Category: Investing Insight

Investing insight to make you a better investor.

The Inflation Drag on Returns

What do you think is the annualized inflation adjusted NIFTY 50 return is from 1991 through 2016? Hint: Gross returns were ~13%
Gross vs. Real NIFTY 50 returns
It was 5%

The Midcap index was created much later. So to keep things on an even keel, if you run both NIFTY 50 and NIFTY MIDCAP 100 between 2002 and 2016, it turns out that their real returns were about 7% and 13% respectively.

So,

  1. The asset class that you pick should jive with your time horizon. No point investing in NIFTY 50 (or large-caps, for that matter) if you have a 10+ year time-horizon.
  2. The market demanded high gross returns because of high inflation. If the RBI’s commitment of a 4-6% inflation band gets fully priced in, expect gross returns to come down in the future.
  3. Neither market returns nor inflation is under your control. However, your lifestyle inflation is all on you.

Code and additional charts are on github.

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StockViz Tools

Compare and Plot multiple time-series datasets

Ever wondered how the dollar adjusted NIFTY MIDCAP 100 index performed vs. US Midcaps? Wonder no more! You can now quickly run a comparison using our new Compare tool.

compre time-series

We have made a large number of datasets available:

NASDAQOMX The NASDAQ OMX TR USD Dataset
MF A pruned set of Indian mutual funds
FRED The St. Louis FRED dataset
THEME StockViz Themes
IN_NSE Indices available on the NSE
IN_BSE Indices available on the BSE
ETF_US US listed ETFs
EQ_US US listed Stocks
EQ_NSE Stocks listed on the NSE
EQ_BSE Stocks listed on the BSE
MCX Commodity futures listed on MCX
NCDEX Commodity futures listed on NCDEX

The “THEME” comparison tools also gives you the impact of STT and brokerage costs on returns.

So, now you can compare pretty much anything with everything.

When it comes to plotting a single time-series, we have made intraday prices on stocks listed on the NSE available. You can run these 10-days at a time:
chart time-series

The daily chart of NSE stocks also marks important corporate actions:
TCS daily time-series candle-stick with corporate actions

Keeping it free

The biggest challenge we faced was managing data storage costs. Earlier, we tried to upload all the data to the cloud but we quickly ran into performance bottlenecks and costs overruns. So we went back to the drawing board and designed a hybrid solution where the data and the analytics reside within our firewalls and only results are displayed to the user. This allows us to keep these tools free and open to everybody.

I want more!

If you want to see something here that would be of interest to other investors/traders, please WhatsApp us (+918026650232) with your ideas!

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Tax Drag on Compounding

The long-term capital gains tax on equity returns of 10% may not seem as much but it makes a huge difference if you are one of those “long-term” mutual fund investors who switch funds every year. To think through the effect of the tax on compounded returns, imagine a simple scenario where you invest in the midcap index and just sell and buy it back at the end of every year. In this hypothetical scenario, from the year 2002 through now, gross returns of buy-and-hold would have been 2245% vs. 1754% after tax. That’s ~22% of profits gone poof.

after tax midcap 100 returns

Will mutual fund investors be better behaved given this new normal?

Code and more charts on github.

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Simple Momentum with Transaction costs and Taxes

The earlier post on a simple momentum strategy ignored transaction costs and taxes. Typically, these are added to backtests where gross profits are high enough to consider them for further analysis. However, one of readers requested that we add these costs to get an idea of their effect on returns.

To keep things simple, we assumed a 25bps net transaction cost and a 10% tax on gains. The tax part is a bit tricky so we ran the analysis with some simplifying assumptions. Follow the github link to the code if you are curious.

Running with these assumptions, transaction costs and taxes lopped 82% off gross returns over Jan 2005 through June 2018.

cumulative midcap 100 simple momentum strategy returns after transaction costs and taxes

What kills you are the taxes, not the transaction costs. There were only 17 trades throughout the period. It is the 10% tax on gains that ruins the compounding.

Code and other charts are on github. Look for ones with a ‘tx’ in the suffix.

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