How to use my blog effectively

I started this blog on June 17th of this year, so it has been around for about 4 months and a fortnight. I must say that I am very surprised at the reception the blog has had. The reason I started it was simple – I knew that a blog with such personal dimension in creating awareness about how to arrive at financial independence did not exist, and given the current interest in personal finance related issues, I was quite sure of a decent readership. Even so, a readership of about 55000 views in this period is astounding to me – it has also encouraged me to keep writing regularly, as the 160 posts will show.

Many readers of the blog have asked me queries ranging from insurance to stock picking to mutual funds and everything in between. While I try to answer every query addressed to me, it is getting more difficult to do so with the increasing number of transactions. More importantly, a lot of these queries would actually get addressed if the reader took care to search the blog for the relevant posts and read these properly. At another level, I may also be responsible to a degree inasmuch as I have not explicitly explained how the blog can be used effectively. So, here is my attempt to do so.

Just below the Title of the blog you will see the link “For first time Readers”. Any new reader or even the old ones should definitely click on this link. It will take you to a post which has further links to a host of useful guides that I have written over the last 4 months. All of these are a must read for anyone interested in personal finance and trying to chart out a plan of their own in their journey towards financial independence. Be sure to click on each of the hyperlinks to read the posts.

The top box on the right hand panel is for search, where you can search for any phrase. For example ” MF Portfolio” will lead you to some posts where this phrase is a part of. If you provide your email id by clicking on the Button “Follow”, you will get an email intimation whenever a new post is published in the blog. I will recommend you to do this if you are interested in following any new posts that I write. Going down the right hand panel, you will see a listing of the recent posts and the archives by month. If you have started reading my blog in October, you may want to click on the earlier month’s to check out what I had written about in those months.

The “Categories” section is obviously the most interesting. I have tried to make the category names as self-explanatory as possible and I hope you will not have problems in using this well. For example you can click on the category SIP to check out all the posts I have written on it. A combination of this and the search feature should be getting you what you want.

How can you get in touch with me if you have a question? Well, there are several ways and it really depends on why you want to interact with me. See below:-

  • If you have a query or a comment on a post I have written then you can simply comment in the blog itself. I normally respond to all the comments within a day.
  • If your query is specific to stock markets or stocks, I encourage you to become member of my Facebook group “Market Musings” and post your query there. You will get a response not only from me but also from a lot of other members who are active in the stock market.
  • If you have a query on your personal investment then the best way will be to send me a message on Facebook Messenger. I normally respond within 1 day here too.
  • If you want me to help you with your financial plan send me a message and ask for my email id. Once I respond with it, you can send me the details through email.

I will of course, continue to write the blog but feel that it already contains a wealth of information that you can use effectively in planning out your route to financial independence. Read it and use it well – it does have potential to decisively change your life for the better.

Advertisements

50 plus but not financially organized – can you afford to retire?

I had a rather interesting conversation with a friend the other day. We go back a long time, to our days in college, though of late our interactions are in the cyber space only. He had read my blog and wanted to know why I did not write about people who were 50 and wanted to retire for a variety of reasons. When I gave him the idea of reading my posts on financial independence and generation of passive income he said – ” I know you had planned it out but what about the many people who have not planned it out but want to do it suddenly. They may also not be as organized as you are.”

Well, everything in life really cannot be planned and it is a fact of life that voluntary or involuntary separation from your job at an age of 50 plus, will make it rather difficult for you to get an equivalent job that you will be happy doing. At this stage, the normal question to come up will be, “do I have enough to just chuck it all?”. Let us see whether you do or not. For the purpose of this post, I will be making certain assumptions on the profile of the person. When you are trying to apply this situation to your own, you can make the suitable modifications.

  • Ankur Anand is 52 years old, his wife Seema is 48 and his only child Karishma is 22. 
  • Ankur works in an IT MNC, Seema is a homemaker and Karishma has just completed her Engineering and has plans to get into an MBA program in India from one of the top IIM s.
  • Ankur has his own apartment in Bangalore which is paid for. His outstanding goals apart from retirement are Karishma’s PG education that may cost about 20 lacs and her marriage, 5 years away costing 15 lacs in today’s price.
  • He has invested in MF and stocks but not for any particular goal. These portfolio values are currently 1.2 crores and 80 lacs respectively. He has PPF and FD totaling about 60 lacs.
  • His PF and Gratuity along with stock options will come to about 2 crores if he stopped working today.
  • He has looked at an expenditure of 6 lacs per year for household expenses and another 2 lacs per year for vacations and other contingencies.

Can Ankur retire today if he wanted to? To answer the question we will need to look at his current goals and retirement expenses and then compare it to his available money. If this basic test holds then the deployment of his money to get an amount of passive income per month is the easier part. So let us look at the goals:-

  • Karishma’s MBA will cost 20 lacs as it is pretty much immediate.
  • Her marriage will cost 15 lacs in today’s money.
  • Ankur expects to live for another 35 years and his current expenses are 8 lacs per year. At zero real rate of return he will be needing 2.8 crores over the 35 years.
  • His total money requirement is therefore 3.15 crores.

Now adding up all his available assets we see that Ankur will have an amount of 4.6 crores if he converted everything to cash today. Therefore he should be quite OK if he retired today. The cushion he has will let him dpend some money on any asset he may want to buy later and for contingencies of living beyond 35 years in retirement.

Now let us look at how the money is to be deployed. He can follow the simple strategy given below:-

  1. Start by withdrawing from PPF and FD while keeping equity intact. Money from PF etc can be put into debt funds which he can start to redeem after PPF / FD are over.
  2. Equity can be shifted partly to debt in the good market years and redeemed after 1 is over. 
  3. Residual equity can be touched only when all debt is exhausted.

Ankur therefore is pretty much set to chuck his job and do whatever he pleases to do. Are you in a similar position to him? If you are 50 and above, I strongly suggest you check it out. You may be quite comfortable with the idea of retiring at 60 but it never harms to check out your readiness.

My successful stock picks – a sample

Of late I have been inundated with a lot of requests for sharing my stock portfolio, the price at which I bought the stocks etc. I think these come from two categories of people – some who feel they would be able to learn something from what I had done and others who want to check and probably tell me what I had done wrong and why. Be that as it may, I think both of these types will not get what the want from what I am about to share. These picks are mostly at an earlier point of time and has to be seen in the context of how I operate. However, they do provide some general learning, which may be of use.

Let me start with Mindtree, one of my stock picks in the IT space that I have been very happy with. The details are:-

  • I started investing in Mindtree in July 2007, as it looked to be a rather promising Mid tier IT company. I knew some people in charge there and was confident that the company will do well in the long run.
  • My starting price was 663 and the stock started correcting immediately thereafter. Between 30/7/2007 and 1/11/2007 the stock went down from 663 to 463 and I made a total of 6 purchases each for the same number of shares.
  • My final purchase was after the turmoil of 2008 at a price of 318.
  • After the split my shares doubled and the price was 1500 plus . This was a multiple of 4+ on the invested price. Subsequent to another bonus the CMP is nearly 600 now.
  • I am pretty sure that over the next few years a price of 1000 or so is very achievable for the stock.
  • Mindtree is a good dividend paying company and that is separate from the above.

The next company is the Pharma company Dr Reddys Labs. The details are:-

  • I wanted to have a few Pharma blue chip companies in my portfolio and DRL was an obvious choice.
  • Like Mindtree, most of my investments in DRL were between July 2007 and March 2009. The acquisition price started at 632 and went down to 379 for my last purchase. Average cost of acquisition was 540 Rs.
  • The CMP of DRL today is 3012 Rs and I expect it to go up to 5000 plus in the next 2-3 years.
  • The gains in the stock are of the same scale as those of Mindtree.

The next company is the Automobile market leader Maruti. The details are:-

  • I wanted to have Auto sector represented in my portfolio and Maruti was an obvious choice here.
  • My first purchase was at 741 Rs in June 2007 and the last one was in October 2008 at 515 Rs.
  • CMP of Maruti is nearly 5000 today and it is very likely to cross 6000 in this FY itself.
  • My investment today has multiplied more than 7 times.
  • On an average I get about 20000 Rs dividend per year from this stock.

The next company is also from the Automobile sector and it is M & M. the details are:-

  • I chose this as it complemented Maruti in the commercial vehicles space.
  • I started buying M & M in March 2007 and kept buying till January 2009. My starting point was 723 Rs and the last price I bought it for was 263 Rs. You can imagine the kind of bargain there was, but there were hardly any takers!!
  • After the split adjustment, the current average price is 286 Rs
  • CMP of the stock is 1243 Rs and expectations are for it to reach 2000 Rs sometime in 2016.
  • My investment in this has again multiplied nearly 5 times.
  • This again is a good dividend paying stock, normally declares dividend every quarter.

L & T was my first CD bought way back in 1992. See how it has done so far:-

  • I got 75 shares at the price of 60 Rs each in 1992. This went through bonus/splits etc and today I have 225 shares.
  • This is after I sold some shares in 2007 for 75000 Rs.
  • CMP of L & T is 1518 Rs today and my total realization on a 4500 Rs investment is more than 4 lacs.
  • This is exclusive of the good dividends that L & T normally announces every quarter.
  • There will also be a lot of value unlocking in L & T shares when some of it’s subsidiaries get listed in 2016.

I could go on and list many more but you would have got the point. Of course, I have had spectacular failures too – some of them are Kingfisher Airlines, Reliance Infocom, Teledata Informatics etc. Several of the Infra companies are also not doing well at all but that is a long term play and I am still hopeful of them succeeding.

Many people ask me why I did not continue investing in stocks post 2009 in a significant manner. Firstly, my priorities got focused on my job as CEO of a global company and on my children’s studies as they were getting to a stage where I had to think of their college admissions. Secondly, I thought I had built a good enough portfolio and now it really had to be maintained over a long term. Thirdly due to my thoughts of giving up my corporate career, I needed to invest more in MF and debt products. All such investments have happened since 2008 onward. Finally, after we settled down in Hyderabad my wife got into building a portfolio of her own, though she only holds stocks for short term. Now, I really act as an adviser to her, though it is not easy for us to agree on what price one should buy or sell a stock.

My advise to all investors who are still wondering whether to start with stocks or not – go ahead and begin building a good portfolio over a period of time. Even if 50 % of your picks are successful you will gain much more than any other mode of investment. I absolutely know this in my case and I am sure it’ll be true for you as long as you choose good companies to invest in. No great tips or analysis of ratios is needed – just start with the market leaders first.

SIP – perception exceeds reality by far

I had written a post earlier on how SIP had evolved in India and how it gained in strength post the 2008 crash in the markets. In the last week, when I wrote a few more posts on it questioning the effectiveness of this as a mechanism of investment, I could see from the vehement reactions of many people that it is indeed very firmly entrenched in the psyche of different kinds of people. In that sense it really has been a wonderful marketing success, even though not all investors may have benefited from it in the manner they would have expected to.

Do not get me wrong here. I do believe that for someone who is not investing in equity at all, SIP in MF can be a great starting point. It helps you in instilling a habit of regular and disciplined investment and is a good way of seeing that you are getting progressively closer to your goals. Unfortunately, that is really as much there is to the standard SIP. The problem, as I have explained in my earlier post, is that the current way of SIP investing is clearly unsuited for buying equity. So, while you may well make money in your SIP, the real issue is that you could so easily have done a lot better. People will try to convince you otherwise with a plethora of data and calculations but, think through it yourself and look at the MF NAV over the last 2-3 months, you will easily understand what I am saying.

Now who are the people who have been endorsing SIP from the rooftops and why have they been doing so? Well, different categories of people have different motivations, so let us take a look at each one of them.

To start with there are the Fund houses and the MF distributors. The motivation of these people is not difficult to understand. The toughest aspect of any business today is acquiring customers – if you get a customer to sign up for a 5 year SIP you are doing rather well for yourself. For the MF distributors, it is a source of recurring commission to them as long as the customer keeps the SIP active.

Why are the financial advisers and several bloggers excitedly promoting SIP? Well, for one it is a rather simple concept, easy to explain and understand. Also, for people who have never invested in stocks, starting with MF and something like SIP is simpler. Many of these people also get caught into thinking that they are actually into a very good thing. The zeal with which SIP is defended actually tells you that many people genuinely feel it is a great concept.

Finally, why are the customers so deeply entrenched. Well firstly, there is the endowment effect. You are new to equity when you start SIP and returns of 12 – 15 % over the last 3-4 years when all that you have been used to are 8-9 % debt returns seem really wonderful. You want to support it as you feel it is a great deal, you want your friends and relatives to get a benefit from this wonderful thing too. You keep reading everywhere how great a concept SIP is and so on. When the markets are going up, your adviser tells you that your portfolio is having a bonanza, even if you are paying a higher amount for your units. When the markets go down, he says that you are now having the great advantage of buying your units at a bargain price and surely all Indians love a good bargain?

Like in the larger world the rich only get richer and the largest borrowers from banks get even larger loans, so in the world of investment something successful gets even more investors flocking to it. This has happened for PPF, ULIP, several LIC policies, Tax free bonds and also to the MF investments through SIP. So much so that many end investors who invest through their brokers do not really even know what exactly they are investing in – many have actually told me that they invest in SIP and that it is hugely superior to stocks as their broker has told them so.

Again, despite the efforts of SEBI against wrong selling, without making the customer aware of what he is getting into is rampant in our country. Many customers are told that SIP is quite similar to the debt products over the long term of 10-15 years, only the rate of return you get is much higher than the debt products people normally invest in. I mean, isn’t this downright wrong selling, never mind the fact that the investor should really not be so gullible.

My conclusion is that SIP is a good mechanism if one uses it in an intelligent manner and not be constrained by the common method of investing the same amount on the same day every month. However, a lot of people are being drawn into it without the full picture and that is never a good thing, even if some investors may yet hopefully do well out of it. As for the smarter investors the standard SIP is a clear no-no. You can do a whole lot better with your money – I will explain how in the next post.

An alternative to standard SIP – why and how

I have written several posts on SIP investments in MF now and most of the issues are really discussed. Readers interested in those can search the blog if they are interested in reading them. A question that many have asked me is why I do not favor the standard SIP and in that case, how do I then plan to invest in Mutual funds. I wanted to address both these issues here.

Let me first state that I do think MF is a good investment vehicle for people who do not have the time or inclination to invest in direct stocks. Even for people into direct stocks, my opinion has always been that you must have an MF portfolio as it is far easier to deal with goal based investing through this. Stocks are like the icing on the cake for many of us, you can generate great long term wealth through it.

The issue really is that equity MF have stocks as the underlying asset and, one you understand this, it is very clear to see why the route of standard SIP is clearly not the way to go. Face this – would you ever buy a stock on a particular day of the month, irrespective of the price? Of course not and you are probably now thinking there is something seriously wrong with me!! Yet, you think nothing about doing exactly the same for MF units? A lot of the SIP dates are in the first 10 days of the month as it is the time when all salaried people get their cash inflows into their banks. That may be convenient for the MF distributors but do remember that the stock markets do not care about these dates. Sure you may get lucky and buy your units at a low price if your SIP date coincides with a downturn in the market. However, what is the real probability of that? I would say very low. And now, what is the probability of this happening over 120 months if your SIP is for 10 years? I am not a statistician but the probability is pretty much zero.

However, whenever this discussion comes up, people invested in SIP simply refuse to accept it due to the endowment effect – we like what we have and are not keen to change. Well, I too have been a victim of this since 2008. For the last 7 years I have religiously invested in the standard SIP, month on month. I did supplement it with some one time investments but essentially SIP was the basic MF investment. It is only when I started the blog that I started to think deeply on this and was able to understand that it made very little sense to do it the way I was. The proof of the pudding is always in the eating – so I decided to do a performance analysis of my SIP investments since October 2013. I had written about this in my last post. Interestingly ICICI Focused Blue Chip which is a large cap fund, had given an XIRR of 14.69 % over 2 years. Pretty good you’ll say, till I realized that Nifty had given returns of 34 % in the same period. I am sure that had my SIP been on some other days, the results may have been a tad different. I am sure you get the point though.

Enough said – the standard SIP is pushed heavily by a lot of people selling it because it suits their interest. As an investor I have to look into my interest and it is not being served well by the standard SIP. There are a few different ways to achieve this – take a look at some of the possible ways:-

  • One way is to reduce the standard SIP amount by 50 % and invest the rest on a day where the level of the relevant index falls sharply. Use Nifty for Large cap, Midcap index for mid caps etc.
  • You can also just keep checking the 200 DMA of the relevant index and invest on a day when you see it fall lower than this. Do not worry if the market is rising, it will always have days of correction.
  • If you cannot invest every month, it is no big deal. You would rather invest 2 months late if the NAV is 20 Rs instead of 21.5. Remember for equity investments, time you buy is irrelevant, the level that you buy it in is.
  • If you are looking into investing in both debt and equity, managing this is fairly simple – invest in debt when you do not want to invest in equity and vice versa.

So far so good, but what exactly will I do for investing in MF myself? I am working on a plan as I need to put that into operation from November. Hopefully, I will be able to share it in a post this week.

Some of my MF investments – An analysis

I am currently in Kuwait and have some more time in my hands than usual. Today being a holiday here, I decided to take stock of some of my MF investments. Am sharing my analysis in the post as I feel it will illustrate some of the points that I have spoken about, regarding investments in MF schemes, over a period of time in my earlier posts.

Let me start by two funds that I have for a very long time. In 2001 I purchased some units of ICICI Technology fund. The level of purchase was at NAV of 3 Rs or so, as the fund was doing very poorly then due to the IT recession of 2000. Some things to note about this investment are as follows:

  • Current NAV of the fund is 33.16. XIRR for the past 14 years has been 24.77 %
  • The XIRR is linked to the low level I bought the fund.
  • People who bought it in the NFO stage at 10 Rs NAV, would have XIRR at only about 10 %
  • This clearly shows the impact of the purchase price on your returns.

Another fund I invested in was ICICI Exports and Other Services in 2005 when it had the NFO. Note below:

  • Purchase NAV was 10 Rs and current value is 48.61.
  • XIRR of the fund over last 10 years has been 17 %.
  • Both the above examples show that over a longish period the growth has been reasonable.

Note also that the sector fund has really done worse than the more general purpose fund. It only appears the sector fund has done better as I had bought it at an NAV of 3 Rs. Such things will really not occur today as the fund managers will be sure to take care that the NAV does not drop to such a low value.

Let us now come to my more recent investments. I had started SIP of 5000 Rs each in 7 funds on October 2013 for 2 years. Most of these are coming to an end now and I wanted to check how they have done.

  • ICICI Focused Bluechip equity fund has given an XIRR of 14.69 % over the last 2 years.
  • Over the last 2 years Nifty has grown by about 34 %.
  • If you had the money, it would obviously have made sense to put it in a few well timed installments rather than doing SIP. When markets fluctuate randomly but with an overall positive bias, SIP tends to lose out more often than not.
  • In the same period ICICI Value Discovery fund has given an XIRR of 30.42 %. This supports my view that well managed multi-cap funds looking for value investments are likely to give superior returns as compared to funds which are essentially investing in large cap stocks.
  • DSP BR Micro cap fund has given an XIRR of greater than 35 %. This again goes on to show that you must embrace small cap funds as part of your portfolio, not shy away from them thinking that they will be volatile. Yes, volatility is a fact of life but then so is growth.

Finally let me write about a close ended fund that I had invested in 2014. My idea of doing so was mainly for dividend from it to form a part of my passive income, that I needed to take care of my expenses when I would not be in a regular job.

  • ICICI Prudential Value Fund – Series 3 has given an XIRR of 40.2 % over the last 18 months. This is in addition to the dividends of 45000 Rs that it has paid out. The investment made was 2,00,000 Rs.
  • I think this illustrates the point that not all close ended schemes are bad, it really depends on the context in which you are using it. From my viewpoint this has been a pretty good investment.
  • The relative insulation from the vagaries of redemption and the ability to pick the right stocks for the fund managers seem to have worked well for these stocks.

I have had some lessons from this analysis and most of them are a corroboration of what I thought would happen. From the next month, I will change my investment plan in mutual funds quite a bit.

You must not forget these 3 rules of equity investing

It has never ceased to amaze me how people with a high level of intelligence and very successful in their profession or work, can sometimes get it so completely wrong when it comes to understanding the basic characteristics of equity investing. Now that my blog is getting a lot of traction, I keep interacting with many people where this becomes more evident. The other day when I was trying to explain equity investment rules to a friend, he wanted to know what are the top 3 rules that one had to keep in mind. The motivation of this post comes from that discussion.

The first rule is simple – Equity returns do not compound. Now, I know you may have read in scores of blogs and heard from many financial planners that they do, but it does not matter. What is wrong will remain wrong, irrespective of how many people tell it and how vehemently they do so. If you are interested in details, look at another blog post of mine where I have written about it with clear reasoning as to why the returns from equity do not compound. What is the upshot of this?

The second rule that follows from the first is this – What time you invest in equity is not important, what really matters is the level at which you invest. This is easier to understand as you must have faced it many a time when investing in SIP. You may invest in an MF with NAV of 14.5 per unit in July 2015 and suddenly see the NAV slipping to 13.4 per unit in 2 months time. Obviously, no one can definitively predict the market, but to say that you should just keep investing at a monthly frequency, irrespective of what is happening to the market is surely not correct at all. That would be true for debt products, where the earlier you invest the more returns you are likely to get, for there the returns do compound. Let us say the Nifty is at 8200 today and from the broad trends I know that the probability of it falling to 7800 in the next 2 months is quite high – should I still wear my blinkers and keep contributing to my monthly SIP? No way.

The third rule of equity investing that you must never forget is this – Never put yourself in a situation where you have to redeem your equity investments in a bad market. We all know that we are investing for our goals and when the goal comes we need to redeem our financial investments in order to meet the goals. However, if you are in a bad market you may somehow see your portfolio erode greatly at the time of redemption. This really is the greatest risk in equity investments, when by selling in a poor market you convert your notional losses to real ones. Again, if you are interested you can search the blog and read some posts on this topic and how you can avoid being in this situation. The only practical way is to have a corresponding debt portfolio that you can tap into, should such a market situation arise.

This then are the 3 rules of equity, never to be forgotten. How do you implement them in real life? There are many ways to do it but let me give some pointers that you can easily use.

  • Start investing in debt products like PPF first – unlike equity returns, debt returns do compound handsomely over a long period of time. Fortunately PF is compulsory for most of the people in the organized sector.
  • Create a parallel strong debt portfolio along with your MF and stock portfolio. This will obviate the need of redeeming equity in a bad market, which is really the riskiest part of equity investing.
  • Come out of the mindset that you must invest 5000 or 10000 every month in a particular fund for donkey’s years to get anywhere with your goals. Regular investment in equity is a good practice but there is no need at all to be rigid. If you are investing 1,20,000 a year in a fund, you can still do the same in a much more productive manner.

For people interested in knowing more about all that I have referred to here, without getting into the details, I urge you to explore the blog and read through the posts on Stocks, MF, SIP and Goal based financial planning. It may completely change the way you are investing right now.