Know what Rs. 5000 per month can do

There are a lot of things that we can do with Rs.5000 per month.

Know what Rs. 5000 per month can do

Here are a couple of options:

• Watch a movie – These days watching a movie with family or friends is an expensive affair. You may barely watch one movie with popcorn and drinks with Rs 5000.

• Go for dinner – This may again be touching too close to what you can achieve with Rs 5000 but sure you can have a meal with a friend but the dinner may not be a luxury one.

• Buy clothes – Depending upon what you like but 5k can help you shop a little. You can buy a few things and that’s about it.

• Keep it in saving – Just leave it in a bank account because it’s not big anyways.

• Invest – Here is an interesting option. Rs 5k invested in an equity mutual fund over 25 years may become Rs 1.65 lacs. And if the same amount is invested every month, it reaches Rs 1.62 crores in 25 years. And now the favourite one, Rs 5000 invested every month and the investment amount increases by 10% every year i.e. 5000 pm in year 1, 5500 pm in year 2, 6050 pm in year 3 and so on, it reaches Rs 11.64 crores in 25 years.

Life is a choice and so is investing.

Even a small monthly contribution done sensibly can create a handsome amount if you start early by investing in a disciplined manner.

PE ratio and how to use it to identify opportunities

There are a lot of fund managers/investors who feel that PE is not relevant. They often advocate other complex indicators. I do agree that price to earnings (PE) ratio cannot be used for decision making, but it can still be used to get a sense of the valuation.

Knowing what to move can provide you an edge

The PE ratio is the market price of the stock divided by the past 12 months of earnings. Often people use future earnings to calculate the expected PE of a stock. I prefer using trailing numbers because they are actual.

If we reverse the ratio, we get the price of the stock as PE multiplied by earnings.

“Over the long term, it is hard for a stock to earn a much better return than the business which underlies it earns. For example, if the business earns 6% on capital over 40 years and holds it for that 40 years, you’re not going to make much different than a 6% return even if you originally buy it at a huge discount. Conversely, if a business earns 10% on capital over 20 or 30 years, even if you pay an expensive-looking price you’ll end up with a good result.” - Charlie Munger

Over the long term, the stock return will match its earnings growth. However, in the short-term and medium-term PE growth or de-growth can impact the stock price return.

Stock Return = Earnings Growth + PE growth

In 2020, a lot of healthcare companies saw a moderate increase in their earnings, but a massive increase in their PE. The stock price skyrocketed in a short span. However, the same set of companies had their price beaten down in 2022 when the market became more realistic.

Similarly, in 2021, a lot of start-up funding happened at a certain valuation. Since start-ups usually don’t have any earnings a lot of this valuation was driven by market narrative. However, in 2022, a lot of these start-ups saw a decline in their valuation. Market expectations were reduced and PE de-rated.

Now how can this be used to identify opportunities?

I will use the analogy of Mr Buffet that each business can be classified as a great, good or gruesome business. A simple way to identify these businesses is by looking at return on equity, RoE. Good and great businesses will command RoE of more than 15% per annum, and there would be consistency around that. A gruesome business will find it hard to earn a good RoE, often less than the cost of capital.

One of the ways of identifying opportunities is to look at the share price increase (Good or Great Businesses) and compare it with the earnings growth. For example, if the share price has increased by 20% per annum and the earnings have increased by 40% per annum during the same period, there is a chance of PE growing.

The opposite also holds good. If the share price has increased by 50% per annum over five years but the earnings have increased by only 10% pa. The market expects the company to grow its earnings at a phenomenal rate but the company is not growing at that rate. Sooner than later the market will realise it and there is a chance of de-rating i.e. share price declining. However, if the company continues to grow its earnings, the share price may hold or grow further.

If you can identify a company that is growing its earnings, but the same is not reflected in stock price, there is a chance of PE re-rating or PE growing.

A snowball effect is created when earnings growth is combined with PE re-rating. This is often the reason why a stock price may rise a 100/200% in a short duration. A smart investor will prepare himself or herself to capitalise on such a situation.

What is a SIP?

You must have heard someone say this, but what does SIP mean? Is it a brand? Some new trend? Let’s understand what is an SIP.

What is a SIP?

You must have heard someone say this, but what does SIP mean? Is it a brand? Some new trend? Let’s understand what is an SIP.

A Systematic Investment Plan (SIP), more commonly known as SIP, is a facility offered by mutual funds to investors to invest in a self-controlled manner. It is a mode of investing in mutual funds where you can invest a specific amount of money either monthly, quarterly, or whatever period you choose.

This means that you don’t need to have a huge amount of money to start investing in mutual funds. You can start a SIP with an amount as low as Rs. 500.

How does it work?

The magic of compounding!

Your money will grow and multiply, slowly turning your small investment into a big sum.

Additionally, you don’t have to time the market. A small sum of money gets invested every month and you get the average cost. The cost of your investments is averaged over some time, thereby making sure that you never invest all your money at the highest point in the market.