what would be a fair return for an investment ???

capitalgain · 1 what would be a fair return for an investment ??? Sun Sep 04, 2011 10:44 am

capitalgain

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Hi Friends , What do u all think would be a fair return to expect as a % from CSE annually ?

Quibit

Quibit

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This is a very interesting question, therefore I thought I would answer it.

There are many factors requires to be considered in determining fair return for an investment. Also return will always depends o. Degree of risk investor is willing to take. High risk will give you high returns whilst low risk would give you low returns.

If you are a foreign investor, you may consider following factors in investing in the Colombo Stock Market.

A) cost of funds
This is generally the depends on your source of fund in your own country. In many countries interest rate are as low as 1-3%. Therefore cost offends would be about the same rate.

B) exchange rate
Since all investments in Sri Lanka is rupee denominated, investors have to be mindful about the exchange rate fluctuation. Rupee depreciation would make the investments unattractive as conversion on repatriation will make ultimate profits lower. If you study historically Sri Lankan rupee had been depreciating at the rate of approximately 3% per annum.

C) interest rates
Prevalent risk free and bank Interest rate would be another important factor of consideration. If an investor is to invest money in government treasury bills or deposit of a commercial bank via sfida account what would be the rate of return he or she could expect. I would put this figure around 6%. This is also could be considered as the opportunity cost of funds or the minimum benchmark return expected.

D) tax liability
Tax liability in respect of interest income vs capital gains tax. Sri lanka capital gains tax is zero, hence this stock market investment become quite attractive.

Ok, now let's look at the expected retune on investment as per the given formula.

Cost of fund + Exchange risk + benchmark return + tax
3% + 3% + 6%+ 0
12%

As given above minimum expected return would be 12 %.
Now you need to add the risk premium in respect of the specific investment. Eg property, stock market, commodities etc.

If it is stock market I would add at least 5-7% risk return premium.

According to may calculation investor expectation from the stock market should be minimum 20- 25% per annum. If you work backward on the basis of Internal Rate of Return (IRR) by adjusting your cash flows to time value of Money, then the expected return should be approximately 20%.

Hope this helps!

the contrarian

the contrarian

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great article Quibit,,, well done... yeah i am too a firm believer of the 20% rule... this is the yard stick i have for my investments,,, you will double your money nearly every three & half years.....

i dont know how accurate this is... but read somewhere that even the great Warren Buffett manages around 23-30% YOY.

happy investing..

jonny · 4 Re: what would be a fair return for an investment ??? Sun Sep 04, 2011 1:31 pm

jonny

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@Quibit wrote:This is a very interesting question, therefore I thought I would answer it.

There are many factors requires to be considered in determining fair return for an investment. Also return will always depends o. Degree of risk investor is willing to take. High risk will give you high returns whilst low risk would give you low returns.

If you are a foreign investor, you may consider following factors in investing in the Colombo Stock Market.

A) cost of funds
This is generally the depends on your source of fund in your own country. In many countries interest rate are as low as 1-3%. Therefore cost offends would be about the same rate.

B) exchange rate
Since all investments in Sri Lanka is rupee denominated, investors have to be mindful about the exchange rate fluctuation. Rupee depreciation would make the investments unattractive as conversion on repatriation will make ultimate profits lower. If you study historically Sri Lankan rupee had been depreciating at the rate of approximately 3% per annum.

C) interest rates
Prevalent risk free and bank Interest rate would be another important factor of consideration. If an investor is to invest money in government treasury bills or deposit of a commercial bank via sfida account what would be the rate of return he or she could expect. I would put this figure around 6%. This is also could be considered as the opportunity cost of funds or the minimum benchmark return expected.

D) tax liability
Tax liability in respect of interest income vs capital gains tax. Sri lanka capital gains tax is zero, hence this stock market investment become quite attractive.

Ok, now let's look at the expected retune on investment as per the given formula.

Cost of fund + Exchange risk + benchmark return + tax
3% + 3% + 6%+ 0
12%

As given above minimum expected return would be 12 %.
Now you need to add the risk premium in respect of the specific investment. Eg property, stock market, commodities etc.

If it is stock market I would add at least 5-7% risk return premium.

According to may calculation investor expectation from the stock market should be minimum 20- 25% per annum. If you work backward on the basis of Internal Rate of Return (IRR) by adjusting your cash flows to time value of Money, then the expected return should be approximately 20%.

Hope this helps!

HI Quibit...Nice explanation.+ rep for your knowledge...Tks...

rijayasooriya · 5 Re: what would be a fair return for an investment ??? Sun Sep 04, 2011 4:00 pm

rijayasooriya

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There are more Sri Lankan investers than foriegn investers in C(COLOMBO)SE.

capitalgain · 6 Re: what would be a fair return for an investment ??? Sun Sep 04, 2011 8:33 pm

capitalgain

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Thanks for the detailed explanation Quibi .... I also think a 20-25% return will be a good one to expect from CSE !!!!!!
Cheers !!!!!!!!!

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what would be a fair return for an investment ???

1 what would be a fair return for an investment ??? Sun Sep 04, 2011 10:44 am

capitalgain

2 Re: what would be a fair return for an investment ??? Sun Sep 04, 2011 11:14 am

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3 Re: what would be a fair return for an investment ??? Sun Sep 04, 2011 12:08 pm

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4 Re: what would be a fair return for an investment ??? Sun Sep 04, 2011 1:31 pm

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5 Re: what would be a fair return for an investment ??? Sun Sep 04, 2011 4:00 pm

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6 Re: what would be a fair return for an investment ??? Sun Sep 04, 2011 8:33 pm

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