Kindly find the appended brief updates and the importance of calculating XIRR or CAGR return instead of getting confused with Absolute returns.

UPDATES:

A decade long awaited GST Bill got cleared in both the houses unanimously. Govt is putting all efforts to implement the same from next financial year. The design of GST and the yet un -known rate and its implementation, will dictate its effectiveness. In the long term it holds potential to boost economic activity substantially, improve tax efficiency, increase in govt revenue etc.

Apart from it many other key bills like Bankruptcy; Real estate bill etc. got cleared.

Govt appointed Dr Urjit Patel as next RBI Governor. The current Governor Rajan’s tenure ends on Sep 4th 2016.

Mr.Rajan steered the economy from a difficult macro situation to a stable one. His work will be remembered in successfully bringing inflation under control, cleaning of bank NPA’s, change in the way of giving banking licenses, and improvement in liquidity etc.

The appointment of the new governor by the govt shows its acceptance to continue the policy framework laid by Rajan and adds huge credibility to India’s macro policy.

The first quarter result of the companies has been showing signs of improvement. Further improvement can be expected in the coming quarters.

So far the monsoon has been normal. Sowing of inflation sensitive crops like pulses etc has seen robust growth.

Many economies of the world are still suffering from poor economic growth and deflationary signs. Inspite of zero and negative interest regime these countries are struggling for growth.

With the stable macro environment, benign inflation environment and improving economic parameters our markets are expected to do well in the near future with intermittent volatility caused by domestic and global factors.

ABSOLUTE vs CAGR:

I would like to touch upon one important tool while calculating returns from real estate or any other asset. It is prudent to always use Annualised return or Compounded Annual Growth Rate(CAGR) rather than absolute returns. CAGR measures year over year growth rate over a specified period of time. Only for holding period less than a year absolute returns can be calculated.

Few days back there was news about a Prime Property in Mumbai got sold for whooping Rs 400 crores. The person who sold has acquired the same in 1917 for One Lakh rupees.

It is whooping 40,000 times in close to 100 years in absolute terms. Real estate returns always discussed in terms of how many times it has multiplied.

However the same expressed in annualised or CAGR the returns work out to apprx 11%. Not a bad return. But not so exciting as 40,000 times.

Many of us hear stories like a property bought 25 years ago multiplied by 10 times. However the annulised return works out 10%.

When i say estimate return of 12% CAGR from equity it may not sound great. If rephrase the same sentence and say you can make 17 times returns in 25 years it sounds good. Or a particular fund has delivered 20% plus returns in the last 20 years it doesn’t sound great. If I rephrase the same sentence and say it has grown more than 35 times it suddenly starts looks very attractive.

Important point to note is comparison between asset classes is meaningless if not measured in same way.

Hence forth do remember and calculate XIRR for all asset classes. It can be done by using XIRR function in MS Excel.

FOCUS ON ASSET ALLOCATION:

As markets are moving uni-directional after the budget due to continuity of reforms from govt side, foreign flows,good monsoon etc. chances are one would get carried away by herd mentality and ignore his asset allocation.

However do remember that long term wealth is build by being strategically focused and adhering to one’s Pre-determined Asset Allocation levels.

In your long term investing journey markets will provide enough opportunities to invest. The only trait one requires at that point of time is investing without fear.

As Buffet aptly sums it up as “Be Fearful When Others Are Greedy and Greedy When Others Are Fearful”

Do let me know in case of any further information.

“Simplicity is the master key to financial success. When there are multiple solutions to a problem, choose the simplest one.”- John Bogle