The transience of life

When I was in class X at St Xavier’s School, Durgapur we were taught the Shakespearean play Julius Caesar as part of our ICSE curriculum. I consider it the best work of the Bard and it is full of memorable quotes that had made an indelible impression in my formative mind. The part I best liked was the one where Caesar’s wife, Calphurnia, is beseeching Caesar to avoid venturing out that day, citing the several omens that had occurred. Caesar’s response to it is an all time classic :-

Of all the wonders that I yet have heard, 

It seems to me most strange that men should fear,

Seeing that death, a necessary end,

Will come when it will come.

I do not wish to be morbid but it is a given that all of us will die, some earlier than others and some later. Given that this is an essential truth, it will seem logical that all of us should try to add value to our own lives and that of others while we do live. However, it is really not so for most people. Many of us are obsessed with some facets of life and hold ourselves back from enjoying life fully. Once common fallacy is that we need to be focused on financial responsibility and therefore cannot indulge in some of the things that will greatly add value to our lives. The sad part is that life, as you know it, may well be over tomorrow morning. Let me give you some examples, which brought home this truth to me powerfully over the last one year :-

• In a get together of our school friends, I was shocked to learn that many of their parents, who I knew very well while in school, have passed away. I felt rather fortunate that my parents are still there and in reasonably good health.
• When I shifted from Delhi to Chennai a Recruitment consultant had helped me find the job in Sify. Got to know last November that he had passed away, he was only 55.
• In our school we were a batch of 70 and this has already seen 4 deaths.
• Look around yourself and you will see examples of people passing away suddenly and unexpectedly.

Death and taxes, it is said, are the only certainties in life and in the Indian context the former is the unique certainty. Therefore, it makes a lot of sense to do worthwhile things in life in an early part, give yourself time and money in the end and finally find time for things you genuinely enjoy. I have tried to do this to a large extent in my own life, though I do not claim to have all the answers. A suggested blue print could be this :-

• Focus on building your knowledge and skills through education in the early part of your life. However, if you enjoy sports or any other hobbies and are reasonably good at it then you must take it up. Find time for it, can always be done.
• While making a living is important, do not get into believing that work is your life as that will be a very sad way to view it. Strike a balance – you work to earn money so that you are able to do things you genuinely enjoy doing. It could be reading books, watching plays, acting in group theater or traveling.
• Children do need to focus on education but do not make them one track people, there is a lot more to life than school marks and college grades. Spend time with them to understand  their potential and try to develop the same. As parents our responsibilities should be to enjoy our time with the children when they are young, they do grow up very fast and will go away long before you want them to.
• Unless you have a venture of your own or are really passionate about a profession, try to organize your finances in such a manner that you are financially independent by 45 or 50. This will give you enough time to do the things you love and enjoy while you are still physically fit. If you do a job till you are 60 then you will have very little energy to do other things in the rest of your life.
• While it is impossible to get a general blueprint for everyone, for most in modern India who want to get professional qualifications and work thereafter, follow this :-
  • Focus on Education, sports and hobbies till you are 22 or 24 depending on what qualifications you go for. This is the time to build skills and value to yourself.
  • Focus on your career for at least 4-6 years before you think of marriage.
  • Between 28 and 48-52 focus on your career and your family life simultaneously, making sure you have a rich life as a professional and as a person.
  • If you do things right then by this time your children will be in college and you will be financially independent. Once this happens, you can figure out how you want to spend your next few years.
  • At this time arrange your finances in such a manner that you can live comfortably without having to depend on any active income.

Living life well is important as it is the only one we have. Making it useful for others will make it worthwhile, but we first need to take care of ourselves and our families before we can think of others. As such the earlier we can get to financial independence the more chances we will have of being of use to others.

You may want to read several other posts in this blog to understand how you can achieve the above.

 

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My cash flows and investment plans in 2019

The start of a new year is always full of excitement and hope. There are new opportunities to explore and you hope for a lot of significant events to take place in the year, irrespective of what may ha e happened in the earlier one. In my previous posts I had outlined how 2018 was a fairly poor one both for my own active income generation as well as for the markets. In this post let me talk about my plans for 2019.

One must always start with the cash flow outlook for the year. Fortunately, with both my children becoming financially independent of me now, courtesy their careers, my major head of cash outflow is gone now. Currently their college education fees are all done and even though Ronju may get into a B school sometime in the future, we can always look at it through Education loans. On the flip side our expenses on travel are ever increasing due to the number of trips as well as the way we travel. Last year we had 2 vacations outside India, 2 full vacations in India as well as several shorter trips for leisure or family issues. 2019 looks similar as we already have a planned visit to Phuket in March. Our children are fortunately staying with us now though that may change through the middle of the year. Based on all these I am looking at cash outflow in these terms :-

• Regular household expenditure likely to be in the range of 6 lacs
• Travel expenses can be estimated at 3.5 lacs to be on the safe side.
• Family support will be in the region of 2 lacs.
• Rent for our Hyderabad apartment is around 3.5 lacs.
• So overall cash flows required will be in the range of 15 lacs

Against these the cash inflows I am expecting in 2019 are as follows :-

• Interest from Tax free bonds, InvIT funds and POMIS will be about 4 lacs
• Dividends from Stocks and Equity MF schemes will be about 4 lacs
• Capital gains from FMP redemption will be about 3 lacs
• Rental income from our Chennai apartment  will be about 3.6 lacs
• Income from Debt funds and stock trading will be about 1 lac

The above looks good but what if the markets continue to do badly and the dividends dry up? Well, as a backup plan I have the PPF accounts of both me and my wife. At present it earns about 5 lacs in interest per year and I can dip into it if needed. Another way could be to redeem some of my Debt MF schemes, to the extent I need the money. A final option will be to sell some stock that is doing really well but I do not feel this will be needed.

What about investments then? Well, in my present stage of life I am not looking at too much investment obviously. Even then, I had started a secondary stock portfolio in 2018 and have invested about 7 lacs in it so far. My idea is to let this portfolio grow and also do selective trading in it, something I have wanted to do for a long time. I do not want to do this on my primary stock portfolio where the plan is to have it for the really long term. Based on all of these the new investments I plan to do in 2019 are as follows :-

• 3 lacs in the two PPF accounts that we have.
• Put all FMP redemption money in Hybrid funds – this will be about 10 lacs in the year 2019. Part of this may also be used in my secondary stock portfolio.
• Build the Secondary stock portfolio to at least 10 lacs by putting in a minimum of 3 lacs in this year.
• Look at any interesting NFO themes as they become available.
• Keep adding to my Primary stock portfolio based on available money.

Where will the money for this come from? Well, what ever income I have from my Consultancy services will all be invested in above avenues as my passive income is adequate to take care of my cash flow needs.

So things look rather good right now, hoping that the markets will recover this year !!

My year end investment audit for 2018

Every year I try to take stock of my life and my finances on the last day of the year. It serves two major purposes – firstly, it shows me where I am and what do I need to do in order to get to my desired state and secondly, it gives me an idea as to whether I am doing the right things by my money. 

Any way we look at it, 2018 was a bad year from a financial or investment viewpoint. In the beginning it had not appeared so, especially after the stellar 2017 we had for our markets. January was a good month, corporate earning was looking like turning the corner and politics was largely stable, BJP having won Gujarat despite some hiccups. It was unfortunately to go wrong very soon, the first blow being the equity taxation in the budget. This has been talked about in every budget over the past few years but the markets clearly did not think it would actually happen. Once it did a domino effect of bad news and sentiment followed which has damaged equity portfolios through the year. I will not go into a detailed commentary here but crude oil prices, withdrawal of FII money, BJP losing Karnataka and then the Hindi heartland states, corporate earning being rather flat all played a role to ensure that our markets did very poorly. Even when there was some recovery, it was seen only in the large cap stocks, the mid caps and the small caps have been battered out of shape.

The news was not much better on the Debt front either. The ILFS fiasco affected several debt funds poorly and the returns for this year will be well below par. Short term accrual funds, normally considered the safest bets, also had fairly bad cuts. Redemption from debt funds was sustained over the year and the fund houses were saved by the continuing SIP inflow into equity MF schemes. So, while it was good to see that the Indian retail investor had gained some financial maturity, from a portfolio return perspective there were hardly any financial instruments that you could rely on.

With this backdrop, let us see how my investments have done in 2018 :-

• My direct stock portfolio suffered in a big way early on, recovered somewhat in July/August period and then went down after that. The large cap stocks are not doing badly now but the mid cap and small caps have tanked quite a bit. On the whole the portfolio would have hardly made any returns after adjusting for inflation, I suspect there may be some losses too.
• Similarly my Equity MF portfolio has suffered too, more in the mid cap and small cap space while holding on in the large cap space.
• Thankfully, since both of these portfolios are long term, they are still doing well in the overall sense. Also, given the fact that I do not really have any need to redeem any of my investments, I can wait and hope for things to turn around.
• The markets and stocks tanking also presented a buying opportunity. I have started a secondary portfolio of stocks which I want to run for 10 years. My plan is to invest about 10 lacs in it and so far I have done about 7 lacs. There are some posts in my blog on this and you can go through those for more details.
• I do have a few open ended debt funds and they have not done well. During the year some of my FMP schemes had matured and I invested the principal amounts into hybrid schemes such as Balanced funds and Equity Savings funds.
• My fixed income instruments were the savior for 2018. The Tax free bonds, InvIT funds, PPF, POMIS performed as expected and generated the expected cash flows.
• With the rise of the US Dollar, I sold off some Dollars that I had over the years. I used this money to kick start my secondary stock portfolio.
• I also received the maturity proceeds of an old LIC policy and this was also used in my secondary stock portfolio.

So what is the overall verdict? This was a year of bad returns and high expenditure due to our travels which included trips to Bali and Mauritius. As I said in yesterday’s post my active income was also not as expected. Despite all of these issues, my cash flows were comfortable and I was even able to invest in a secondary stock portfolio. This gives me the confidence that my asset base is capable of supporting my financial independent state with some leeway. Hopefully next year will get better and the asset base will increase to an even more comfortable state.

What are my cash flow plans for 2019 and how will I plan to invest next year? These will be the subjects of my next 2 posts.

Wishing all my readers a very happy and successful 2019.

 

2018 in perspective – life and finances

What with one thing and another, I have not written any blog post for quite a while now. At such times, when I feel lazy to pen down something, it is invariably the responses from the readers that gets me going again. Human ego is an amazing thing and just the feeling there are enough people to read your post is itself quite gratifying in many ways!!

2018 has been a very interesting year and I was looking at it in different perspectives in the last week. As I have written in several of my blog posts, one must look at life events and lifestyle choices in a holistic manner and plan for them – finance is a way to support these events and choices, so it necessarily plays a supporting role and not a determining one. In simpler words, availability of money and investing for the same is important but the key issue is what you are needing it for. It is this need for money that is unique to each individual, yet we often disregard this fundamental aspect. Viewed in this context, it makes sense to review the major life situations first and then look at the finances next.

To begin with, professionally the year was not really a very satisfying one for me. I had begun an assignment with an SME company under certain understanding but the owner of the company did not stick to his part of the deal. While I am sure these things happen from time to time, it was a first for me and to that extent a disappointing experience. A good learning will be to choose engagements more carefully next year. In terms of the venture idea I have been toying with, I did manage to get some ideas formulated and it is in a good spot to move ahead now, lot to be done next year. Overall though, both in terms of the activities and active income generation the year was not as good as I had hoped it would be.

On the personal front however, a lot of good things happened in 2018 and it was probably one of the best years for our family. At our stage in life a lot gets defined by how well the children are doing and this year both of them have excelled in their careers. My daughter Rinki completed her MBA from XLRI and has joined a company of her choice, where she is doing rather well. My son Ronju is in his last internship as part of his course work in BITS and he has already got a job offer. In effect, both of them are financially independent and do not need my financial support any longer. As a family, we were also staying together after a long time as both my children worked in Hyderabad for the past few months. 

Travel has been a constant theme for both Lipi and me, this year was no different. We started off with a trip to Khajuraho in February, went to Goa for a week in March with our children, visited Purulia in West Bengal for two short trips, had a family vacation to Bali in May, celebrated our silver anniversary with a Mauritius trip in September and wound up the year with an absolutely delightful trip to MP in December. As you can well imagine, all of this were rather expensive and my travel budget shot through the roof. Be that as it may, all the travel was great fun and I will do it again if I get half the chance !!

On that note, let me transition to my finances for the year. Despite my relative shortfall in active income, the cushion I had with my passive income was good enough for all my expenditure. The bulk of my cash inflows came from the below sources :-

• Interest from Tax free bonds, InvIT funds and POMIS.
• Dividends from Stocks and Equity Mutual funds.
• Capital Gains made through maturity of FMP schemes.
• Maturity proceeds of an LIC policy.
• Rental income from my Chennai apartment.

Of course, there were other passive income such as from PPF and Debt funds but I have just let them grow as usual. Unless absolutely needed I do not want to utilize any of these for the next decade or so. For this year my passive income from part of my portfolio was enough to take care of my expenses with enhanced travel and even let me do some new investments in a secondary portfolio of stocks.

So far so good then, but what about the 2019 plans and beyond? Well, let me write about it in my next post.

Society, Economy, Politics -how will markets react now ?

India of 2018 is a very interesting case study of contradictions in many ways. We have a government that was taken to be long term, at least till 2024, but with the election results this week it is clearly under siege. We have an opposition buoyed and flush with the recent electoral success but pulling in too many directions that may militate against it mounting an effective challenge. We are the fastest growing large economy in the world but our GDP growth rate is again under pressure. With so many things happening in the society, economy and politics, how are our markets likely to react?

Let us take society first – it is easy to see that we live in deeply divided times. The fault lines between different parts of our society is very clear. In terms of religion, the division is wide among Hindus and Muslims with both feeling they are hard done by. The non decision by the courts on the Ram temple issue has clearly caused a deeper divide and is like a festering wound that is now taking a heavy toll on communal harmony. The cow slaughter issue is central to a lot of disharmony and is not being handled properly by the governments. People today lack faith in law and order and are increasing taking the law into their own hands as evidenced by the spate of lynchings across the country, the latest being the sad death of a policeman. Religion is only one side of the coin though, caste is the other. Even today the dalits are treated atrociously in India and that is a great shame. As they get better educated and relatively improve their economic state, they are becoming more assertive, obviously to the chagrin of the upper castes. In general the society is also high on aspiration, education and jobs being the prime drivers. Sadly there is a clear disconnect between them and a lot of educated youth are not finding any avenues to use that education. Changes must be brought through an entrepreneurial revolution but even with government financing the success here is mixed as yet. This is leading to increased demand of more and more reservations, which obviously is not a solution. The societal disparities are also staggering and while the overall per-capita income and living standards rise have reduced poverty, the difference in how the various classes of society lives is mind boggling. All of these create a society in constant tension, reflected by so many unsavory incidents we get to hear of almost daily.

Coming to the economy, agrarian distress is definitely a cause for great concern. A lot of people even today depend on agriculture in our country and the reality is it is virtually impossible to make a living out of it, unless things are changed drastically. Elimination of middlemen and focusing on streamlining of the supply chain is the need of the hour but the vested interests are way too strong for it to get done easily. The focus therefore wrongly shifts to loan waivers which is akin to applying balm when you really need surgery. GST has been a much needed tax reform but the implications of it are that people need to pay taxes honestly after declaring their incomes – again something that most Indians are wont to do. It has to be accepted now that demonetization had a lot of short term pain for the economy and people, it unfortunately was also not followed up properly to get the tax windfall that was quite possible to achieve. Our GDP growth could easily have hit 8 % but for this step and the country is paying a heavy price for it. The tax system has really had no reforms other than the GST and compliance, though improved, have not really led to any game changing tax collection buoyancy. Finally, corporate earnings are still languishing and do not enthuse the markets. So if you had to evaluate the overall economy over the last 4 years, you will probably see a lot of long term initiatives but no great short term performance.

What of politics then? Well, about a year back BJP pretty much ruled most of India and it was a foregone conclusion that they will come back to power in 2019. However, the scene has changed rather dramatically in the last few months culminating in the Congress win of 3 states. BJP or NDA might still come back to power but it will be a tough battle and one they may well lose too. In democracy that is not an issue but the two opposing sides are so bitterly opposed to each other that any change of government will create a fair bit of upheaval throughout the country. Turbulent times ahead as the opposition will seek to hammer home the advantage they have got and BJP will try to take initiatives to win back the goodwill of people.

How will the markets take in all this? To begin with the markets have taken the BJP losses rather well as they were probably factored in. Over the last year the indices have not really gone anywhere, the mid caps and the small caps having taken the biggest hits. FII participation has been lukewarm at best and looks to continue in the same vein with other markets looking more attractive than India. SIP money coming in regularly into the markets courtesy retail participation has been a saving grace for the markets this year and this may well continue. As I see it the markets will take a pause for now and Nifty will be range bound between 10400 and 10800, maybe touching 11000 on the upper end. By the time we get into the budget exercise the markets will react one way or the other. BJP will be forced to take populist measures and this may cause markets to react negatively. My sense is that Nifty can get down to 9500 or so at the lower end and is unlikely to cross 11000 at the upper end. This will hold true till May, unless the budget is significantly positive for corporate India. The other aspect is of course the annual results and earning growth which is unlikely to be very enthusing. Beyond the May 2019 elections, markets will rise as long as there is a stable government.

So what should you do about your investments then? I will write about it in the next post.

 

Debt returns going south poses a great challenge for investors

2018 has indeed been a rather sad year for equity related investments. The indices by themselves have given poor returns, the broader markets have under-performed more significantly and select stocks have really tanked in a brutal manner. However, people investing in equity for a long time, such as me, can take this in their stride knowing that a good year in 2019 or after can redress this to some extent. 

There is however, another issue which many of us miss badly. Not only have equity returns plummeted, Debt returns have gone south too. Let us look at some data for the best performing funds in different categories to first understand the factual context :-

• For long term Debt funds the best one year returns are between 2.6 % and 3.5 %.
• For same category 3 year returns are between 6.5 % and 7.1 %. Returns for 5 years range between 7.9 % and 9.1 %.
• For short term Debt funds the best one year returns are between 5.9 % and 6.2 %.
• For same category 3 year returns are between 7.3 % and 7.6 %. Returns for 5 years range between 8.4 % and 8.7 %.

So what does this mean in real terms to an investor who has parked some of his money in Debt funds as part of his asset allocation? Firstly, while the 5 year returns still look good for the best performing Debt funds, these will now start to get impacted by the poor current performance. Secondly, if you are parking your money for 2-3 years then Long term Debt funds are a really bad idea, you might as well keep your money in FD or Post office. Thirdly, if you are looking at some regular income and had assumed you will get 8 % every year, you really need to rethink your strategy.

How dramatic has been the change over the last 5 years or so? Let me illustrate this by a personal example. As many of you know, I have substantial investments in FMP type of products as I like the relative stability they bring to expected returns. As and when they get redeemed, I reinvest the Principal and use the capital gains for my regular expenses in my current FI state. Now look at the following data :-

• Recently there was a redemption of an FMP – ICICI Capital protection plan, where I had invested 2 lacs. This was a 5 year plan.
• Yesterday I received 3.21 lacs for it and the XIRR was 9.93 % over the 5 year period.
• An exactly similar scheme I had invested in December 2016 now has an XIRR of 5.26 % only.

It will be obvious from the above that the first investment suited my situation perfectly and the second is really not doing so. As I had said earlier, dramatic recovery from this 5.26 % XIRR is unlikely. At best I can hope for is 6 % or so and this will hardly be very worthwhile, given the lock-in period of 3 years plus.

So the question remains as to where should one put his or her money? More specifically for me, where should I put my 2 lacs now? Actually, it is about 3 lacs as I do not really need the capital gains amount for my regular expenditure. 

I will try to address this in the next post.

How has my first Mutual fund investment performed?

Over the last week, I have been taking a closer look at some investments I have done in my early days as an investor and trying to see how they have worked out. While readers will know by now that I started investing in stocks since 1990, my foray into the Mutual fund world was only in the year 2001. This was after we had shifted to Chennai in 1998 and, despite having 2 young kids with high expenses, happily found that we had quite a bit of invest-able surplus every month, thanks to a strategic job change that had resulted in a pretty decent take home compensation.

When we were approached by a Financial adviser who wanted us to invest in equity through the vehicle of MF, it seemed a natural progression from my investments in stocks. To start with we wanted to look at a large cap fund and see how things worked out for a while. The choice of Franklin Blue Chip fund was a logical one among the schemes that were in vogue then. We started off with a 10000 Rs investment in February 2001 and over the next 12 months this investment went to 50000 Rs. The NAV of the scheme was around 10 Rs only during those days, courtesy the markets having tanked due to the Harshad Mehta scam and we got 4722 units for our investment. With one thing and another I did not keep up with my investments in this after January 2002 – our focus shifted to buying an apartment in Chennai, we started a stock portfolio in a meaningful way and my professional life got busy. When we did start our MF investments again in 2008, the MF universe had changed quite a bit and there were many schemes on offer. 

So the long and the short of the story is that I have had the investment in FT Blue chip fund for nearly 17 years now. This makes it an ideal investment candidate to check if equity investments in the long run have really worked. We had invested in the dividend option  and the fund has declared a dividend unfailingly every year since 2002. Some basic data on the fund performance is as follows :-

• Dividends over the year have added up to 2.85 lacs
• Current value of my units in this scheme is 1.83 lacs
• As I said earlier, our investment between Feb 2001 and Jan 2002 was 50000 Rs
• From the FT site, I can see that this translates to an XIRR of 30 % plus.

Without getting into any discussions of relative performance etc, one can see quite easily from the above that the investment has done rather well. Though future projections are fraught with risks, this should encourage all investors to invest in MF schemes for the long term. The expectations should not center around the XIRR here, but even with an 18 % XIRR your investment will grow 16 fold in 16 years, which is remarkable.

Was a dividend option a good idea? Yes, for us it was as it enabled us to spend on some things during the years when money supply was tight, despite my high income, due to our buying the Chennai apartment and trying to pay it off quickly. I also have a feeling that taking some money off the scheme has worked well in the bad years of the market. This has to be corroborated by data and I will do a separate post on that soon.

The bottom line though is this – investment in MF is a very viable option in the Indian markets for the long term. If you have time on your side, start this now. In fact, any investor with more than 10 years till he needs the money must do so.