Thursday, October 26, 2006

Demystifying TWINVEST

Update 2 I would like to bring attention to an interesting piece of discussion going on at SIP, should I do it??. Please look in the comment section from here

I have added some blogs on the right hand side which I read. They are theinvestorblog, guide2mutualfunds and ulip. They are quite interesting. Infact there is one good article at the ulip blog which is at Which charges have the biggest impact on returns. Quite an interesting read.

Update: I have added a comment at SIP, should I do it??. It contains bit more explanation of the alternate scenario. Thanks Deepak Shenoy for the wonderful comment.

Hope all of you had a very happy Diwali and Ramzan. I am back with my articles. A Rupee Manager reader mailed me with some questions and comments. I am glad that my readers are taking good interest in their financial matter. I would answer the questions along with the mail.

p.s: Those who havent yet read my post on TWINVEST, read it at SIP, should you do it?

These are my understanding of your twinvest plan:: (I couldn’t see the xls, so all these are from the screenshot.). See if I’m right?
1. We hold more cash when the NAV is more & hold less cash when the NAV is less. (ie, buy more when NAV is less)
You are right, but looking otherwise, you buy more when NAV is less and buy less when NAV is more. So average price of the unit comes down. This means that you are buying the MF cheaper and hence getting more value for your money.

The first thing you should forget is that markets will remain +ve/-ve. Your investment stratergy should not be dependent on how markets move. On a positive note, if economy is booming then markets over a period of time (> 5 yrs) will be positive.When markets rise, the NAVs also rise. As NAVs rise, you are tempted to invest more. If you look from other side, the market is luring you into it.
2.The work-out looks at the redemption at the end of 1yr. If we decide to hold for more yrs, then the SIP will fare better in +ve markets, due to more units.
3.For –ve markets, we have a cushion by way of the cash. So, twst fares better that way.

4.However, such style of investing needs much much more discipline. Normally, one tends to do at one go, which is v.wrong for the market-based instruments like MF. So, better is to use SIP, where we give away the control & employ rupee-cost-averaging. That is reasonable. But in your twinvest, one needs to do it by self & yet not allow oneself to be pulled back-n-forth by the NAV’s.
Well to have less risk you would have to do some work.. No pain no gain. You cannot expect your money to grow better unless until you water it better!!

5. Since the purchase of units is at our control, we can go for a finer-granularity, ie., do it every two-weeks, for better v-c-a effect.
6. One needs to take into account the overheads for this style. Say, the additional efforts, the money that goes into sending every cheque by post/courier, and the entry loads & etc……
7. Entry loads:: most of non-sip MF-schemes have entry loads, after the NFO period. So, we need to factor in that also.
If you go for finer granularity like 2 week, well and good. The system would be able to tap the volatility much better. Looking at overhead, some of the banks offer you the facility of buying/selling MFs on the net. So the overhead of post/courier is eliminated. Regarding entry loads, since we are going to be in the market for more than 5 years, the 2.5% of entry load shouldnt deter you, if the MF is under a good MF manager. But try to look for MFs which have no Entry load and some exit load till 2 years/3 years. Since we wont be selling it so soon, this way we negate the bad effect of entry load on our unit.
Feedback: Pl follow DD-MM-YYYY format for dates, as we are used to it more.
In the “points to be looked” part, you have completely left the cash-at-hand quantum for twinvest. That is a much greater attraction, na?
;) Sorry for the mistake. Will surely take care about the date format in my further excels. Regarding the cash-at-hand quantum, I should have mentioned it. Thanks for your reminder
Even after reading that article, I am not fully convinced of what it targets at, for the quantum of efforts put in!!
This twinvest might be v.good theoretically, & with examples too. But honestly typing, I would love SIP for the sheer convenience of it.

1 “Long-term investment horizon”: How long is it? 1yr? or 5yrs?
2 “Second, TWINVEST likes MFs which are agressive and little volatile.”:: What do you mean by little volatile? Do you say a bit of volatility is better, or do you say there must be v.little volatility, or you say it mustn’t be volatile at all? (If first: put “a little”, if second: put “v.little”, if third: make it more clear.)
"Long-term Investment horizon" means you remain invested for a minimum period of 5 years. Sorry for the goof up in volatility. Any MF which moves within a volatility range of 7% - 10% is good. I would try to be precise in my future articles.

p.s: Please let me know about goof ups like this. This is my first blog and I am learning on how to present the concept. Let me know your feedback/comments. This would greatly help me and other readers.

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