Coin newsletter #1: Bull market mistakes

In the past year or so, we’ve seen a huge spike in new investors. While, in general, this new breed of investors are more informed than the previous generation, some of them continue to make the same old mistakes.

At Zerodha, we spend quite a bit of time educating investors. We constantly share things and answer queries from investors on Varsity, Z-Connect, Tradingqna and the Zerodha YouTube channel & podcasts.

So every month, we’ll publish an update with the most important things you should know as an investor. We’ll also include links to all the important things we share across Varsity, Z-Connect etc so that you don’t miss out on anything important.

Oh, and just one more thing. If you’re new to the markets and thinking of investing in mutual funds, here’s one important thing you should know. All mutual funds come in two plans: Regular and Direct. When you invest in a regular plan, you pay up to 1% as commission every year for as long as you’re investing. But when you invest in a direct plan of a mutual fund, there are zero commissions. On Coin, we offer zero commission direct mutual funds. 

The thing about commissions is that they compound over time. So, if you’re a DIY investor, it makes no sense to invest in regular plans of mutual funds. Oh, and regular plans are also sometimes mis-sold as free, they aren’t. Always remember, costs are a big drag on returns in the long run. So, read this Varsity chapter before you start investing in mutual funds. 

NFOs

It’s still raining NFOs. In 2020, there were about 50 odd NFOs as fund houses rushed to capitalise on the market rebound. But just 7 months into 2021, we’ve already crossed 50 NFOs and counting. What’s surprising is that these NFOs have collected over Rs 30,000 crores. And it looks this isn’t stopping anytime soon, given that AMCs continue to file for new fund launches. The last time we saw so many NFOs was probably in 2008.

Even to this day, quite a few investors confuse NFOs for IPOs and expect listing gains. But NFOs and IPOs are two different things. In very simplistic terms:

IPO: When a private company wants to raise capital, it sells shares to the general public.

NFO: When an asset management company (AMC) wants to launch a new scheme, it launches a New Fund Offering (NFO) and sells units to investors. It uses the money it raises to buy the underlying securities (stocks, bonds, commodities) in the new fund.

NFOs are heavily marketed, especially in bull markets like the current one. They can be tempting, but not all NFOs are worth investing in. Even today, NFOs are mis-sold with a pitch that the units are available for cheap at just Rs 10, particularly by banks & wealth managers. Investors fall for the pitch without realising that Rs 10 is just a number and doesn’t mean anything.

A few things to keep in mind about NFOs:

1. Most NFOs have existing alternatives with performance track records.
2. Except for unique funds, not all NFOs are worth investing in. For example, up until the last 2-3 years, we didn’t have too many international funds if you wanted to diversify globally.
3. It’s better to see how a new fund performs than invest right away.

Markets near lifetime highs

The large, mid, and smallcap indices are all trading at or near their lifetime highs.

Major indices

And this is the time when some investors start getting nervous and start tinkering with their investments or stop their SIPs. But that would be a huge mistake.

The thing is, markets keep making fresh highs all the time. This image shows the number of times Nifty made new highs each year. So, just because the markets hit new highs doesn’t mean they have to fall. In fact, strong momentum tends to persist if you observe the image.

Nifty 50 all-time high instances

But in any case, even if you were to time the market, i.e., sell at the peak and buy at the bottom, you need to be right twice. As much as we humans like to think we’re good at predicting things, we aren’t. And even if you time the market perfectly, you aren’t guaranteed to beat a simple SIP.

Most of us will be saving for our long term goals like retirement, which are decades away. Reacting to short term movements is a sure way of hurting your odds of reaching those goals.

The best thing you as an investor should do is:

1. Get your asset allocation right. It sounds complex, but it need not be. We even have a simple guide to help you figure out your asset allocation.
2. Rebalance periodically to keep your desired allocation.
3. Ignore all the noise.

On Zerodha Educate

Last month we caught up with Rishad Manekia of Kairos Capital. In part 1, Rishad speaks about how a new investor should think about personal finance and shares some dos and don’ts. In part 2, Rishad talks about how to manage your personal finances in these challenging times.

Varsity updates

Speaking of personal finance, there are a lot of misconceptions around it. Personal finance is uniquely personal, and there are no easy answers. What works for someone might not work for you. Most people assume personal finance is all about investing; it’s not. Investing is just a small part of it.

We now have a dedicated module for personal finance right from the basics. With about 30 chapters, it’s also the biggest module on Varsity. It has pretty much everything you need to know to start your personal finance journey, starting with the fundamental question of why you should save.

We’d love to hear your thoughts. Please leave a comment if you have any feedback, suggestions or ideas for us; we’re listening.