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    How to avoid big negative returns in your mutual fund portfolio?


    Neil Parikh was speaking at the 14th edition of ET Wealth Investment Workshop held in Surat on July 12.

    How to avoid big negative returns in your MF portfolio: Neil Parag Parikh
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    Rule No 1: Never lose money

    Rule No 2: Don’t forget Rule No 1

    Most equity investors know this often-repeated quote of Warren Buffett, arguably the world’s greatest investor. However, do these investors follow the two rules in their investment life? Not really. Probably because they are not easy to follow. However, Neil Parag Parikh, CEO, PPFAS Mutual Fund, believes simple behavioural changes can help investors to implement these two rules in their portfolios.

    Neil Parikh was speaking at the 14th edition of ET Wealth Investment Workshop held in Surat on July 12.

    Neil Parikh offered the examples of two investment options to the participants at the workshop. Both the options show annual returns for four years. The first option showed very large double-digit returns in three years and it also offered a large negative return in one year. The other option looked a “little boring” in comparison: it offered modest double-digit returns, all positive, in all the four years. Take a look at the two options below:

    Neil Parikh then asked the participants to choose an option. Obviously, most participants chose Option A because it showed a higher average return on investments than Option B.

    Parikh then showed the real figures. He showed the growth of Rs 100 in four years in both the options. The results surprised most of the participants. Take a look at the figures:

    Rs 100 invested in option A became Rs 139 at the end of four years, much lower than Rs 194 accumulated in option B.

    “Option B might look boring but it is giving very decent stable returns compared to Option A. It is not losing money. Investment A though looks really exciting, the average in option A is about 9.5 per cent when you compound it whereas, Option B nearly doubles your money. The point here is to make sure there is no big negative in your portfolio,” said Neil Parikh.

    “The idea is to expect and go for reasonable average returns and let it compound over a long term if you wish to make money,” he added.

    So, how badly can a single big negative return hit your portfolio? Neil Parikh explained with figures. “Suppose if a stock worth Rs 100 falls by 25 per cent to Rs 75. Your stock has to jump by 33 per cent to recover to its original price.”

    Similarly, if Rs 100 stock falls by 50 per cent, it has to go up by 100 per cent to reach its original value. Likewise, if it falls by 75 per cent, the stock needs to gain 300 per cent to recover and if it falls by 90 per cent, it needs to jump 900 per cent to recover.

    “The moral is the more you lose the tougher it gets to get back to your original price. Little five, 10 or 15 per cent is normal in the market to go down but if you go down around 30-40 per cent it is really hard to recover to your principal,” said Parikh.

    He gave a simple formula to implement Warren Buffet’s two rule principle to investing. “Preservation of capital, earning a reasonable rate of return and investing in a disciplined manner can help you to avoid big negative returns in your portfolio.” said Parikh.

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