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Everyone ought to and can be rich!

Pavan Bajaj | March 22, 2005

In last 15 years, I have seen 4 'bull' and 3 severe 'bear' markets. A lot of people made a lot of money, but a much larger number of retail investors lost their life's savings in stock market scams.

In every bull market retail investors enter at end of bull market hoping to make a quick buck and in every bear market retail investors exit at the end of bear market tired of losing money.

To garner some solace for an aching soul and bank balance, the retail investors end blaming their losses on either 'bad luck' or the operators (brokers, etc).

It has been proven again and again that timing the stock market is not everyone's cup of tea. People use all kinds of techniques to forecast price movement of stocks on a daily basis and this can be difficult for retail investors to follow.

I was in constant search for some very easy methods to make money in the stock market. Methods where I would not have to apply my brains, but still be able to get returns high returns.

I tried various approaches like chasing hot stocks, tips, technical analyses, etc. But all this requires constant monitoring of the stock prices on a day-to-day basis. One needs to be very nimble at entering and exiting stocks. This may be easy for professional traders, but not for people like you and me who need to devote our time to our jobs.

It was then that I heard about SIPs (Systematic Investment Plans) from mutual funds.

Initially, I completely shrugged them off, thinking that it is just another marketing gimmick used by mutual funds to market their products so that their asset base can grow.

But returns shown by investment done through SIPs were consistently better then investments done at one go. In an SIP, you invest a fixed amount of money every month, irrespective of market movement. So you are able to get more shares at the bottom of market (when everyone is exiting) and less shares at the peak (when everyone is excited and buying stocks like crazy).

I thought of verifying returns by doing all kinds of calculations. My calculations will show you that I am terribly wrong in timing the stock market, but I had firm faith in SIPs' superior returns.

So I continued to invest even when everyone thought that the stock market was very risk y and no analyst was advising to stay invested in stock market.

The worst possible time to start investing can be at the peak of tech bubble (Feb-2000) when market was extremely overvalued and stock market was about to fall. Stock market was in bearish mode for next 3 years; still I generated good results as shown below.

For simplicity, I have done calculations for an index-based fund that invests in Sensex stocks. Below are details about each column.

  • Every month, I invest Rs 10,000
  • Units purchased = (Sensex value)/10,000.
  • Total Units Accumulated are all units accumulated till date.
  • Worth of investment = (Total units accumulated) * (Value of Sensex)
  • Total money invested is shown by adding Rs 10,000 every month.
  • Net profit/Loss = (Total Money Invested) (Value of Investment)
  • % Profit/ Loss = Profit or Loss shown in percentage.

Date

Sensex

Units Purchased

Total Units Accumulated

Worth of Investment

Total Money Invested

Net Profit / Loss

% Profit / Loss

Feb-00

5,447

1.84

1.84

10,000.00

10,000.00

0.00

0.00%

Mar-00

5,001

2.00

3.84

19,180.92

20,000.00

-819.08

-4.10%

Apr-00

4,658

2.15

5.98

27,862.65

30,000.00

-2,137.35

-7.12%

May-00

4,434

2.26

8.24

36,522.98

40,000.00

-3,477.02

-8.69%

Jun-00

4,749

2.11

10.34

49,119.19

50,000.00

-880.81

-1.76%

Jul-00

4,280

2.34

12.68

54,268.99

60,000.00

-5,731.01

-9.55%

Aug-00

4,477

2.23

14.91

66,772.68

70,000.00

-3,227.32

-4.61%

Sep-00

4,090

2.44

17.36

71,002.17

80,000.00

-8,997.83

-11.25%

Oct-00

3,711

2.69

20.05

74,417.11

90,000.00

-15,582.89

-17.31%

Nov-00

3,998

2.50

22.55

90,171.72

100,000.00

-9,828.28

-9.83%

Dec-00

3,972

2.52

25.07

99,588.24

110,000.00

-10,411.76

-9.47%

Jan-01

4,327

2.31

27.38

118,478.71

120,000.00

-1,521.29

-1.27%

Feb-01

4,247

2.35

29.74

126,296.83

130,000.00

-3,703.17

-2.85%

Mar-01

3,604

2.77

32.51

117,185.66

140,000.00

-22,814.34

-16.30%

Apr-01

3,519

2.84

35.35

124,414.98

150,000.00

-25,585.02

-17.06%

May-01

3,632

2.75

38.11

138,401.10

160,000.00

-21,598.90

-13.50%

Jun-01

3,457

2.89

41.00

141,727.43

170,000.00

-28,272.57

-16.63%

Jul-01

3,329

3.00

44.00

146,499.95

180,000.00

-33,500.05

-18.61%

Aug-01

3,245

3.08

47.09

152,789.13

190,000.00

-37,210.87

-19.58%

Sep-01

2,812

3.56

50.64

142,384.76

200,000.00

-57,615.24

-28.81%

Oct-01

2,989

3.35

53.99

161,386.36

210,000.00

-48,613.64

-23.15%

Nov-01

3,288

3.04

57.03

187,485.85

220,000.00

-32,514.15

-14.78%

Dec-01

3,262

3.07

60.09

196,047.01

230,000.00

-33,952.99

-14.76%

Jan-02

3,311

3.02

63.11

208,973.60

240,000.00

-31,026.40

-12.93%

Feb-02

3,562

2.81

65.92

234,832.98

250,000.00

-15,167.02

-6.07%

Mar-02

3,469

2.88

68.80

238,704.91

260,000.00

-21,295.09

-8.19%

Apr-02

3,338

3.00

71.80

239,678.53

270,000.00

-30,321.47

-11.23%

May-02

3,126

3.20

75.00

234,426.14

280,000.00

-45,573.86

-16.28%

Jun-02

3,245

3.08

78.08

253,348.75

290,000.00

-36,651.25

-12.64%

Jul-02

2,988

3.35

81.43

243,278.08

300,000.00

-56,721.92

-18.91%

Aug-02

3,181

3.14

84.57

269,040.90

310,000.00

-40,959.10

-13.21%

Sep-02

2,991

3.34

87.91

262,983.34

320,000.00

-57,016.66

-17.82%

Oct-02

2,949

3.39

91.30

269,287.42

330,000.00

-60,712.58

-18.40%

Nov-02

3,229

3.10

94.40

304,807.14

340,000.00

-35,192.86

-10.35%

Dec-02

3,377

2.96

97.36

328,822.07

350,000.00

-21,177.93

-6.05%

Jan-03

3,250

3.08

100.44

326,466.70

360,000.00

-33,533.30

-9.31%

Feb-03

3,284

3.05

103.48

339,809.33

370,000.00

-30,190.67

-8.16%

Mar-03

3,049

3.28

106.76

325,496.58

380,000.00

-54,503.42

-14.34%

Apr-03

2,960

3.38

110.14

326,001.97

390,000.00

-63,998.03

-16.41%

May-03

3,181

3.14

113.29

360,339.30

400,000.00

-39,660.70

-9.92%

Jun-03

3,607

2.77

116.06

418,642.84

410,000.00

8,642.84

2.11%

Jul-03

3,793

2.64

118.70

450,169.61

420,000.00

30,169.61

7.18%

Aug-03

4,245

2.36

121.05

513,834.69

430,000.00

83,834.69

19.50%

Sep-03

4,453

2.25

123.30

549,075.32

440,000.00

109,075.32

24.79%

Oct-03

4,907

2.04

125.34

615,006.96

450,000.00

165,006.96

36.67%

Nov-03

5,045

1.98

127.32

642,297.05

460,000.00

182,297.05

39.63%

Dec-03

5,839

1.71

129.03

753,405.47

470,000.00

283,405.47

60.30%

Jan-04

5,696

1.76

130.79

744,916.65

480,000.00

264,916.65

55.19%

Feb-04

5,668

1.76

132.55

751,233.70

490,000.00

261,233.70

53.31%

Mar-04

5,591

1.79

134.34

751,039.21

500,000.00

251,039.21

50.21%

Apr-04

5,655

1.77

136.11

769,702.78

510,000.00

259,702.78

50.92%

May-04

4,760

2.10

138.21

657,822.18

520,000.00

137,822.18

26.50%

Jun-04

4,795

2.09

140.29

672,775.59

530,000.00

142,775.59

26.94%

Jul-04

5,170

1.93

142.23

735,366.30

540,000.00

195,366.30

36.18%

Aug-04

5,192

1.93

144.15

748,461.19

550,000.00

198,461.19

36.08%

Sep-04

5,700

1.75

145.91

831,680.10

560,000.00

271,680.10

48.51%

Oct-04

5672

1.76

147.67

837,594.65

570,000.00

267,594.65

46.95%

Nov-04

6234

1.60

149.28

930,586.22

580,000.00

350,586.22

60.45%

Dec-04

6602

1.51

150.79

995,519.77

590,000.00

405,519.77

68.73%

Jan-05

6555

1.53

152.32

998,432.61

600,000.00

398,432.61

66.41%

Feb-05

6713

1.49

153.81

1,032,498.56

610,000.00

422,498.56

69.26%

Mar-05

6690

1.49

155.30

1,038,961.03

620,000.00

418,961.03

67.57%

Few points to observe

I started at a terribly wrong time -- when the market was almost at its peak.

I continued to invest money of Rs 10,000 every month when no one was thinking of buying any stocks and everyone was getting out of stocks.

I could break even at 3,600 level of Sensex when hardly anyone could guess that the bull market has started.

I have not included dividend yield of 2 per cent from Sensex stocks. After including 2 per cent dividend yield, effective return will go up further.

By investing Rs 10,000 every month, I could generate 67.6% return in the last 4 years. Some money was invested 4 years ago and some money was invested last month, so average investment time is about 2 years. So it comes to an annualized return of 34%.

I could purchase more units at the bottom of the market (i.e. at a very low price) and few units at the peak of market (i.e. at very high prices).

From the above it is clear that by investing in a Systematic Investment Plan, I didn't try to time market but still could make very attractive returns.

Further improvement in returns

We can generate even better returns by following a few techniques religiously.

In the above calculations I have invested in Sensex stocks. By investing in diversified mutual funds, returns can be much higher than shown above because in India, mutual funds are consistently beating Sensex returns.

Some of the good mutual funds, to my mind, include Franklin Templeton Bluechip, Franklin Templeton Prima, Franklin Templeton Prima Plus, SBI Magnum Contra, Fidelity Equity Fund, Reliance Equity Fund, etc.

When I started investing in SIPs, the Sensex was trading at a PE (price to equity) ratio of more than 30. To avoid investing at a wrong time, one should invest only when Sensex is trading a PE ratio of below 20.

One should just sit idle when the Sensex is trading between PE ratio of 20 and 30. One can start booking profits when the Sensex is trading above a PE ratio of 30.

The best way to make money -- and it can be done using this simple technique -- is to buy low and sell high.

Conclusion

SIPs are the best and the easiest way to make money. By using SIPs in top performing diversified mutual funds, even a layman can make money without taking undue risks.

From 1970 to till date, SIP investments have given a compounded annual return of 21 per cent.

I consider this one of the simplest techniques of generating money consistently.

In the short-term, stock markets can be very volatile but over the long term, stocks always give better returns compared to any other asset class including gold, bonds, real estate, fixed deposits, etc.

The author works with a software company in Bangalore. He studies the stock market as a passionate hobby. The opinions expressed here are personal.


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Number of User Comments: 24




Sub: help!

I have the same problem. There are many courses being offered on stock trading. Any suggestions about the extent they might be useful?


Posted by saurabh





Sub: Information Needed on Stock Markets

Hi Pavan , I am very much new to stock market and mutual funds. I am presently working in a software firm in Delhi. Please ...


Posted by Jatin Bahl





Sub: investment

A good article


Posted by gahan sadhu





Sub: Some tips

For guys who are just waiting to jump into stock market, I have some suggestions.Please do not enter the market without doing your home work.What ...


Posted by Sujith





Sub: everybody can make money-buy units of sensex periodically

the article is very intelligent. the observations and practice are great. it is the best way to follow/invest who is not a full timer. there ...


Posted by ASHIT THAKER




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