The Secrets of Low Cost Investing.

Cost Investing

By: Yogesh Gupta, CEO 4th Street Capital

I have been investing the US stock markets since 2000. During this period, I saw three business cycle, dotcom bubble and burst, the great financial crisis and covid bust and boom thereafter. But, if we look over last 2-3 centuries, the basic fundamentals of the investing remain same. In the US, equities has been the best performing asset class over last century and I would bet, that may be true for most markets globally.

Below, I am sharing some of my learnings over the years to help new investors.

  1. Think long term – To be a successful investor, you have to think from long term perspective. It is very hard to predict the markets on day-to- day basis or in the short term. We don’t know, if markets will be up or down tomorrow. But, we can know with almost certainty that markets will be up in ten years. So, if invest only those funds that you can invest for minimum 3-5 years. But, buy stocks, that you think, will do well over next 5-10 years
  2. Embrace volatility – Equity markets are more volatile, and uncertainty creates opportunity. So, whenever markets are uncertain, investors are fearful, that is generally not the time to sell, but buy.
  3. Don’t take excessive risks – Don’t use leverage and don’t try to be rich in one day. Everything takes time. As Warren says, you can’t pregnant nine women and get a baby in one month. Money is in the waiting.
  4. Don’t try to time the market – Over the long term, markets go up by 10-15% including dividends. So, if market is down big, invest some money and don’t try to time the bottom and top.
  5. Think in terms of business, and not stock – When you are buying a stock, you are buying a piece of a business. So, buy stocks in the companies whom you like as a business over the long term.
  1. Case for Low-Cost Investing Even if everything above looks overwhelming and complicated, there is a very simple way to invest in the stock market to get the market returns of 10-15% over the long term.

    According to S&P Dow Jones’ SPIVA India report, over a 10-year period, 68 per cent and over 5 year period, 82% of large-cap funds have underperformed their benchmark in period ended last December.
  1. As financial markets grow and become more efficient, it has been increasingly difficult for active fund managers to generate reasonable alpha by beating the benchmark. Especially as large cap stocks are very well covered by all major institutions and research analysts, it is more difficult for Large Cap active managers to stand out. As evident from the tables below, most active managers have underperformed the benchmark over last many years. That is not to say that all active managers underperform, but exceptional managers are far and few. Predominantly for average investors, lowcost index-based funds or combination of active or passive offers best option to gain exposure to the equity market.

By: Yogesh Gupta, CEO 4th Street Capital

Due to consistent underperformance and higher fee, investors are turning to ETFs as building blocks for their asset allocation. Also, with increasing number of ETF offerings, it has become much easier and cost effective to replace active funds with ETFs with similar exposure. A low-cost Index based ETF with broad exposure to the Indian equity market is an important investment vehicle for both institutional and retail investors. For this purpose, Nifty 50 index is a well-diversified index of 50 blue chip companies representing about two-thirds of the total free-floating market capitalization4 of all listed equity companies on c (NSE). Furthermore, Nifty 50 stocks account for more than 50% of liquidity4 of all listed equity stocks on NSE. Other considerations for the ETF product are low costs, tax efficiency and liquidity. NIFTY 50 ETF can be part of core holdings for any investor and investors can gain exposure to other sectors or themes via more specific ETFs.

Persistency of performance has been declining amongst active managers, and on an average active large cap managers have been underperforming the benchmarks for the past many years. This trend is likely to continue, therefore investing in index funds is an easy way to ensure performance that will outperform most actively managed funds over time.

Active managers charge expense ratios of up to 2.25-2.5% whereas Nifty 50 ETFs normally charge a minimal management fee only. Few Months back, The National Stock Exchange on said Assets Under Management (AUM) of all the Exchange Traded Funds and Index Funds tracking Nifty 50 Index have crossed Rs 2 lakh crore. Nifty 50 index linked ETFs account for 40 percent share of total AUM of ETFs and Index Funds in India.5

Savings are Passed on to the Investors Low cost of an ETF as compared to a mutual fund with 2.5% fee can make a significant difference in the returns overtime. As we can see in the chart below, over ten years, an investor in a NIFTY 50 ETF with 0.25% fee vs one in a Large Cap mutual fund with a 2.5% fee will have 22% higher returns over 10 years for the investors.

Investor Suitability
Investing in IND50 ETF has same risks as investing in any equity fund. Investors can use this ETF as their core holding or replace equity portion of their asset allocation plan.

Yogesh Gupta, CFA, started investing in the US financial markets in the year 2000. Prior to launching 4th Street Capital, Yogesh was the Portfolio Manager at Alphainvesting, where he formulated and managed investments for his clients. Before that, Yogesh worked with Morgan Stanley Wealth Management in CIO’s office in New York as an investment analyst and an asset-allocation strategist. Yogesh has an M.B.A. from New York University and a B.E. from Delhi College of Engineering.

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