Many people (sadly including CIOs of mutual funds and life insurance companies) think that 2-3 year schemes in equity makes sense. Hence a rash of close ended mutual fund schemes, and almost none doing well – except by a timing accident.

A few days ago I profiled a few of my HNI readers – very broadly of course. Let me give you a little of their back ground.

For most of them big time wealth has been created by their Equity holding.

Almost all of them can be said to be ‘To the Manor born’ . These were houses which were well off. Not fabulously rich, but surely upper middle class if not rich.

So when a kid was born a bank account was opened and a PPF account was opened when the kid was 1 year old. Quickly gifts received were converted to bank fixed deposits and equity shares. Which means by the time the kid was 5 years old he was receiving cheques from Tata Steel and Larsen & Toubro. All this made sense because dividends up to Rs. 7000 were tax free and taxation rates were high. Almost all of them would have a HUF – Hindu Undivided Family account to avail of the tax benefits too.

The kids 3rd birthday or the 5th birthday would have been the trigger to buy shares and by 15 he/she would have a brimming PPF account, a decent equity portfolio and an income far far more than that kids expenses. These families would have expenses of X per annum, cash flow income of 5x per annum and a portfolio appreciation of say 10x per annum.

They never had to bother about where their next vacation would be, but most of them would spend much less than their ‘affordability’. Many of them would have borrowed money from Hdfc to buy a house, but along with the house they would have picked up 100 shares too. In fact in many of the cases I have pushed them for a higher loan and using the balance to pick up equity shares of Hdfc. All of them have sought advice and at no point did they think that since they had a portfolio, they could do it themselves. Many of them have consulted me from time to time on things ranging from mending a damaged portfolio, a damaged education and a damaged marriage. This has nothing to do with their life skills, but an occasional touch here and there helped.

All these people would hold equity shares – forever. I know people who have held Tata Steel since the 1950s. So immaterial of the ‘r’ they got, the ‘n’ of the compounding formula may have created money. For most of them the un-booked profit of their equity portfolio would be a big multiple of their costs of building their portfolio. So if I commented ..’your equity portfolio is Rs. 22 crores’ – it would be met with ‘are we not lucky that our investing of Rs. 20 lakhs has become Rs. 22 crores?’ . They keep forgetting the trading profits, dividends reinvested, time spent in the market, and not interrupting the compounding. During this period they may have bought shares in the secondary market, primary market, done SIPs, met managements, sold shares after holding them for 20 years, done quick trades, done delivery based trading,  – it is very difficult to classify them as ‘Value’ investors or ‘Growth’ investors. They have worn various hats at various points in time. They have not paid too much attention to asset allocation, and understood that equity is about having a high tolerance for standard deviation. It they had listened to ‘advice’ they may have sold in 2004 because the index had doubled. Or at least in 2006. They did not.

Are these people lucky? I am sure they are, but they worked towards their luck. Many of them have Colgate, PnG, Nestle, Cadbury, Gsk, …still in their portfolio. All of this would have been first bought in 1977. Are they day traders? delivery based traders? value investors? growth investors? just buy and forget shareholders? Well in different parts of their portfolio they are different things.

Most of them would not have a written down goal plan. None of them started a ‘SIP’ to meet a goal. None of them worried too much about asset allocation – all of them would have 4-5 PPF accounts fully funded and extended beyond the first 15 years. Other than PPF they would have some bank deposits to keep their bankers happy but not as a serious asset allocation exercise. They would invest in good shares, in balanced funds, equity funds, etc. without worrying much about large cap, mid cap, micro cap, etc. Even their own portfolio would not be broken up. Most of their investments would be a bottom up approach.

Thus this is the background. You may or may not be able to copy what these people have done. You may want a quick fix. You may believe that doing a SIP of Rs. 15,000 from age 32 will put you in this league. Or you may believe that you can get wealthy because you are doing a SIP of Rs. 1,50,000 a month. Sadly whatever r you get and how much so ever your SIP amount, it is difficult to replace the power of n (theoretically possible, but not practical).

However, doing a SIP or not doing a SIP is not the question. The question is what are your expectations with which you are doing it, that is all. Keep your SIP going, use some kind of advice (enough people who espouse the direct method of investing seek advice personally but not professionally). And there are many people who give generic advice and think that is ‘personal advice’. God bless.

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  1. Its Psycological it dosnt matter if you invest in your or childs name if you have discipline. For HNIs its their loose change which they invest in their childs name (rather than giving pocket money) so dont try to blindly copy anything. Understand why/what/when/how then only invest in your child’s name

  2. caveat: above post is not for “low class” people

    ” In fact in many of the cases I have pushed them for a higher loan and using the balance to pick up equity shares of Hdfc – ”

    hmm..borrowing a loan to invest in equity

    caution: stunts performed by experienced people under controlled circumstances. do not try these at home.

  3. ” portfolio appreciation of say 9x per annum.”

    Shouldn’t this be portfolio appreciation of say 9 % per annum ?

  4. Moron(buffet)

    What subra meant is
    lets take my example

    I had saved 45 lks over years with SIP and other investments.
    When i had to buy house worth 80lks, Since i was eligible for 65lks loan, and 45lks cash in hand, I could have borrowed only 35lks.
    But i did barrow 65lks and let that remaining 30lks grow, thats what subra meant,
    You are taking loan for asset and investing your money into equity.
    Not taking loan to invest in equity.

  5. No. Aniruddha Malpani take an example.

    I mean a family has 15L of annual expenses, their income is say 75L and the value of their portfolio (thanks to the appreciation, not cash dividends) goes up by Rs. 1.35 crores.

    Thus X, 5X and 9X. NOT 9%.

    I hope I am clear?

  6. I think if one underspends income, invests the savings in equities, and has a long time for any use of the money so invested, he has replicated more or less the snowball effect told by Buffett. Here the Rate of return on investments will not matter much and in any case in not in the investors control. He has control over how much money he can keep investing and how long time is there for the money to grow.

  7. Also, as someone said it is better to be approximately right than to be accurately wrong, same goes for portfolio, a broad portfolio of equities would do well. No point in losing sleep over very scientific sounding terms that one is most likely to forget come a 30% drop in prices. AS you rightly said ‘ High tolerance for standard deviation ‘ or in simple terms, would you hold on when blood is on the streets and some of it is your own blood !! The gut plays a major part here not brain ! If one has enough time and need not worry about day to day living, they can come back,

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