As I keep highlighting in my posts that with each passing day, the investors are finding it difficult to generate double-digit returns from their investment portfolio. In my last post, I shared, Low-Interest Period – How to generate additional returns. After that, I received multiple queries from readers how to generate double-digit returns without substantial risk. Trust me 10% annual return is a psychological barrier for conservative investors. The reason being, long-term return on equity is just 12%. Also, note that returns % referred in this post are after tax. On the contrary, expecting a return of more than 15% are unrealistic targets. It is only possible if you are a stock trader and know how to play in the stock market.
Why is it important to generate double-digit returns from Investment Portfolio?
Before I proceed, let me clarify that for my investment portfolio I keep two targets i.e. Gross Return and Net Return. You must be wondering what these targets are. Assuming I plan for a Gross Return of 10% then trust me my net returns over a period of time will be 7% to 8% considering the losses from equity, low-interest period, uncertainty, emergency fund requirement etc. In this post, I am considering the net return of double digit. Let’s discuss the factors that impact gross returns.
(a) Financial Planning:
Financial planning is must for every individual to take care of future goals, needs, and requirement. Many times, the investor gives an excuse that my portfolio is too small for financial planning. Please note irrespective of a size of a portfolio, you need to plan for future accordingly. The choice of product depends on your risk appetite. Recently, I was reading a related post on tomorrowmakers.com i.e. how to choose between fixed income & market linked investment avenues.
Any kind of financial planning is based on certain assumptions. In almost 100% cases, I observed that basic assumption of financial planning is double digit returns. Sometimes it is over exaggerated to 18% to 20% but practically you should target gross returns of 12% to 15% depending on risk appetite to achieve net returns of 10%. In the case of any change in basic assumption, the financial planning goes for a toss.
(b) Risk Buffer:
The basic objective of any investment is not to incur any loss. In my post, 5 Investment myths that you should never believe I shared that ideal asset allocation is a grossly overbought myth. In my opinion, the concept of ideal asset allocation does not exist. The best example is that even debt funds can deliver negative returns. Therefore even 100% perceived risk-free investment option can deliver low or negative returns. In short, if you aim and plan for double digit return then it can act as a buffer or cushion against any non-performing investments.
To summarize, you should have a buffer of minimum 10% in case of any sudden and unexpected movement of the investment portfolio.
(c) Period of Low Returns:
Currently, we are going through the period of low returns. The investors heavily dependent on the small savings schemes are reeling under pressure because of low-interest rates. It is not possible or feasible to churn the portfolio if the investments are locked. Even if the investments are liquid still you need time to understand the situation. In the case of the high-value investment portfolio, you need minimum a month’s time to churn the portfolio. It cannot be churned overnight.
Besides investment risks, sometimes you need to dip into your investment portfolio to meet the emergency capital requirement. Therefore, to compensate for this dip the gross return should be 12% to 15%. In my case, the max amount I dip from investment portfolio is not more than net returns generated till date to protect the principal invested.
To summarize, double-digit returns provide a buffer to your investment portfolio during the period of low returns and financial emergencies.
Basic Requirements to Generate Double Digit Returns from Your Investment Portfolio
The fact of the matter is investment eco-system is more dynamic and volatile these days. There are NO clear WINNERS or LOSERS. The days of fill it, shut it and forget it is over. As an investor, you should be always on look out for right financial products for your investment portfolio. For this, you should fulfill following requirements
(a) Latest Economic/Business Developments:
As an investor, you should be well versed with the happenings not only in India but Worldwide. As I keep highlighting that contrary to popular perception, international developments impact your investment portfolio more than Indian economy.
Another important point rather golden mantra is “Buy the Rumor and Sell the News”. Sometimes an investor anticipates one effect on financial investment because of the rumor but news has opposite effect. Trust me this is one of the major reasons for INVESTOR’s LOSS. The best example is experts predicted that gold price will cross $1450 per ounce if Donald Trump is elected USA President. On the contrary, the Gold dropped below $1200 per ounce in the international market.
For investors who are thinking ahead should check how GST will impact their investment portfolio. But remember to Buy the Rumor and Sell the News or vice versa. Be a proactive investor as I will explain in next point.
The point I am trying to make is that as an investor you should have thorough knowledge of latest economic/business developments
(b) Be a Proactive Investor:
With dynamic/volatile investment eco-system, an investor should be proactive rather being reactive. For example, when the interest rate cycle reversed I shifted my investments to long-term debt funds. I also shared a post at that time why you should buy Long Term Debt Funds? Many regular readers wrote to me that RBI will not allow further softening of interest rates. Anyways, my move paid off and I generated 15% annual return. I will explain later how I analyzed the interest rate movement. Therefore, being a proactive investor helps to grow investment portfolio.
(c) Concentrated Portfolio:
Based on my personal experience, I can say that diversification of investment portfolio is indirectly proportional to the returns. More diversification means lower returns. On the other hand, the concentrated portfolio can deliver superior returns. The concentrated investment portfolio is riskier compared to a diversified portfolio.
In my opinion, in a current scenario too much-diversified investment portfolio cannot deliver double-digit returns. Therefore, the only risk an investor will be carrying is a concentrated portfolio.
How To Generate Double Digit Returns From Your Investment Portfolio?
1. Interest Rate Cycle:
In my opinion, this is one the easiest investment theme to play. Trust me it can help to generate double-digit returns by taking the minimal risk. You only need to check the statements of Finance Minister and RBI Governor to predict the interest rate cycle. The most crucial documents are Minutes of the Monetary Policy Committee and Bi-monthly policy statement available on the RBI website.
Once you predict the interest rate cycle, you can easily generate a return of 15% to 18%. The simple logic says; during increasing interest rates the short-term debt mutual funds deliver superior returns. On the contrary, in the case of falling interest rate, the long-term debt mutual funds deliver good returns.
In case, you can’t predict the interest rate cycle then invest in the good dynamic bond fund. It will also deliver a double-digit return on a consistent basis.
2. Risk-Free Equity Investments:
Now you must be wondering how the equity investments can be risk-free. Based on my personal experience I can say it is possible. I discussed it in detail in my post, Stock Investment – When to enter and exit the stock market. I enter the market when P/E is less than 20, P/B is less than 3.5 and when the FII’s turn net buyers. By following this strategy you might be out of market half the times but during another half, you can generate at least 25% return. When the market is in a bear phase, you can put money in liquid funds to generate around 8% annual return. Therefore, the net yearly return can be around 14% to 15%.
In this case, the timing of investment portfolio is important. You exit when the market overheats (FII’s turn net sellers, P/E>24 & P/B>4.5) and enter when the market cools down. The key is FII should be net buyers. For FII buying in specific stocks, you can check my post, How to find out FII buying in stocks?
3. Buy and Sell Auction Properties:
Let me admit that this is an unconventional way of investment. At the same time when conventional ways fail to deliver the investors turn towards unconventional investment portfolio.
Be assured of minimum 20% returns within 6 months if you can identify bank auction property with clear title. Though as an individual the risk is high but if you find some good lawyer or law firm who can help in title certificate then you are home. In my earlier posts on the same subject, I shared how to safeguard your financial interest in dealing with bank auction property.
With the increasing NPA’s, the banks are in a hurry to clear their balance sheets. Therefore you may find large no of properties up for bank auction. Secondly, as we are moving towards jobless growth, therefore, the supply will never dry up.
Once of the mantra is to have patience while dealing with such properties. It needs expertise and experience that can be gained over a period of time. One of my client deals only in bank auction property. Besides the clear title, you should have a fair idea of property market i.e. demand and rental value. Secondly, buy the property only after 2-3 failed auctions. The reason being bank reduce the auction price with every failed auction.
Now you must be wondering what if I fail to find the buyers for a bank auction property at market rate. The answer is you need to evaluate rental yield before bidding for bank auction property. This is plan B in case you can’t find a buyer for your property. Assuming property price is 75 Lac and you are getting it for 60 Lac under bank auction. The rental value is Rs 25,000 per month. Therefore, the rental yield on auction price is 5%. Considering the average appreciation of 5% to 7% p.a. The returns are 10% to 12%. Please remember you received an upfront discount of 20%. If you hold the property for 5 years and apportion 4% discount every year then the net returns are 14% to 16%.
The best markets for this option are Hyderabad, Bangalore, and Pune. You will find a lot of properties fulfilling your requirement. At the same time, this option can be risky if due diligence is not done.
Words of Wisdom:
To generate double-digit returns you should identify and focus on max 5-6 options for your investment portfolio. Trust me you cannot keep track of more than 5-6 investment options. At any given point, my investment portfolio might consist of only 2-3 financial instruments/assets. The reason being, cyclic nature of returns as I explained in the post. Moreover, you should only consider net returns after adjusting capital gain tax or income tax (if any). If you are in 30% tax bracket then the post-tax return of 8% is better compared to a pre-tax return of 10%.
I shared only one unconventional investment options and I am trying to find out more. I am of the opinion that in the growth-oriented economy the investors cannot depend on conventional investment options like what happened in USA or Japan. The interest rates touched 0 %. In the case of Japan interest rate is negative i.e. Govt charge investors for parking money in investment options. It will not happen in Indian but double digit returns will become more and more challenging day by day.
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