Monthly Archives: July 2020

Alert – Simple Algebra required for understanding

It has been said that “Change is constant in life.” It is evident in our lifecycle. Life starts as an infant, to a school going kid, than to a college going teenager, to a family person and lastly to phase of retirement.

All phases comes with a change which we accept as human being.

When it comes to hard earned money, we question the rule of change. One must understand the importance of outperformance and underperformance. Let me explain the simple criteria considering current market situation.

Pre Covid Fall From 100 Hence, Value Now Once benchmark will regain 100
Benchmark 100 20% 80 25%
Non performing scheme 100 25% 75 Rs.94
performing scheme 100 15% 85 Rs.106

Why Portfolio Reshuffling is important?

  • Imagine a situation of index value at 100 before Covid situation.
  • Due to Covid, Index falls from 100 to 80 (-20%)
  • At the same time, a performing scheme is outperforming index and falls only -15%
  • While an underperforming scheme is underperforming index and falls -25%
  • In an hypothetical situation, Index recovers from 80 to 100 which is 25% growth.
  • As the performing scheme fell less to 85 will become 106.
  • And the underperforming scheme fell more to 75 will become 94.

Case here to prove is loss can be recovered by patience but underperformance cannot be recovered.

Mutual fund investors must review and reshuffle portfolios at different time horizons.