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Acuwealth Advisors Half Yearly Update July 2018

Hello Everyone,

We have completed the first half of 2018 this past weekend. And what a six-month period it has been! As we wrote in our 2018 welcome letter in January, various macro-economic factors have impacted financial markets including long term capital gains, oil price increase, tariff wars, regulatory changes etc.

Let us take a quick look at the market performance, the key events and what we should be doing.

Financial Markets in 2018

While the Large cap indices have remained flat (1% change in Nifty 50) both the midcap (15% fall in Nifty Midcap 100) and small cap (22% fall in Nifty small cap 250) have fallen steeply this year.
Do keep in mind that this correction has come after a steep rise in the past five years. Even now the Nifty small cap has five year annualized returns of 22% with several funds doing much better.

As always movements in the individual stocks are much more volatile. While the Nifty 50 has been flat individual stocks like Kotak and TCS are up more than 30% this year while Tata Motors and Bharti Airtel have lost 30% and more in the same period.

If you have invested in Mid and Small Cap Funds in alignment with your long term goals, be patient and remain invested.  It is the inherent nature of these stocks to have vicious corrections and stunning rises.

The below chart will give you a good idea about the previous falls and rises in BSE 500 index over the last 15 years.  For every fall, the market has risen sharply risen after that, including the 2008 meltdown.

We are continuously evaluating this mid and small cap fund space and will get in touch with you when we see interesting investment opportunities.

Key events in 2018
There have been few structural changes this year which impacts the long term investors.
I.SEBI driven re-classification of mutual funds– Various mutual funds have revamped their bouquet of funds. In the short run, there has been an increase in noise, sub categories and paper work. The guidelines may favor specific fund categories and we are closely watching the developments. Its still early days and at this moment, we are not making any large scale changes to our recommended funds list.  We will reach out to you if we have to re-align portfolios.
II.Introduction of 10% long term capital gains on equitiesin the budget this year will increase the importance of fund selection and staying the course. It is dis-incentivizing constant churning of schemes to some extent.  The Long Term Capital Gains tax will make the switching more expensive. Hence, the importance of putting together a portfolio of high quality funds and staying invested with it becomes even more important.
III.Communication of changes in Total Expense Ratio (TER)– you would also be receiving many mails on the changes in TER for the funds you have invested in. These emails are being sent by Fund Houses as a result of recent changes in regulations by SEBI on communication of TER to investors.  It is a routine process and doesn’t require any action.

What should you be doing in 2018 
As always, focus on the basics like

  1. Adequate risk management through necessary emergency corpus and insurance (health and life). If this is pending, then the time to take action is now.
  2. Ensuring that you are saving enough to meet your long term financial goals through SIPs or lump sum investments.
  3. Revisit equity allocation and make sure that it is aligned to long term goals.

It is worth re-iterating the timeless principles for wealth creation

  1. Appropriate asset allocation remains the key. Historically Indian investors have remained under invested in equity and over invested in real estate. If anything, the current dip provides an opportunity to continue the long-term plan for asset balancing.
  2. Investments in high quality funds/companies has never been more important. They command a premium in bull markets and will survive the bear markets!
  3. Ignore the noise (switch off the newspaper/television channel which predicts that the world is coming to an end).  Easier said than done.
  4. Temper expectations and be ready for a volatile ride over the next 18 months. This will be beneficial for wealth creation in the long run.

Volatility in financial assets will always be there due to macro or micro economic factors like crude oil price rise, tariffs etc.  Its important to remain invested and to focus on continuing the long-term wealth creation process.  At the cost of sounding very boring, lets reiterate the mantra for wealth creation.  Be patient and stay the course!!

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