“Look Through Equity Mutual Funds Beyond Past Performance “ by Vikas Biyani

Contributed by : Mandar Chapekar, CFA

CFA Society India, Pune hosted a session on “Look Through Equity Mutual Funds Beyond Past Performance “by Vikas Biyani on 23rd March 2018. Vikas heads Client Advisory team at Multi-Act. He has 14+ years of experience in the field of equity research, capital markets and portfolio advisory to high net-worth and institutional clients.  He has been associated with Multi-Act since 2003. He has earned his Chartered Accountancy qualification from ICAI in 2003. He is also pursuing his CFA (L-3 Candidate).


The Crux of the Topic was, while selecting Equity Mutual Funds for investment purpose, various factors to be analyzed, considered by Investor or Financial Advisor apart from just focusing on past performance criteria

Vikas initially started off with discussion by providing statistics on  huge inflows of funds coming into Equity Mutual Funds in recent period and its impact on Market, Performance of Equity MFs especially on Small cap and Mid cap Funds

Thereafter Vikas went on to discuss why past performance should not be the only criteria for selection of mutual funds He elaborated , Mutual Funds themselves mention that past performance is not guarantee of future results . Vikas provided illustration of how Funds selected based on last 3 years performance performed in next 3 Years.  The result was only 1 or 2 funds selected on 3 years past performance basis   appeared in top 10 funds in next 3 years -time period. He also referred to famous Dalbar Study done in US to support the illustration. Again he mentioned about hindsight bias affecting decision making while selecting Equity Mutual Fund based on Past Performance

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He further discussed on general disclaimer of Mutual Funds i.e.  Mutual Fund Investments are subject to Market Risk. He explained his definition of Market Risk i.e.

Market Risk =Quality + Valuations + Technicals

Vikas mentioned that Investor need to think of his/her investment objective i.e. whether the priority is performance or safety first or Momentum or Value.  Accordingly Equity Mutual Fund need to be selected.  One Size Fits All” criteria does not work well over here.

Again Investors suffer from various biases while selecting Mutual Funds viz. Chasing Fads, Hindsight bias , Loss Aversion bias and Urge to act.  They need to take cognizance of these biases

Vikas explained that while selecting Equity Mutual Fund one should consider

  • Consistency in performance rather than recent performance. Again while calculating consistency, rolling period returns can be used to mitigate starting and ending point bias
  • Quality of Portfolio holdings of Equity Mutual Funds Schemes. Funds having exposure to ow quality businesses need to be avoided. Funds having low Drawdowns in Bear Market Phase need to be selected
  • Mutual Funds Schemes having lower/reasonable Valuation (but not at the cost quality) need to be considered as the valuations drive the potential return on the investment. Simple Valuation Metrics like P/E can be used to compare different Mutual Fund schemes
  • Expense Ratio of the Fund need to be considered. Funds having not too high expense ratio need to be considered
  • Funds having not too high portfolio turnover can be considered
  • Process Driven Funds rather than Manager driven Funds can be considered
  • Need to consider Absorption Capacity of Mutual Fund scheme based on Size of AUM and Mandate of the scheme
  • Need to consider Style drift if any of Fund Manager as against stipulated mandate as per the Fund’s objective

Vikas elaborated all above aspects   with apt and real life illustrations which made the session really interesting.

Vikas also provided details of guidelines, SEBI has recently issued to Mutual Funds regarding categorization and rationalization of Mutual Funds Schemes.  The aforesaid guidelines are likely to bring significant change in Mutual Fund Industry.   The impact of implementation of these guidelines may prove past performance of Mutual Fund schemes not very useful. In this scenario, Analysis of Mutual Fund schemes beyond past performance would be critical

All in all it was very good informative and educative session full of real life illustrations which would help attendees to take Rational Investment Decisions while selecting Equity Mutual Fund Schemes

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Workshop on “Behavioral Finance for Wealth Managers” in Pune

                                                                                                                                                  Contributed by: Manish Chandak

CFA Society India, Pune hosted a 4-hour workshop on “Behavioral Finance for Wealth Managers” by Dr. Abhishek Sachan on 26th May 2018. Dr. Abhishek is a CFA Charter holder and has graduated with a PhD from Nirma University in Behavioral Finance. He is currently Finance faculty at School of BFSI, Symbiosis University of Applied Sciences, Indore.


He started the session by introducing Behavioral Finance and differentiating between Rational Investor and Real Investor. He pointed out that the theoretical Rational Economic Man (REM) does not exist. Behavioral Finance considers investors as real investors. Unlike Rational investors, Real investors have limited information, limited processing capacity and limited time to take decision and have bounded rationality.

He further explained following Emotional Biases and Cognitive Errors with various examples.

Emotional Biases: Emotions affect decisions directly and indirectly; an emotionally biased person gives subjective value to alternatives based upon illogical premises. The decisions of investment may not be based on informational and analytical inputs but on some emotional aspects. These biases stem from impulse, intuition and feelings.

These biases are difficult to correct, usually portfolio managers adapt to the clients which show presence of emotional biases.

  • Loss Aversion
  • Endowment
  • Status Quo
  • Self-Control
  • Regret Aversion
  • Optimism


Cognitive Errors: Cognitive errors indicate towards limitations of individuals for basic information processing. Broadly, cognitive errors stem from inability to understand statistics, memory errors, improper reasoning, and underweighting/overweighting new information.

The good thing about them is that to an extent they can be corrected by educating clients.

  • Cognitive Dissonance
  • Ambiguity Aversion
  • Availability
  • Mental Accounting
  • Representativeness
  • Illusion of Control
  • Framing
  • Anchoring & Adjustment
  • Conservatism
  • Self-Attribution Bias
  • Hindsight
  • Overconfidence
  • Confirmation
  • Recency

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He also distributed handouts and discussed various case studies and provided fascinating insights. He suggested that wealth managers should go beyond risk profiling and conduct behavioral profiling based on biases, personality and demographics. He also shared interesting patterns of investors based on demographics and personality.

He suggested following books for those interested in Behavioral Finance:

  • Behavioral Finance and Wealth Management – Michael M Pompian
  • Beyond Greed and Fear – Hersh Shefrin
  • Handbook of Behavioral Finance – Brian Bruce
  • Misbehaving – Richard H Thaler
  • Predictably Irrational – Dan Ariely

This is the first time Pune chapter of CFA Society India hosted 4-hour event. The response to the workshop was overwhelming. The workshop was attended by wealth managers, CFA Society members, CFA candidates and guests. In the end, Sampath Reddy (CIO, Bajaj Allianz Life Insurance) felicitated Dr. Abhishek Sachan. This was followed by networking and dinner.



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Understanding blockchain and demystifying crypto currencies

Contributed By : Vivek Rathi, CFA & Chandra Mohan, CFA

IAIP Hyderabad chapter organized an event on “Understanding Block chain and demystifying Crypto currencies” on 28th April 2018. Ramani ‘Ram’ Ramachandran, CEO and Co-Founder and Gautam Seshadri, CBO and Co-founder of Zenprivex limited were the key speakers for the aforementioned topic.


Block chain and Crypto currencies being the new buzzwords attract a lot of attention. Likewise, the response was overwhelming and the event was well received. The speakers were equal to the task and kept the audience engaged while unraveling the mystery, which crypto currencies are. Both Ram and Gautam stressed on the need for an alternative to the traditional fiat currency and the gold. They explained how crypto currencies could evolve as an alternative asset class while providing the much needed resiliency and transparency to the currency market. This could eventually remove the intermediator and reduce spurious transactions. All the while they backed their analysis with the data, exhibited in a meticulously prepared presentation.

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Everyone in the audience participated enthusiastically in the Q&A session that was conducted at the end. The session culminated with the lunch being served where again everyone got an opportunity to interact with the guests and satiate their appetite for knowledge. Overall, it was weekend afternoon that was well spent with everyone left asking for more

Few key facts from the session:

  • There are 1500 plus crypto currencies, valued at $400 billion
  • Crypto currencies can be considered proxy of digital gold
  • Crypto N/W’s don’t need to know the counterparty. Anonymity and privacy of transactions are at the heart of Block chain technology
  • Crypto currencies should be considered as technology and not an asset class. The cost of adoption of technology going down
  • A user would need 3-4 billion dollar worth of electricity per day to control 51% of crypto network. Economic incentive is to participate rather than hack the network. This is 10 times the amount needed a decade ago and is expected to increase exponentially
  • Argentina has a very high rate of Bitcoin adoption. Venezuela banned bitcoin because of heightened mining activity as the electricity is very cheap there
  • Crypto currency (Bitcoin) has a very low correlation with any other asset class
  • Bitcoin now accounts for roughly 40% of Crypto market cap
  • Crypto currency fortify trust in incentives (from trust in people)
  • ICO – Initial Coin Offerings. In 2017, $3.9 billion raised through ICO’s

108 token to be launched – Will follow passive Index strategy

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Talk By Mr H.M. Bangur -The Entrepreneur within You

Contributed By : Dhruv Saraf

In the session organised by Kolkata chapter of IAIP, Mr Bangur (MD of Shree Cement) began by mentioning that the truth is always the same –  the method to attaining it doesn’t matter. Ultimately, a business earns a certain amount of free cash and that is the truth – the way of arriving at the number doesn’t matter. Mr Bangur also mentioned the fact that in business, cash flows always take precedence over book profits as the P/L statement merely represents certain numbers whereas the cash flow statement reflects the true picture of the business and the quantum of cash that it generates year after year
Mr Bangur then went on to talk about the art of decision making. He elucidated upon the fact that the worst of decisions are made in the best of times and the best of decisions are made in the worst of times. When times are ripe for growth, every management team extrapolates that into the future and sets ambitious targets for the business without recognizing the presence of cycles that prevail across time. In the context of analyzing investment opportunities, Mr Bangur talked about understanding companies and the behavior of management teams across the cycle – both in a downturn and an upturn. In good times, everyone grows and performs well, but it is the bad times that truly separate the enduring franchises from the rest. In this context, it also becomes important to understand that whether the company is also growing at a similar clip to its peers during the good times. There is a fine line between ambition and over-ambition and managements should be careful of not crossing that when the going is smooth
Sir then went onto talk about the nuances that separate an analyst from an entrepreneur. An analyst prefers business to always operate in a steady state environment without the presence of exogenous shocks – which is very difficult as business environment in reality is a dynamic force. Risk taking is an essential part of the game and in the absence of an animal spirit, there is little scope for outsized value creation. Mr Bangur then went onto give an example of ability  to take risk  by citing his acquisition of a plant in the middle east. Mr. HM Bangur said ..we have bought this at 2000 crore..a small bet..if things don’t do well we can sell it back 10% lower. So that’s roughly a 200 crore loss which is 2-3 months profit. He also mentioned that Analysts are much much better at projecting future cash flows than the management as the element of uncertainty in business plays a big part in guiding strategy for the people who run the company.
The other highlight of the talk was the point made on an individual’s area of concern v/s his area of influence. What Mr Bangur talked about is similar to Buffet’s theory on one’s circle of competence. People always focus on gathering more and more information daily(area of concern) but only a selected few focus on processing it and extracting the most out of it (area of influence)
On being asked about corporate governance and providing a plethora of information available to shareholders, Sir said that if one wants to hide a banyan tree, it can only hide it amongst 100 other Banyan trees. Similarly if you want to hide data,you can hide it by giving much more data than actually required. Giving more than what is needed is always a red flag for the investor.
Mr Bangur concluded his talk by saying that his primary role at work is to create new problems everyday that are more complex than previous ones. This is what brings the element of innovation at work and this is why Shree today is the cost leader in a commoditized industry – a strategy that worked immensely well for the company thus far and will continue to in the future,
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“Post Budget Analysis & Markets Outlook” with Mr. Amit Khurana, CFA

Contributor: Shivam Garg, CFA

The Delhi chapter of CFA Society India organised a speaker event on 9th Feb 2018 on the topic “Post Budget Analysis & Markets Outlook” with Mr. Amit Khurana, CFA – Director, CFA Society India and Head of Equities & Research, Dolat Capital Market Pvt. Ltd. The annual budget is the most talked about event in a financial year although the practice might become redundant after five to ten years just like railways budget. The agenda for the event was to look at budget’s political message and its impact on markets.


In his presentation titled “Economics of political strategy or vice versa”, Mr. Khurana spoke about how each action in budget had a political connotation attached to it. Some are obvious while others may not be. His first point was on how the government at all international forums talks as a capitalist but acts like a leftist. Nearly sixty-five percent of the budget is about people living in rural areas and farmers. Minimum Support Price (MSP) has been revised to 1.5x of cost of production, though the method & implementation has not been made clear. Universal health care program is the biggest scheme ever announced but with meagre budget allocated to it. Tax rates have been increased and are highest in last so many years which is opposite of what US is doing. LTCG is back which brings us to a point where we have STT, STCG and LTCG in capital markets now. The question is -how do we make profits with so many taxes in this profession? There is an increase in customs duty on raw materials (Make in India) and the disinvestment target is increased to 80K Cr. More consolidation is expected in public sector like HPCL acquisition by ONGC.

Mr. Khurana next gave a summary of important items of the budget like revenue, expenditure, fiscal deficit, etc. He pointed out that nominal GDP growth which is the biggest assumption by finance minister has been kept at 11.5% and tax revenue increase has been assumed at 16.6%. The government has been very disciplined in keeping fiscal deficit number in control. At present, it is at 3.5% of GDP. Oil prices are lower but yet there is highest ever retail prices which shows government has not taken a populist approach here. Subsidies have been kept low on food and fertilizers as well. The Tax to GDP ratio is sustainable at 15-16% for a country. The government has been able to pull it up to 11-12% from 8-10%. GST is expected to bring in windfalls and hence, increase it further. Corporate earnings have not grown but still taxes have been kept high. The subsidies have been rationalized which shows a disciplined approach.

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After this, the impact of budget on various sectors was discussed. The sectors having positive impact are – Agrochemicals, BFSI, Cement and building, Consumer Stables, Consumer Durables, Capital Goods, Infrastructure, IT services, Logistics, Media and Real estate. The ones having neutral impact include – Automobile, Energy, Pharma and Power and utilities and tiles sector is expected to have a negative impact.

In the final section, several macro & micro indicators were covered and the outlook for equity markets was discussed. The macro indicators are looking positive. Inflation is under control and oil prices are still low. The government is not reversing any of its decisions unlike previous coalition led UPA government. Investments are driven by steady local money and not the hot money from FIIs. Private sector banks are amongst the best performing stocks whereas pharma is the biggest laggard. Sensex current P/E , P/BV ratios and Standard Deviation are at the highest of all times. The domestic flows have been key support at a steady 6-10K crores infusion in markets every year. EPS is expected to go higher from here. Things seem to be moving in right direction for markets with GST coming in, recognition of bad loans happening and rural economy growing. The only thing is micros are not looking so good as the earnings are not increasing. P/E ratio is highest due to increase in stock prices (P) but no movement in earnings (E). Vix index is lowest for longest periods and inflation is expected to go up as it has not grown in last few quarters.

US 10 year yield will be the most imp metric to observe in next few months. Currently it is at 2.8% and the moment it crosses psychological barrier of 3%, there will be blood bath in equity markets, simply because globally bond markets are much bigger than equity markets. Serious correction is expected in equity markets if this yield moves substantially and quickly. Movement in yields will also driven by inflation. Also, any change in Indian regime is going to bring huge correction in markets. Markets are not ready for the kind of uncertainty that a government change will bring. Worst possible scenario is a third front led govt. Volatility is expected to go up in next few quarters due to incoming elections and changing sentiments around the same



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How Fintech will Disrupt the Future ?

Contributed by: Manish Chandak


CFA Society India, Pune organized a Speaker session on “How Fintech will Disrupt the Future” with Mr. Kunal Bajaj on 8th December 2017. Kunal is Founder & CEO of Clearfunds. Clearfunds is an online investment advisor which lets investors buy mutual funds in India at a low, flat fee, not a fat fee. Kunal has 18 years of experience in Investment Banking domain and has also worked with Goldman Sachs, Credit Suisse, J.P. Morgan and CLSA.

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Kunal began the session with a caveat that technology will ensure that all products and services which can be commoditized will be commoditized. Hence if traditional brick and mortar industries want to stay in business, they need to customize and differentiate their product offerings. Otherwise, their business will be disrupted and commoditized by technology. How Jeff Bezos of Amazon has disrupted and commoditized traditional retailers by providing products and services at wafer-thin margins. He talked about how 15-20 years back Craigslist and Yahoo used to provide directory services by listing various services like ridesharing, dating, rental on their sites. Now all those services got unbundled as various start-ups attacked different parts or services of Craigslist. This is called Unbundling of Craigslist and has spawned many unicorns.

Unbundling Craigslist

Picture.pngHe felt that banking and financial services industry (which includes banks, personal financial management, insurance, payment, asset management) across the globe is yet to get disrupted in real sense. Since disruption in financial services industry is long overdue, we might see unbundling of their product and services sooner rather than later. FinTech companies are slowly chipping away various pieces of the financial services industry. FinTech companies are leveraging technology to disintermediate the traditional financial services companies and provide better services for both consumers and businesses at dramatically lower cost and at a faster pace. FinTech companies are agile and nimble-footed whereas legacy systems burden traditional banks. It is only a matter of time before we will see an emergence of fintech “unicorns” — private companies worth over $1 billion.

In the Indian context, he talked about how Fintech companies are riding the India Stack ecosystem (includes Aadhaar, UPI, digital document storage and elocker) and how this will help in achieving India’s financial inclusion goals. He compared this transition to mobile vs Landline moment. The session was followed by Q&A session. Apart from Fintech, he also answered queries about Clearfunds, India Stack ecosystem, Bitcoin, and Blockchain.


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Case for Internationalization of the Indian Rupee

Contributed by: Priyanka Chandran, CFA

The threat to the USD as an international currency in the wake of the financial crisis, emergence of currencies such as the EUR and more recently the RMB which has been accepted in the International Monetary Fund (IMF) basket as a reserve currency raise many questions. These pertain to the evolution and development of internationalization of a currency along with the policy interventions necessary to promote this end. In light of these events, the progress made by the Indian Rupee and the merit to make the currency more international is worth contemplation.

The argument for internationalizing Rupee include benefits availed by any currency which is internationalized. These include currency gains for importers and exporters, lower borrowing costs for domestic borrowers and financial institutions and benefit of seigniorage for the government. But the bigger argument for the internationalization of Rupee lies in the progress of the Indian economy. Literature suggests that economic size, the sophistication of the domestic financial market and stable macroeconomic policies (especially low inflation) ought to be important determinants of currency internationalization, and empirical evidence is generally supportive (Chey, 2013). India has made a lot of progress against some of the parameters which was also evident in the evolution of international currencies over the last century, including the rise of the U.S. dollar in the 1920s and 1930s, the Japanese yen, Deutsche mark and the Euro more recently. This further builds a case for internationalization of INR

Some of the preliminary steps which have already been taken by Reserve Bank of India to liberalize the foreign exchange markets and develop the bond markets include allowing cancellation and rebook of foreign contracts, introduction of INR billing, increasing the FII debt limit, allowing issuance of INR bonds etc. However, some of the other steps which RBI could take in this direction could be as follows:

Liberalization of Currency Market: These would include allowing cancellation and rebook of FX contracts for foreign institutional investors (FII), relaxing trading restrictions for domestic and foreign banks by allowing them to trade in exchange traded contracts forwards and options for their own books and developing a deeper options market.

Deregulation and Deeping of Bond Markets: CRISIL estimates that India will need approx USD 650 billion for infrastructure till 20201. Use of Corporate Bonds for the LAF, developing Exchange Driven markets for Interest Rate Swaps etc could help.


Increased trade flows in the currency: While RBI has a guideline in place to support exports in INR, from a more strategic point of view, it makes sense for India to have local currency invoicing arrangements mostly with countries with which it enjoys a surplus in bilateral trade. A local currency swap arrangement with countries from whom India imports will only encourage more imports.

Having said the above, the roadmap to internationalization of Rupee also has many challenges. China, runs large current account surpluses but India has generally been a current account deficit country. In view of the large current account deficit, the exchange rate of the rupee is susceptible to the influence of large capital movements, especially during crisis periods. Strong and deep bond and currency markets along with robust regulatory and settlement systems would need to be in place. Further to denominate the trades in a common currency other than USD with the adjoining countries in Asia a certain degree of financial market integration is essential. Asian countries have not yet shown the degree of integration as displayed by Europe. There is a definitely more scope for greater cooperation.

While India has a long way to go towards that road, Internationalization is not an inevitable consequence of financial liberalization, nor can a government guarantee that the steps it takes to liberalize its country’s capital account will lead inevitably to internationalization. Yet the macroeconomic situations of India do demand efforts in this direction and internationalization may lead to strengthening of the domestic financial system and enrich the menu of financial assets available to domestic and international investors.



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