing portfolio resilience. * **Cost-Efficiency:** Smart beta funds often have lower expense ratios than actively managed funds, making them a more affordable option for investors. * **Transparency:** The rules-based nature of smart beta funds ensures transparency and predictability, allowing investors to understand the underlying investment strategy. **Key Considerations for Investors** While smart beta funds offer numerous advantages, it's essential to consider the following factors before investing: * **Factor Exposure:** Understand the specific factors the fund is targeting and their potential impact on returns. * **Track Record:** Evaluate the fund's performance history, considering both up and down markets. * **Expense Ratios:** Compare the expense ratios of different smart beta funds to identify the most cost-effective options. * **Tax Implications:** Consider the tax implications of investing in smart beta funds, especially if you're in a high tax bracket. * **Market Conditions:** Be aware that the performance of smart beta funds can be influenced by market conditions and the relative performance of the targeted factors. Smart beta funds represent a promising investment strategy that can help investors achieve their financial goals. By leveraging the power of factors, these funds offer the potential for enhanced returns, reduced risk, and improved diversification. However, it's crucial to consider **taking help of a professional** who will consider your individual investment objectives before making investment decisions.

The Crucial Role of Manufacturing in India's Economic Growth

Category Mutual Fund

Manufacturing is a fundamental pillar of economic growth, standing alongside services and agriculture. In India, the services sector currently leads the way, contributing a remarkable 56% to the nation's GDP, followed by manufacturing at 27%, and agriculture and allied sectors at 17%. Despite this progress, the manufacturing sector holds significant potential for expansion and can play a pivotal role in the country's economic development. #### Why Manufacturing Matters Manufacturing is essential for several reasons: 1. **Import Substitution**: A strong manufacturing sector reduces the need for imports, decreasing dependency on foreign products and strengthening the domestic economy. By producing goods locally, India can conserve foreign exchange reserves and enhance self-reliance, which is crucial during global trade disruptions. 2. **Boosting Exports**: A robust manufacturing sector significantly enhances export growth. By developing local manufacturing capabilities, India can produce goods for both domestic and international markets, improving the trade balance, increasing foreign exchange earnings, and positioning itself as a competitive player in the global market. 3. **Job Creation**: Manufacturing is a major driver of job creation, helping to reduce unemployment and underemployment. This contributes to social stability and economic growth, providing livelihoods for millions. 4. **Stimulating Related Sectors**: Manufacturing also stimulates growth in related sectors such as logistics, information technology, and maintenance services, enhancing the overall service sector. 5. **Enhancing Productivity**: By utilizing resources more efficiently and scaling up production, manufacturing boosts overall productivity, which is crucial for sustainable economic growth and improving living standards. #### Initiatives to Boost Manufacturing The Indian government has implemented several strategic initiatives to strengthen the domestic manufacturing sector: - **Vocal for Local**: This campaign aims to promote Indian manufacturing by encouraging the production and consumption of locally made goods. It seeks to reduce reliance on imports while strengthening domestic industries and creating more job opportunities. - **Production Linked Incentive (PLI) Scheme**: Recognizing 14 key sectors, this scheme offers financial incentives to boost production and exports. It enhances manufacturing capabilities, attracts investments, and positions India as a global manufacturing hub. - **National Logistics Policy**: This policy focuses on reducing logistics costs, improving overall cost efficiency, and ensuring timely delivery of goods. By enhancing infrastructure and connectivity, it benefits the manufacturing sector and strengthens the entire economic framework. #### India’s Manufacturing Advantage As the world becomes increasingly aware of the environmental hazards posed by industrialization, there is a shift away from energy-intensive sectors, potentially benefiting India by attracting more manufacturing opportunities. India's low labor costs make it an attractive destination for manufacturing. In the wake of the pandemic, global companies are diversifying their supply chains outside of China, presenting significant opportunities for India. Moreover, with a younger workforce and rising consumption potential, India is well-positioned to capitalize on manufacturing growth. The strong domestic capital expenditure cycle, debt reduction, and high-profit margins further indicate that the manufacturing sector could thrive in the coming years. In conclusion, while India's services sector currently dominates the economy, the manufacturing sector has immense potential for growth. By implementing strategic initiatives and capitalizing on its inherent advantages, India can strengthen its manufacturing capabilities, drive economic development, and enhance the overall quality of life for its citizens. The future of India's economy may very well depend on the success of its manufacturing sector.

10 Financial Tips for Newly Married Couples

Category Mutual Fund

Following are some of the tips you can follow to manage your financial requirements efficiently: **1**. **Plan Your Aspirations Mutually** Financial goals are not the same for all individuals. You and your spouse may have different sets of aspirations in life in terms of work, family planning, etc. This is why you must communicate and mutually decide how to approach fulfilling those dreams. It will benefit you in setting your budget and doing financial planning. **2**. **Establish Your Budget** One of the most important pieces of financial advice for newly married couples would be to plan a budget. It will help you keep your expenditure within your combined earning capacity. The budget is a systematic plan for expenses that you must bear to sustain the household and lifestyle requirements. You should think about where and how you should spend your money and save your excess earnings. **3**. **Decide on Financial Responsibilities** Another important piece of financial advice for newly married couples would be on splitting responsibilities with each other, especially when both of you are earning members. You need to mutually decide who will take care of EMIs, investments, household expenses and other similar financial commitments. This way, you can divide and reduce the total financial pressure from each other and concentrate on other necessary things in life. **4**. **Build an Emergency Fund** Sound financial planning for newlyweds should also stress the necessity of building an emergency fund. This is because emergencies like health issues and loss of employment are unpredictable. You can encounter difficulties in sailing through those difficult times without adequate finance. The emergency fund will help tackle those challenges without facing much stress. In fact, you will not have to borrow and subsequently engage in repayment to manage your basic household requirements. **5**. **Start Investing Part of Income** You and your spouse can build and grow funds for the future through systematic investment in different instruments like mutual funds, stocks, bank deposits, etc. Before the investment, however, you need to mutually decide how much you can put towards your funds, considering your income and budget. You should consult a financial advisor (connect with Divine Investments at 9326380653) and should mutually decide to put your money into to let it grow according to your capacity for risk and reward. **6**. **Create Fund for Child Education** Another essential piece of financial advice for young married couples would be to start planning and saving for child education from an early period. You can build a dedicated fund for this and start putting your money into it methodically. With little but gradual investment from an early period, it will not be much difficult for you to raise the required capital. Additionally, you can also get the maximum benefit of compounding interest by investing for a prolonged period. **7**. **Buy Health Insurance Plans** A health insurance policy can help you keep your emergency funds unaffected during medical emergencies. It gives you financial coverage against your medical expenses up to the predetermined sum insured value.You can also start your cashless treatment from partnered hospitals of your insurance company. It will help you secure treatment facilities without paying up front. Your insurer will pay all your medical bills directly to the hospital. All these benefits make it essential that you get yourself and your spouse covered under health insurance policies. **8**. **Get a Life Insurance Coverage** Purchasing a life insurance term plan is also an essential financial advice for newly married couples, especially if one spouse is a non-professional. It will allow both of you to obtain a life cover. In case of your premature demise, your spouse will get the predetermined lump sum as a death benefit or vice versa. However, for this, you need to make them your beneficiary for the policy. **9**. **Create Joint Account- bank account and investment account** A joint account can help both you and your spouse manage your savings effortlessly. Both of you will have more and less equal access to all the services linked with the savings account. In case of financial requirements, you, as well as your spouse, will be able to withdraw funds, deposit money, make online transactions, etc. In fact, you can also link your loans with this joint account if needed. **10**. **Keep Money in Bank Accounts** One more financial advice for newly married couples would be to keep as little hard cash at home as possible. Instead, you need to put that in your savings account. This will help you resist your impulses to spend more than necessary. It will also reduce the chances of losing your hard-earned money. Furthermore, you can utilize your cash stored in the bank account for several purposes, including paying bills, transacting money for online purchases, etc. By acting on the stated financial advice for newly married couples, you can fulfill your financial responsibilities towards your new family. You can develop proper financial discipline for your family to secure your future requirements without compromising on your current lifestyles.

The Tortoise and the Hare: Part II (A Sequel)

Category Mutual Fund

The inspiration for this article is the revised version of this children’s story. In Aesop’s legendary fable, the tortoise and the hare, the two animals race against each other. The hare sets off at top speed but is easily distracted, whereas the tortoise keeps up the slow and steady pace ignoring all the noise and distractions- ultimately winning the race. Let’s compare this scenario with our investments which we majorly invest into two asset classes – Fixed Income (Debt) like Fixed Deposits, Bonds, PPF, Debt Mutual funds and Equity like stocks and equity mutual funds. Now the Tortoise is Equity and Hare is Debt. In the first race, the Debt (Hare) starts off with providing returns to the portfolio whereas the markets with volatility is left behind, however with economy growing , Equity ( Tortoise ) catches up and wins the race. Now there is a twist. After losing the race, the chastened hare asks the tortoise for a re-match, confident that he has learned his lesson. The tortoise agrees, but smartly insists that he will pick the track. The hare agrees. The tortoise picks a route that has a river in between. So while the hare races ahead, he gets stuck when he reaches the riverbank. He can’t cross the river!. The tortoise slowly makes his way, swims across the river and wins yet again. Good Lesson isn’t it. Winning the war is often about choosing the battleground sensibly. And then comes the clincher. After the race, the hare and the tortoise catch-up for a drink, and turn somewhat philosophical. Life is not about beating the other guy, but about being our best, they feel. Instead of competing with each other, the hare and tortoise decide to collaborate and see how quickly they can reach the finish line. The hare carries the tortoise and runs to the riverbank. He then jumps onto the tortoise’s back as they cross the river. And once again switch places and reach the finish line- faster than they might have on their own. Most people want to bet on hares. Tortoises are never in the news. One should take a very pragmatic approach and bet on both basis the time in which the race needs to be completed. This means one should look at asset allocation across equity and debt basis risk taking capacity and time horizon. In very simple terms, asset allocation is essentially that if you have to invest Rs 100, you take a call saying how much of that Rs 100 goes into equity, how much into debt. Similar to the collaboration which the Tortoise and the hare made, the benefit for an investor, arising from the negative correlation of various assets, is that volatility in one market is cushioned by stability in another. This reflects well in your portfolio when assets are shifted or juggled accordingly. It’s hard and impractical to predict the asset that gives you the highest return. Data shows that every year, the winner varies, since the market is at the confluence of multiple variables. Strategic asset allocation is about matching the nature of the investment and your suitability. In essence, your allocation decision should not be influenced by current market levels. A bullish market leads to “recency bias" in your decisions and you tend to allocate higher. Even if you have diligently allocated your portfolio between debt and equity, there may come a time down the line when you need to shift funds between the two to retain your planned allocation ratio. This activity is known as portfolio re-balancing similar to the way the tortoise and the hare kept switching from ones back to the other while crossing the river. In case equity funds have fared better than debt funds in your portfolio, you can periodically consider shifting the gains from equity to debt, lest your portfolio become too skewed to one asset class.

How to invest in Mutual Funds without any prior knowledge about it

Category Mutual Fund

**How to invest in mutual funds without any prior knowledge about it?** Investing in mutual funds can be a smart way to grow your wealth, even if you have no prior knowledge of the financial markets. Here's a step-by-step guide on how to start your mutual fund investment journey without any prior expertise. **1. Educate Yourself:** The first and most crucial step is to educate yourself about mutual funds. A mutual fund is a pool of money collected from many investors which is managed by a professional fund manager. The manager invests the pooled money in a diversified portfolio of stocks, bonds, or other securities. There are various types of mutual funds, such as equity funds, debt funds, hybrid funds etc. each with its own risk and return profile. Take some time to read articles, watch videos, and gain a basic understanding of these concepts. **2. Set Clear Financial Goals:** Determine your investment goals. Are you investing for retirement, a major purchase, or simply to grow your wealth? Knowing your objectives will help you choose the right type of mutual fund and develop a strategy. **3. Seek Professional Guidance:** If you're unsure about where to start, it's highly recommended to seek professional guidance. An expert can assess your financial situation, risk tolerance, and investment goals, and suggest suitable mutual funds thus reducing costly financial mistakes. **4. Select a Mutual Fund:** Always makes sure that you choose a mutual fund that aligns with your investment goals and risk tolerance. **5. Open an Investment Account:** To invest in mutual funds, you'll need to open an investment account. The account setup process is typically straightforward and involves providing some personal and financial information. The platform you choose will guide you through the necessary steps. **6. Start with a Small Investment:** It's a good idea to start with a small amount of money, especially if you're new to investing. Many mutual funds have a minimum investment requirement, which can vary from scheme to scheme and AMC to AMC too. Make sure to check this requirement and ensure that it fits your budget. Starting small helps you understand how investing works without risking a lot of money. **7. Monitor your investments:** After investing in a mutual fund, it's crucial to review your portfolio. You can track your investments through the online platform where you opened your account. Check the performance of your funds periodically and compare it to your investment goals. Be prepared to make adjustments to your portfolio if your goals change or if a fund consistently underperforms. **8. Continuous Learning:** Investing is an ongoing process. As you gain more experience, continue to educate yourself about mutual funds and investment strategies. Read books, attend seminars, and stay updated with financial news. The more you learn, the better equipped you'll be to make informed investment decisions. Investing in mutual funds without knowledge is possible, but it's important to know that all investments have risks. Mutual funds too can fluctuate in value, and it's possible to lose money. If you ever feel uncomfortable making investment decisions on your own, don't hesitate to seek professional guidance. Education, planning, and expert advice can lead to a successful mutual fund investment journey.

How Mutual Funds Can Help In Achieving Financial Freedom

Category Mutual Fund

Financial freedom is a dream for many, where you have the resources and flexibility to live life on your terms. While it may seem like an elusive goal, mutual funds can be a powerful tool to help you achieve this aspiration. In this blog, we will explore how mutual funds can contribute to your journey to financial freedom. **→ Diversification and Risk Management** One of the fundamental advantages of mutual funds is their ability to diversify your investments. Diversification means spreading your money across a range of assets, such as stocks, bonds, commodities. By investing in a mutual fund, you become a part of a larger pool of investors, which, in turn, allows the fund manager to diversify your investments effectively. This diversification helps to reduce the impact of poor-performing assets and manage risk. **→ Professional Management** Mutual funds are managed by experienced fund managers who make investment decisions on your behalf. These professionals are equipped with the knowledge and expertise to navigate the complex world of financial markets. They conduct research, analyze market trends, and strategically allocate the fund's assets to maximize returns while mitigating risks. This professional management ensures that your investments are in capable hands. **→ Accessibility** Unlike some investment options that require substantial initial capital, mutual funds offer accessibility to a wide range of investors. You can start investing with a relatively small amount of money. This accessibility makes mutual funds an attractive choice for individuals at various stages of their financial journey. **→ Liquidity** Mutual funds provide liquidity, meaning you can easily buy or sell your units. This flexibility ensures that you have access to your money when you need it. Whether you're saving for short-term goals or maintaining an emergency fund, mutual funds allow you to maintain financial flexibility. **→ Automatic Investment with SIPs** Achieving financial freedom often requires discipline and consistent saving. Mutual funds offer a solution through Systematic Investment Plans (SIPs). SIPs allow you to set up automatic, periodic investments, helping you save and invest consistently. Over time, this disciplined approach can significantly increase your wealth. **→ The Power of Compounding** Mutual funds harness the power of compounding, which can significantly impact your wealth over time. As your investments generate returns, those returns are reinvested, and your investment base grows. This leads to exponential growth and can be a key driver in achieving your financial goals. **→ Flexibility** Mutual funds come in various categories and cater to different investment goals. Whether you're saving for retirement, your child's education, or buying a home, there is likely a mutual fund category that aligns with your specific financial objectives. This flexibility allows you to tailor your investments to meet your unique needs. **→ Transparency** Investors receive regular updates on their mutual fund investments, ensuring transparency. You can easily track the performance of your investments and make informed decisions about your portfolio. **→ Tax Benefits** Certain mutual funds offer tax advantages. For example, Equity-Linked Savings Schemes (ELSS) can provide tax deductions under Section 80C of the Income Tax Act. → Goal-Oriented Investing Mutual funds can be a vital tool for goal-oriented investing. Choose funds that match your financial goals to help you reach them in an organized way. This approach ensures that you are not just saving money but actively working towards your aspirations. **Conclusion** Financial freedom is not a distant dream; it's a tangible goal that you can work towards with the help of mutual funds. Through diversification, professional management, accessibility, liquidity, compound growth, and other advantages, mutual funds provide a path to financial independence. To make the most of this investment option, it's essential to select funds that match your risk tolerance, time horizon, and financial objectives. Regularly reviewing your investments and staying committed to your goals will help you realize your vision of financial freedom. So, start your mutual fund journey today and take the first step towards achieving your financial aspirations.