Category Archives: Investing

The past decade has been characterized by the rapid growth of technology companies. These companies, often unprofitable, became the darling of investors on the promise of higher-than-average revenue growth.

Indian investors warmed up to these Growth stocks in the past year with the listing of companies such as Zomato, Paytm, Nykaa, etc. But what exactly are they and how are they different from the other end of the spectrum i.e. Value stocks? Let’s find out the difference between Growth vs Value stocks.

What are Growth stocks?

Growth stocks are typically companies that are growing at a fast pace and have relatively higher valuations as measured by the price-to-earnings ratio or price-to-book value ratio. These companies are more focused on user acquisition and revenue growth than near-term profitability and therefore their earnings tend to occur far out in the future.

Investors continue to flock to these stocks and ascribe them to high valuations as long as they can demonstrate growing market share and revenue growth. However, any signs of a slowdown or a decrease in growth can cause their stocks to come crashing down.

E.g. Share price of Netflix crashed by almost  -40% after it reported a loss in its subscriber numbers. 

Examples of Growth stocks: Adani Gas, Adani Green, PolicyBazaar, Paytm, Nykaa (*these are not stock suggestions)

What are Value stocks?

Value stocks by comparison are associated with mostly ‘boring’ companies. Technically, stocks that are currently trading at a lower price or are valued cheaply compared to their actual intrinsic value. These are stable companies that produce strong cash flows and steady revenue growth. And are mostly favoured by investors who are seeking a dividend income.

These stocks are less risky than growth stocks as they have a proven and a stable business model.

E.g. Large Indian IT firms such as TCS, Infosys, Wipro and banks such as HDFC Bank, Axis Bank fit into the above criteria of being ‘cheap’ compared to their actual worth and paying steady and consistent dividends to their shareholders.

Growth vs Value – Differences

Where are we in the current market cycle?

Growth stocks tend to perform the best in a low-interest rate regime. In an inflationary environment (like the current one) – an upward-trending interest rate tends to lower the current value of the future cash flows thus making the growth style less appealing than the value style. This follows the notion that the value of an asset (shares or anything) is nothing but the discounted value of future cash flows.

Investors have now instead turned their focus on companies that produce robust cash flows and reward them with consistent dividend payouts.

Where should we be invested then? 

We typically do not believe in a ‘this-or-that’ approach. Rather, we feel that both these styles of investing have their strengths and weaknesses and that investors should have appropriate allocations to both of them per their risk appetite.

Investors too focused on the growth style of investing saw much of their gains get erased in the recent market downturn. Some of the world’s biggest investors were forced to book big losses because of the uncertainty surrounding the interest rate decisions by central banks around the world.

And investors who had higher exposure to value stocks over the past few years, couldn’t participate in the huge run-up in the valuations of most of the technology companies.

How should we position our portfolios?

While investors can have their view on where the economy is headed and can accordingly position their portfolios to match that – we feel that it is best if the exposure to these individual styles of investing is limited to the ‘Satellite’ portion of the portfolio. This ensures that the portfolios are well-diversified across different market cycles and not over-exposed to any single macroeconomic factor.

Our DMAS portfolios follow the time-tested approach of investing and are constructed in a manner that gives investors adequate exposure to both these styles. Speak to one of our wealth experts if you’d like us to customize a portfolio for you.

We know a lot of the finance terms look a bit scary at first glance. And that then typically discourages a lot of people from taking the first step towards investing.

Here’s a list of finance jargons you should know that will make your investing journey more pleasant:

1. Active Funds

Mutual funds/ETFs that seek to beat the market index (Sensex, Nifty, etc.) and generate alpha

2. Alpha

A measure of ‘excess return’ that an investment generates over and above a benchmark

3. Asset Allocation

The proportion in which your money is divided among different asset classes such as stocks, bonds, etc.

4. Asset Class

A collection of investments (e.g. stocks, bonds) that displays common characteristics and responds similarly to the markets

5. Benchmark

A standard against which the performance of a security, mutual fund, asset, etc. can be measured

6. Beta

A measure of stock’s volatility (refer to volatility definition below) compared to the overall market (Sensex, Nifty, etc.)

7. Correlation

A statistical measure that measures the degree to which two or more securities move relative to each other

8. Debt Fund

Mutual funds that invest in debt securities (like bonds, NCDs, Commercial Papers, etc.) issued by the public/private sector

9. Diversification

The process of dividing your money across different asset classes to reduce the overall risk

10. Exchange-traded Funds (ETFs)

An investment fund that invests in a basket of stocks, bonds, or other assets. ETFs are traded on stock exchanges, just like stocks. 

11. Expense Ratio

% of a fund’s AUM that is paid to the fund house for covering their annual operating expenses like salaries, compliance costs, etc. 

12. Index Funds

Mutual funds/ETFs that track the performance of a specific market index like Sensex/Nifty50

13. Liquidity

The ease with which an asset can be bought/sold or converted to cash

14. Model Portfolios

All-in-one, ready-made investments that combine different asset classes into a single package designed to achieve a specific objective 

15. Mutual Funds

A professionally-managed pool of money that invests in a single or multiple asset class/es

16. Net Asset Value (NAV)

The market value of all securities held by a mutual fund scheme divided by the total number of units of the same scheme

17. Passive Funds

Mutual funds/ETFs that seek to replicate the performance of an underlying index

18. REITs

Real Estate Investment Trust is an investment vehicle that owns/manages income-producing real estate (like office parks, malls, hotels, etc.)

19. Risk

In investing when we talk about Risk, we are usually referring to its ‘Volatility’. See the Volatility definition below. 

20. Risk Profile

An analysis of an individual’s willingness and ability to take risk

21. Rolling Returns

Average annualized returns for a given timeframe taken on every day/week/month till the last day of the period

22. Security

A financial asset like stocks or bonds entitles its holder to either ownership or a repayment right

23. Sharpe Ratio

It measures how much return an asset is generating for every unit of risk it is taking

24. Standard Deviation

A measure of risk that helps to quantify the ‘riskiness’ of an asset/investment

25. Trailing Returns

The return generated by investment for the time period between two specific dates. 

26. Volatility

A measure of how much the price of a security fluctuates up/down over a period of time

Now that we have learned some basic investing jargon, let’s pick up some basics on portfolio construction starting here

It is often said that initiation is the toughest part of any process, and when it comes to managing your hard-earned money it is even more so. With so many options to choose from, we often are scared to take the first step. Because we don’t often know where to begin. In this post, we will discuss the various types of equity mutual funds.

The first jargon you hear when you embark on your investment journey is “Mutual Funds” and for all the right reasons, as they are one of the most flexible investment instruments one can use to diversify their portfolio and in some cases even save taxes.

A basic categorization of Mutual Fund Schemes would look like this [as per SEBI]:

• Equity-Linked Schemes
• Fixed income or debt Schemes
• Hybrid Schemes
• Solution-Oriented Schemes
• Other Schemes

Let’s now dig deeper into the different types of Equity Mutual Funds

What are equity mutual funds?

Equity Mutual Funds park their major investments in equity and equity-related instruments in an attempt to get you higher returns and thus being one of the riskier forms of all the available mutual fund schemes in the market. For people having long-term wealth creation as their major investment goal, equity-linked mutual funds are their go-to mutual fund scheme.

Types of Equity Mutual Funds

Before we understand that, let’s quickly see what the following terms mean:

• Large-cap: 1st 100 company based on market capitalization.
• Mid-cap: 101st – 250th company based on market capitalization
• Small-cap: Beyond the 250th company based on market capitalization

Note: A mutual fund house can either offer a Value fund or a Contra fund but not both.

Conclusion

With so many schemes to choose from, it may become difficult for you to begin your investment journey. That’s why maybe it’s time for you to take the back seat and let us handle your corpus with the help of our experts here at Daulat. Our team follows a disciplined investing approach that takes into account multiple factors to design portfolios suited to your needs.

To say that some of the world’s biggest hedge funds have had a disastrous year would be an understatement. Such has been the magnanimity of the losses, that funds such as Tiger Global have lost over two-thirds of its cumulative gains since its launch in 2001.

Before we look at the performance, let’s first understand what exactly are these.

What are Hedge Funds?

Hedge Funds are investment vehicles that use sophisticated investment strategies to generate alpha i.e. beat the market index. They typically cater to big investors like pension funds, high net-worth individuals, university endowments etc. Individual investors often have very limited access to these funds because of the inherent risk associated with their investment strategies.

In their true sense, hedge funds are expected to do well in all market conditions irrespective of a bull/bear market. This is because traditionally they have followed what is called a ‘long-short’ strategy.

Below, we list the performance data of some of the prominent hedge funds that were down in Q1 2022. The data has been compiled using the most recent 13F filings of these investors:

As we can see from the table above, only 3 of the big names i.e. Bridgewater Associates (Ray Dalio), Norwegian Sovereign Wealth Fund and Renaissance Technologies (Jim Simmons) have posted gains despite a broader market drop. Rest almost all of them have fallen more than the benchmark indices i.e. S&P500 (-4.9%)  and Nasdaq 100 (-8.9%).

Hedge Funds, by definition, are supposed to fall less during a downturn because their positions are, well, ‘hedged’. Yet, we see most of these investment vehicles have mostly transitioned to operating a ‘long-only’ fund. In other words, they bet on the upward movement of the stocks.

A lot of these funds are heavily skewed towards technology stocks which have taken the maximum beating in the current market downturn.

No matter how much one professes of accurate timing or beating the market, the proof of the pudding is that it is difficult to do it consistently — especially in a highly volatile market like now.

“Markets have not been cooperative given the macroeconomic backdrop but we do not believe in excuses and so will not offer any
Tiger Global

So, if are getting nervous looking at your portfolio — you can perhaps take solace in the fact that you are not alone. And that we will look back at this moment as just a point in time over the longer arc of our investment journey.

Don’t wait until it’s too late.

Start today and secure your future.

Sign Up

Introduction

In one of our last posts, we talked about a special category of debt-like mutual funds called Arbitrage Funds. Now, before we understand what is accrual debt mutual funds, let’s take a quick recap of what are debt mutual funds and the types of risks they are exposed to. This will be critical in understanding what accrual funds are.

Debt mutual funds invest primarily in fixed-income generating securities/instruments like Government Bonds (G-Secs), commercial papers, certificates of deposits, and corporate bonds. The issuer agrees to pay a pre-determined interest rate (coupon rate) at specific intervals (monthly, quarterly) during a given time frame.

Types of Risks

While debt mutual funds are a relatively safer option vis-a-vis equity funds, they too are exposed to certain risks:

1. Interest Rate Risk: Interest rates set by central banks like the Federal Reserve, RBI, etc. determine the pricing of virtually all productive assets i.e. equity, debt, and real estate. Generally, when interest rates rise, prices of existing fixed-income securities fall and vice versa. For e.g. Let’s say you hold a bond paying a coupon of 6%. Then, interest rates for similar securities rise to 7%. Therefore, to compensate you for holding the bond — the price of that bond will drop in the secondary market to give you an effective return of 7%.
2. Credit Risk: All debt instruments are assigned a credit rating from established Credit Rating Agencies like S&P, Moody’s, etc. It usually ranges from AAA (Highest) to D (Default). A credit rating assesses the creditworthiness of the borrower. Or in other words, its willingness and ability to repay the principal amount and interest on time. A fund may assume some credit risk by investing in a lower-rated debt instrument (AA or below) in search of a higher return.

Accrual v/s Duration strategy

Now that we know the types of risks that fixed-income instruments are exposed to, this will give us a better understanding of the two strategies followed by debt funds:

1. Accrual Strategy: The accrual strategy is focused on earning interest income from the coupon offered by the securities held in the portfolio. The fund manager typically aims to hold the instruments till maturity. They adopt a buy-and-hold strategy and are suitable for investors who desire to earn stable returns. Although they are not completely immune to the effects of interest rates, the impact is far lower than on duration funds.
2. Duration Strategy: The duration strategy involves investing in debt with a view to interest rate movements. The fund manager takes interest rate calls and accordingly either increases/decreases the duration of a portfolio. When the fund is of the view that the interest rate is going to fall, the manager increases his exposure to longer-dated instruments to take advantage of the price increase in bonds (As discussed above, the price of a bond and interest rate is inversely related. When interest rate falls, the price increases).

Which is better?

Again, just like other investing decisions — it is tough to give a point-blank answer that if Accrual Debt Mutual Funds are perfect or not. It depends on a whole host of other factors like your individual risk tolerance, overall portfolio construct, etc. But, at a high level, we can follow the below framework to think about this:

1. In a rising interest rate environment: To counter the effect of falling bond prices, one can increase their exposure to an accrual strategy by investing in categories such as Credit Risk funds that follow this style of investing. 
2. In a falling interest rate environment: To take advantage of an increase in bond prices, one can consider investing in long-duration funds that offer an opportunity for capital appreciation in a falling interest rate regime.

If all of this still sounds a bit alien and overwhelming to you, sign-up for our DMAS model portfolios. Our all-in-one solutions ensure you never have to worry about these things as we take care of everything — from assessing your individual risk tolerance to constructing your portfolio. And everything in between. 

Don’t wait until it’s too late.

Start today and secure your future.

Sign Up

Bill Ackman is no stranger to boardroom fights and drama. But now he wants to bid adieu to all that and instead pursue a more ‘quieter’ investment approach.

Bill Ackman, Founder & CEO of Pershing Square Capital Management, said in his 2021 shareholder letter that he will ‘permanently retire from this line of work’ referring to his (in) famous style of activist short-selling.

Short-selling is the practice of borrowing and selling shares with a plan to repurchase them at a lower price thereby pocketing the difference.

“Despite our limited participation in this investment strategy, it has generated enormous media attention for Pershing Square,” Mr. Ackman said. “In addition to massive amounts of media hits, our two short activist investments managed to inspire a book and a movie.”

He acknowledged the several-year period of underperformance due to the yearslong battle against Herbalife Nutrition and Valeant noting that “we exited because we believed that the capital could be better deployed in other opportunities, particularly when one considered the opportunity cost of our time.”

The renewed focus seemed to have paid off handsomely for Bill Ackman and his investors. Pershing Square generated a compound annual return of 35.4% and a cumulative return of 236% from December 31, 2017 to December 31, 2021 vis-à-vis 17.6% and 91.5% for the S&P500.

The annual report also shed light on Pershing Square’s utilization of sophisticated financial instruments to hedge its portfolio positions. “At an initial cost of $157 million, the hedge’s asymmetric nature protected the portfolio with a relatively small investment. In January 2022, the substantial majority of the hedge was sold generating proceeds of $1.25 billion”

He noted that “we structure these hedges using instruments, that offer asymmetric payoffs and consume only a modest amount of our capital”

Mr. Ackman has recently taken new long-only positions in firms such as Netflix, Canadian Pacific Railway, Universal Music Group, Lowe’s, etc. “We expect that each of these companies will grow their revenues and profitability over the long term, regardless of recent events and the various other challenges that the world will face over the short, intermediate, and long-term,” Mr. Ackman said.

As we have previously noted, it is often difficult to emulate the investment strategies of these investors like Bill Ackman by merely replicating what’s out there in the public domain — but we can always use these annual letters as a way to get into their minds and how they think.

Don’t wait until it’s too late.

Start today and secure your future.

Sign Up

Indian private lender Axis Bank has agreed to acquire Citibank’s Indian consumer business for $1.6bn in an all-cash transaction. The deal marks the latest retreat of the US banking giant from its retail operations in 13 countries.

This is one of the largest deals in the Indian banking sector since the acquisition of ING Vysya by Kotak Mahindra Bank for INR 15,000 crores in 2014.

The deal includes the sale of Citi’s credit cards, retail banking, wealth management, and consumer loans businesses. “The transaction also includes the sale of the consumer business of Citi’s non-banking financial company, Citicorp Finance (India) Limited, comprising the asset-backed financing business, which includes commercial vehicle and construction equipment loans, as well as the personal loans portfolio,” Citigroup said.

Axis Bank gets access to Citi’s 2.55 million credit card portfolio taking its total card count to over 11 million. This will allow Axis to rise to the number three position in terms of consumer spend per card. Citi Bank typically has had a more affluent client which is reflected in this metric.

Citibank will however continue to retain its Institutional Client businesses in India noting that “Citi remains committed and focused on serving institutional clients in India and globally”.

The exit is part of a broader strategy revamp under the new CEO Jane Fraser who had commissioned the exit of Citi’s consumer franchises in 13 markets as she took on her new role last year.

The deal will eventually free up over $800 million of allocated tangible common equity.

Citi Asia Pacific CEO Peter Babej said the deal with Axis is an “important milestone”. As the company moves forward, India will continue to remain a “key institutional market”, he said.

“In line with our broader strategic repositioning, we will continue to support our institutional clients in this core market and across APAC, delivering the full power of our global network to enable their growth,” Babej further added.

The deal is expected to be closed in about 18 months with about 9-12 months required just to get the requisite regulatory approvals. Axis Bank has also assured Citi’s existing clients that they will ensure that the transition is done smoothly.

Don’t wait until it’s too late.

Start today and secure your future.

Sign Up