Join Early Retirement Today
Thread Tools Search this Thread Display Modes
Guaranteed 8.5% or volatility of Emerging market stocks
Old 05-06-2010, 11:16 AM   #1
Recycles dryer sheets
Join Date: Dec 2009
Location: Hyderabad
Posts: 75
Guaranteed 8.5% or volatility of Emerging market stocks

Currently we are contributing INR 30,000 to Provident Fund (Current rate 8.5% guaranteed by Indian Govt , it has continued for last 6 years, always stays higher than market interset rates) and INR 25,000 into diversified Stocks (through 3 Mutual Funds) for our retirement folio. We have another INR 30,000 freeing up in 1 month, I'm not sure how should distribute this among 2 categories. Indian stock market return could be very high but volatility is extreme, here is some historical data (quarter wise for last 12 years) :

Q1Q2Q3Q420100.18 -- -- -- 20090.18 48.99 18.34 1.90 2008-23.35 -13.63 -3.85 -25.89 2007-5.15 12.25 17.85 16.87 200620.15 -5.62 17.55 10.51 2005-1.52 11.46 20.16 8.50 2004-4.68 -13.62 17.08 17.64 2003-9.85 18.95 24.43 30.90 20026.01 -6.66 -6.82 13.27 2001-9.88 -3.35 -17.98 16.30 2000-0.07 -6.32 -14.59 -2.85 199922.03 11.72 16.78 2.26 1998-- -- -- --

If I put 30K in guaranteed returns would I be a chicken loosing on high returns (specially since I'll be cost averaging the money in) or if I tilt towards market would it be taking unnecessary risk ?

Our personal inflation rate is controlled at 5-6% and tentative retirement year is 2014-15.

I know it depends on personal risk tolerance but please do share ur thoughts.

Thanks a bunch,

DesiGirl is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 05-06-2010, 03:56 PM   #2
Thinks s/he gets paid by the post
MasterBlaster's Avatar
Join Date: Jun 2005
Posts: 4,359
I haven't researched your holdings but have the following general comments.

I suspect that the Indian government guarantees the payout in the local currency. They may have significantly higher inflation. So if that's the case then when you convert back to dollars some years later the realized gain can potentially be significantly less than the 8.5% you quote. Unspoken here is the risk of a devaluation.

As a fun assignment, perhaps you should read (for free on Amazon - search inside option) the opening pages of Andrew Tobias Book " The only investment Guide You will Ever need". He starts off the book explaining how he lost big in Mexican peso's and how he got burned big time in the devaluation. The book is a bit dated having been originally published in 1978. Yet the advice is timeless and really applicable to you here. The question shouldn't be "Are Indian Interest rate contracts any good ?" You should ask yourself... "Should I even be in that game at all ?"

Per the risk thing... Are you betting the farm on this one security or are you holding a diverse portfolio ? My advice is to get rich slowly by investing in a boring portfolio. Perhaps you could have a few wild holdings, but limit it to maybe 5 or 10 percent of the portfolio.

MasterBlaster is offline   Reply With Quote
Old 05-07-2010, 12:28 AM   #3
Recycles dryer sheets
Join Date: Dec 2009
Location: Hyderabad
Posts: 75
Sorry for posting garbled up table guys.

Thanks for your response MasterBlaster.

Talk to me about the roller-coaster journey of $-INR rate, it has swinged > 20% in last 3-4 years. But we are based in India , INR is our local currency (Even though we do have an option of investing in $s). So we'll be consuming in Indian Rupees only and not in $s.

Unfortunately we do not even have good data for last 30-40 years for India's main stock index (forget about mid caps or small stocks). No real bond market, No COLA annuity, no TIPS. If you search for "Early Retirement in India" my profile thread in this forum is first one to come so Early Retirement and depending on Portfolio for living is such an alien concept here. So I have been heavily depending on this forum for both knowledge and motivation. I try to take the concepts from here (and other sites) and try to fit into Indian environment. I'm not even very sure that 3-4% SWR is suitable for Indian conditions (8-9% cash/bond returns , average Equity returns 20% in last 20-30 years but extreemely volatile, double digit inflation in many years).

So based on this information do share ur thoughts. This 8.5% rate is also tax-free while stock market returns will be taxed 20% (Indexed to inflation, which is officially running 15+% BTW :-( )

DesiGirl is offline   Reply With Quote
Old 05-07-2010, 06:06 AM   #4
Thinks s/he gets paid by the post
walkinwood's Avatar
Join Date: Jul 2006
Location: Denver
Posts: 2,767
If I remember correctly, you live in India & plan to retire there.

I have no way of knowing what the right asset allocation for your situation is, but you should figure that out first. Most books I've read have used the US markets as the testing ground for their asset allocations. Once you get your asset allocation, then it is easy to determine where new money goes.

Do you have access to investment vehicles (index ETFs & Mutual Funds) like we do in the US? Can you invest in global equities (developed markets & emerging markets) or are you limited to the Indian stock market? Is there a corporate bond market in India or are you limited to government backed accounts like you mention?

You may get better investment advice on a forum dedicated to investing for Indian residents, but I don't know if one exists.
walkinwood is offline   Reply With Quote
Old 05-08-2010, 12:34 PM   #5
Thinks s/he gets paid by the post
Spanky's Avatar
Join Date: Dec 2004
Location: Minneapolis
Posts: 4,125
My initial thought was that 8.5% tax-free rate sounds great. However, if inflation is 15% (India Inflation Rate), the 8.5% rate is not attractive at all.
May we live in peace and harmony and be free from all human sufferings.
Spanky is offline   Reply With Quote
Old 05-09-2010, 10:47 AM   #6
Recycles dryer sheets
Join Date: Dec 2009
Location: Hyderabad
Posts: 75
Thanks for responses.

Walkinwood , in India we do have ETFs , Mutual Funds etc., Bond Market does not have much depth though. Indian Investment forums also exist bu they are very focussed on short term trading and not Long term or Retirement centric portfolio creation. Asset Allocation is not really a popular idea.

Spanky yes 8.5% (even though tax exempt - No tax during growth or withdrawl, even contributions are tax-free upto certain limit which we have crossed) is not great with 15% inflation but that is mainly food inflation (which is 10% or less of our budget), inflation index is more geared towards lower consumption people and its also very old so things have changed. Its not really fun but it is possible to keep personal inflation at 6-7% (with a little of life-style slide down and replacement etc. ).

I'll try agin to show the data about Indian Market (top 30 index Sensex) and the volatility involved :

So should I be trying to go after returns or stick to safety when difference in retirement date would be 2-3 years atmost.

Here are main categories of our retirement folio :

* Rental house which will roughly generate 1/3 of REtirement income and will be 1/3 of the total retirement asset base. (Already funded)
* 10% will be in cash for Emergency and remaining split evenly between 8% govt backed bonds and stocks.

* Currently we have 25% of retirement folio funded (apart from the rental house) which is evenly split in stocks and PF (guranteed 8.5%).

* Currently we are contributing 360K annual to 8.5% returns , 300K annual to Mutual funds, 600K coming in as Megacorp stock (which we are diversifying as and when we can) 360K is freeing up (30-35K per month) for which we are trying to decide.

Thanks Everybody,
DesiGirl is offline   Reply With Quote
Old 05-10-2010, 09:50 AM   #7
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
kcowan's Avatar
Join Date: Jul 2006
Location: Pacific latitude 20/49
Posts: 6,132
Send a message via Skype™ to kcowan
If 2015 remains your retirement date, I would go with the 8% return. With the volatility in the markets, 5 years is not long enough to recover from a drop. Take the sure thing and froget about it.

For the fun of it...Keith
kcowan is offline   Reply With Quote

Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off

Similar Threads
Thread Thread Starter Forum Replies Last Post
Need to know how much emerging market in FLPSX? snodog FIRE and Money 6 12-08-2007 05:05 PM
Lazard Emerging Market Institutional (LZEMX) Sam Stock Picking and Market Strategy 7 08-23-2007 08:23 PM
individual stocks vs index funds,stocks poor choice mathjak107 FIRE and Money 31 09-12-2006 12:12 AM
International or Emerging market Arif FIRE and Money 29 08-19-2006 06:51 AM
Wating for Emerging Market to Retreat? Spanky FIRE and Money 11 01-30-2006 05:00 PM


All times are GMT -6. The time now is 05:22 AM.
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2018, vBulletin Solutions, Inc.