Your MF buying plan to replace SIP

I am happy to note both the readership and the reactions to my last post on how I planned to buy my large cap oriented MF now. As some of you have rightly pointed out the general framework of investing can be tried out for other categories of funds too, of course the relevant indices would be different. Also, it is possible to track the Mutual fund NAV itself instead of index levels but that data is not easily available. Maybe some reader can try to make a calculator that outputs such information readily. The method will definitely be better if you have information about 200 DMA for the relevant MF NAV etc.

Now many people have got back to me and said that even though at a logical level my plan makes sense there are a few serious issues if they try to implement it. Let us first outline those issues before I respond to them:-

  1. What will happen if the market keeps going up as in a bull run – does it mean we do not buy MF at all?
  2. You want to buy at a particular level, but the markets may go down more.
  3. I may not have 20 % of my planned investment with me when it is time to buy the MF based on your suggestion.

For starters, I think it is very unlikely that we will have a multi-year bull run any time soon. But, even if we do, it does not mean that you will not be buying MF through this method. You need to understand that in a bull run too, there are often corrections and some of them are rather deep. In such situations the 50 DMA and 30 DMA will keep declining and you can buy when the difference between these and market levels is minimal. Of course if the correction is such that the current market level goes below the 30 DMA then it will be ideal.

The second issue is that you must fix a level at which you want to buy. However, this is not sacrosanct and you will evaluate the market situation before you actually buy. For example, I want to buy my large cap MF when Nifty reaches 7800. Now, if I see the Nifty falling rapidly due to some adverse sentiments related to the Fed rate hike in the US, I will obviously wait for a couple of days to see where things go. You always need to have an idea of a level at which you want to buy ( or sell ) in the markets but you decide on the actual transaction based on the ground situation.

The third issue is the availability of money to buy the required units at the right time. There are no easy answers to this but one simple way can be to have a slightly inflated Emergency fund. Of course, you must remember to replenish it as quickly as you can, preferably on the next pay day.

Now that we have addressed all these issues, let me give you an investment approach that I follow myself and recommend to others. You need to understand it completely and implement fully if you are interested, half measures will not do.

  • 3 portfolios Debt, MF and Stocks are all you have.
  • Decide on your overall annual investment and their break-up. For example you can say 3 lacs of Debt ( PF and PPF equally), 3 lacs of MF and 1 lac of stocks. This is just an example.
  • In the starting months if you are not investing in MF due to market levels not being appropriate, invest in PPF or stocks.
  • Once you run out of PPF amount of 1.5 lacs and stocks of 1 lac then keep the money in Liquid funds or just let it be in SB account.

At the end of the day you need to decide how you will invest for yourself. If you still think that standard SIP with the same amount being put on the same date every month, irrespective of the market levels is really the way you want to go about things, then you should do so. It is important to feel comfortable about what you do.

You just need to make sure that your comfort is not based on the fact that you do not know a better way – well, now you do.

My MF buying plan – for large cap funds

Over the past few months I have written several posts on why I do not think investing in the SIP mode in MF is the right way to go about things. Yes, I myself have done it for a long time of 7 years but once you realize that it is a wrong method you need to change. Readers who are interested in understanding my thought process could go and read these posts. The current one is more about the mechanism that I am currently following in order to buy MF.

In this post let me talk of buying large cap oriented MF, which is one category of funds that most investors want to invest in. My last SIP in this category was in ICICI Focused Bluechip – Direct plan and I want to continue in the same fund. Now, had I continued in the SIP mode, my investment of 5000 would have been on tne 7th of each month. In the present context I have not bought anything since October. My plan is to invest about 70000 in this fund between now and 2016 end.

If you look at some of the NIFTY data points closely, you will observe the following. This data is available on several websites.

  • Current NIFTY level is 7942, YTD returns are -4.1%
  • 1 year, 6 months, 1 month returns are all negative.
  • 30 DMA value is 8012, 50 DMA value is 7996
  • 150 DMA value is 8181, 200 DMA value is 8307

Obviously if the large cap fund is follows Nifty reasonably closely then all your SIP that you have done this year will give negative returns. You can go ahead and check for yourself if this is happening. I think this establishes quite conclusively that doing SIP in this year was clearly not a good idea as far as large cap funds are concerned.

So what is the mechanism that I want to use for buying this particular fund. The broad idea I am using can be summarized in these steps:-

  1. Never buy if current Nifty level exceeds 200 DMA value or 150 DMA value.
  2. Current Nifty levels between 30 DMA and 50 DMA are a possible buy range.
  3. Right now we are lower than 30 DMA, so we can possibly buy.
  4. However, the trend to study is the 30 DMA and 50 DMA – if these are declining from these levels then I will wait to see a reversal of trend.
  5. Keep a watch for any big news possibility – in the next few days US Fed decision on hiking rates and our own GST bill progress will be the two major ones.

Based on all of these, I feel that a level of around 7800 or so on the Nifty is quite possible. If that happens and the above mechanism is validated I will probably put about 20 % of my intended investment or 14000. Note that I will only buy 4-6 times in a year and never buy when the levels are not right. Equity is simply not bought that way, people who say that you should be buying on a regular frequency are completely wrong.

I suggest you take a serious look at how your large cap MF purchases through SIP have fared in the past one year and take your own decisions. This method will do much better – there is no doubt on that at all.

Retirement corpus – what is your number?

I had asked a question yesterday on the AIFW group – just wanted to check 2 simple numbers namely current annual expenses and the retirement corpus that people would like to have. It was quite interesting to view some of the responses and I wanted to discuss the same in this post.

To start with let me address the issue that many of the respondents have raised – why have I not asked for the time left in years to retire. Well, there is a simple answer to that. I was wanting to see the relationship that people implicitly put between the two parameters of annual expenditure and retirement corpus. As that did not have anything to do with the time left to retire, I had not asked for that data.

Let us now look at the responses:-

  • Annual expenditure ranged from 1.8 lacs to 16 lacs
  • Retirement corpus desired, ranged from 1 crore to 100 crores.

What is it that one can say about the responses on current annual expenditure? For one, people with lower expenditure are probably at the beginning of their earning life and it is likely that their expenses will increase over the next few years. Similarly, people who are spending 8 lacs and above per year are either having school going children or have some hobby like traveling that costs a fair bit. Over a period of time the expenses of such people are likely to reduce. In general you will see that annual expenditure will start at some figure like 2-3 lacs and keep going up over a period of time till your children are out of college etc. In my own case, when I started working in 1988, my annual expenditure was less than 50000 – had to be so as I did not earn very much more !! In the calendar year 2014, my expenses were about 20 lacs. As I have stated in another post, this included the college fees of children and also a 2 week trip to Australia that came to about 5 lacs. I know this is not representative of my retired state, where my annual expenses will probably be about 8 lacs.

Now, for the purpose of retirement corpus we will need to assume that you have either completed your other financial goals or have some separate arrangement for the same. For example, if I am to look at my retirement corpus today, I will not include expenses related to my son’s graduation, my daughter’s post graduation or their marriages in it. No doubt, these will have to be funded but that is a separate exercise. The retirement corpus has a single minded goal – to take care of the current ( or changed ) lifestyle that you and your spouse want to have for the number of years that you think you are likely to live for. 

With the above explained, let us now look at the framework that you can use to arrive at a retirement corpus that will comfortably see you through the number of years in retirement. I am putting this in a very simple sequence of steps – you do not need a calculator just some pen and paper and basic expense data of 2014 and 2015. Note that your age and / or the number of years to retirement is irrelevant – however, you do need to know your life span for the calculation. Here are the steps:-

  1. From your last annual expenses take out the items that are unlikely to be there at retirement and add ones that are likely to be introduced.
  2. After you arrive at this normalized annual expenditure, think of the other expenses you may need in your retired life. For example, you may need to replace your car once, go on 2-3 vacations outside India or do something else altogether.
  3. Now, let us say that you are 40 years old, your annual expenses are 10 lacs and you are likely to live till 80 years. A safe retirement corpus for you will be 40 x 10 lacs or 4 crores.
  4. If you want to make it super-safe you may want to add another 5 years expenses but that is not needed. Remember that your current annual expenses will probably go down in future so purchases like the car and foreign vacations can well be accounted for that.

That is it in a nutshell – no complex maths, no running around with inflation projections and return expectations etc. This will work quite well for anyone above 30 who has a family. For younger people who are single, you need to inflate your expenditure to the extent it is likely to go up when you do have a family. For most part this will work quite well.

Now, some person who spends 5 lacs today wanted to have a retirement corpus of 20 crores. There is no harm in it, in fact the principle here should be the more the merrier. However, if he is 30 years old and we inflate his expenses by another 3 lacs it comes to 8 lacs for 50 years. Even with such liberal assumptions, he will be needing only about 4 crores.

Calculate your own retirement number using this framework and you will see how different it is from what you may have thought.

How much did I need to be financially independent?

Over the past few days I have read some interesting posts and associated comments in the Facebook groups, related to how much corpus does one need to be classified as financially independent? The figures suggested ranged from a few crores to 100 crores and more. Much of the discussions were hilarious – someone suggesting that a person in government job can do regular SIP and create a corpus of 100 crores etc – well he will probably have to live and work a few more years than is allowed right now !!

Let us come back to the main point though – I do not know clearly what will be the expenses of the person who started the post. I would imagine, most people in the first 5-7 years of their career will not have an earning of more than 10 lacs and an expense of 5 lacs or so. Of course, you can well have a person working in Google earning 1 crore but we are not talking of such people for the purpose of this post. Since any figure that I put out can be contested by others, I think it will be safe to illustrate the financial independence issue with my own example.

When I looked at 2014 December to see where I stood, this is what I saw:-

  • My expenditure for the year was totally about 20 lacs. This was the maximum that we had ever spent in a year.
  • However children’s education, rent and a vacation to Australia was accounting for 13 lacs of the above.
  • I looked at some more travel needs and decided that if I stayed in my own apartment and arranged for the children’s education through other sources of funds, then my annual needs will be about 8 lacs.
  • This amount of 8 lacs will let me maintain the same lifestyle that I maintain today and let me travel a bit more within India.
  • If I wanted to travel outside India or wanted to replace my car then these needs would have to be funded through other sources.

So how much money would I need for a feeling of comfort in not having to earn any more? Two factors are important – the rate of return your money will earn you and the number of years that you needed to plan for. Now, given the changes that will take place in our economy in the near future, it will be best to assume that your returns will only match inflation. You may be able to get your money work a little harder than this but there is no harm in being conservative. As far as the number of years are concerned, I will take 30 years as the remaining time we ( my wife and I ) have to live.

Based on the above how much did I need if I had to feel comfortable about having enough amount at only zero real rate of return? I did a calculation that looked somewhat like what follows here :-

  1. Retirement corpus = 30 years x 8 lacs/year = 240 lacs
  2. Graduation expenses for daughter = 5 lacs
  3. Graduation expenses for son = 15 lacs
  4. Replacement of car = 12 lacs
  5. Vacations outside India = 4 vacations x 5 lacs/vacation = 20 lacs
  6. Replacement of other durable goods = 5 lacs

So, if I had about 3 crores in December 2014, I could feel quite comfortable about my state of financial independence. It did not mean that I would not earn any more, it just meant that even if I did not have any more active income, I would still be able to do all things important to me. Now as my asset base was considerably more than 3 crores, I could very easily think of myself as being financially independent. Note that I have not taken expenses for the PG education of my children as I think they should ideally be responsible for it. Similarly, I have not outlined their expenses for marriage here, though I do have a separate fund for it. 

What is the safety net that I have in this plan? Well, I am still having an active income from my consultancy practice, so much of my 2015 expenses have been funded from there. Also, the way my assets are structured and deployed I can hope to make more than zero real rate of return. However, the key point is that, even with a fairly high level of expenditure and plans the overall corpus required to be financially independent is not prohibitive and is definitely possible to achieve.

How will this really work for someone who wants to be in the state of FI after say 10 years? I will illustrate with an example in the next post.



Children’s college education – some real data

While there is a lot of statistics floating around on educational inflation and how an investor needs to be prepared for it, there is relatively less actual data available on the real costs and how they will be changing over a period of time while your child is in college. As someone who has both his children studying in college, I think it will be a good idea to share some real life experience in this regard.

The good thing in my examples is that they are both for Engineering colleges and a well reputed private one in BITS. As such the costs that you see in this post can be taken to be fairly representative. Also, the trending of the costs over the years will give you an idea of 2 aspects – how much are you likely to pay in future is one, what is the likely impact if the college going years of your two children overlap is the other.

Let me start with my daughter then, who went to college in July 2012 and will be passing out in 2016 June. When I saw the BITS website for the course fees, it was listed quite clearly that fees are likely to increase every year, though the increase will be capped at 15 %. Now to give you some idea the tuition fees were 70000 in year 1 for each semester and increased to 78500, 89000 and 101000 in the next 3 years. If you calculate the CAGR over 3 years it will be about 13 %, so BITS were clearly not saying things in a lighter vein. However, the total educational expenses are normally a lot more than just the tuition fees and this is the figure one will need to keep in mind. Let us look at the overall educational costs for the 4 year period. You need to remember that each year has 2 semesters. Here are the costs:-

  • Cost for the year 2012 – 2013 was about 2.2 lacs
  • Cost for the year 2013 – 2014 was about 2.6 lacs
  • Cost for the year 2014 – 2015 was about 3.1 lacs
  • Cost for the current FY will be about 3.8 lacs

Total cost for the course is therefore around 11.7 lacs. Note that when she entered college it would have been only about 8.8 lacs for 4 years. The cost escalation is not only for increase in fees but there are lifestyle related issues for the child which may push up the costs further.

Now my son is doing a dual degree course in BITS Goa, where the expenses can get a little higher as compared to Hyderabad. Also, unlike my daughter, his course runs for 5 years. A quick calculation tells me that over the 5 years the cash outflow required will be around 21.4 lacs. Even with the extra year, this is a significantly higher amount than what it cost for getting my daughter through her college.Interestingly a 4 year course starting today will cost about 20 lacs and a 5 year course about 25 lacs.

What does this mean for you in real terms, if your son is 3 years old and will go to college in 15 years? Taking the base cost as 20 lacs for a 4 year course and applying an inflation factor of 12 %, the total cost for his course comes to about 109 lacs. While this seems to be a fantastic figure, do remember that the Tuition fees for BITS has increased by 4 times over the last 8 years. Costs will increase and for the better reputed institutes with sufficient demand they will increase at a faster rate.

The only pragmatic way will be to start putting money in equity aggressively from now. 20000 per month at a return of 12 % will amount to the cost of the course we are talking about. Of course, your child may want to do something else altogether, but it is best to be prepared.

Children’s education expenses – spend more on schooling

Readers of this blog would have probably noticed that I often hold a contrarian position to normally accepted views. This remains true in the case of children’s education. While most people will tell you to be conservative on the schooling part and invest the available money for their college, which is very likely to be expensive, I hold the view that schooling is really the most important part of a child’s education. Of course, if you are fortunate enough to get a great school which does not charge you much then, nothing like it. However, if that is not the case then go ahead and spend what is required.

Not that all schools that do not charge a bomb are necessarily bad – I know of several well run Kendriya Vidyalaya and other government schools that provide excellent education. My own children studied in a low profile neighborhood private school in Chennai when we were there and it was a pretty good school too. However, with the kind of competition that the next generation of children will have to face, it is becoming imperative that they are put in a school which not only gives them a good holistic education, but also prepares them to be well rounded personalities capable of taking on the global stage. A few years back, knowing good English would have been considered enough to get along well in life. Nowadays you need to be smart, articulate, well groomed, preferably knowing a foreign language and having a couple of serious hobbies. All these of course are in addition to the fact that you need to do rather well in studies. After all, the good colleges in Delhi will not even allow you to apply if you do not score above 95 % in your 12th Boards.

I do not want to come across as an elitist here but the fact of life is most of the Government schools and the lower profile private ones, while providing great basic education at times, are simply not equipped to take care of the kind of personality development that is required to make our children successful in the future. The schools that do have such resources and bandwidth will obviously need to charge more for their ability to do such stuff. I am not really talking about the slew of schools that term themselves as international schools, but the good Public schools that are available today in every major city in India. They will cost a fair bit today – I did a quick estimate with a friend and saw that for his two children, who are in classes 2nd and 9th, the average monthly expenditure is about 20000. If you add other non-school related expenses, the cost of education per child probably comes to 1.5 lacs per year.

This is very different from what I spent on my children when we were in Chennai – the annual education related expenses there used to be to the tune of about 70000 for both of them. On the flip side, the school only gave opportunities for extra-curricular activities to students who were clearly good to begin with. My daughter, who is good at public speaking got to represent the school almost regularly from the beginning. My son, on the other hand, was somewhat of an introvert and the school made little or no attempt to develop these skills in him. Of course, with about 50 people in each section the teachers would also have a herculean task, hence it must have been easier to promote people who were good to start with.

When we shifted to Hyderabad my wife and I were keen to put them in a good public school. This was made difficult by the fact we were shifting mid session in December. Fortunately, there were 2 vacancies in the respective classes in one of the reputed public schools there. Though reluctant at first the Principal asked them to take a test by seeing their earlier results  ( both were toppers with hardly ever getting less than 95 in any subject ). Their performance in the tests and my agreeing to fork out about 2 lacs for admission and related expenditure got them into the school. Once there, my daughter continued to do well as usual and topped the school both in her 10th and 12th Boards. She went on to Study Engineering from BITS and is in her final year now, having secured a placement in Accenture.

The transformation in my son was remarkable. He was always good in academics, but the attention that he received in terms of other activities developed him greatly in sports and other pursits. So much so, that he started singing once in a while in the school assembly. His communication skills and general smartness also underwent a good deal of change. When he was in 12th he sat for the NDA exam and got through SSB to secure an all India rank of 20th in the merit list. A lot of the credit will go to him but I do not think that unless he joined his school in Hyderabad, he would have excelled in this way. Of course, he also got into IIM Indore and BITS, so he was in a dilemma. Finally he joined BITS and is doing a dual degree in Msc Maths and BE Computer Science.

In my own case, though I have studied Engineering and MBA from two of the best institutes in India ( Jadavpur university and IIM Calcutta ), I strongly believe my robust foundation built through St Xavier’s school has really helped me to achieve whatever I have achieved in my life. A good school does much more than producing a good student who will do well in the board exams. It actually develops people and makes them capable of handling whatever life has to throw at them. It also produces better citizens with the right kind of attitude to take the country forward in more ways than one.

For readers who have heard from others that all schools are the same – do not believe an iota of it. There are many good schools but not all schools are good. Also, while exorbitant fees do not a good school make, it is a reality that to provide good facilities, infrastructure and teaching quality, such schools will need to charge high fees. My recommendation to all parents who are looking to admit their children to school next year – go ahead and identify a good school and admit them there, even if it costs more than what you thought is reasonable. Of course, you need to be able to afford it.

It can very well turn out to be the best decision that you will ever make for your child.

Financial planning promotions are often lies and half-truths

I am sure there are some great financial planners around as are there people really knowledgeable about personal finance – it is just unfortunate that I have not met them in real life, at least in the Indian context. In a couple of discussions over some web forum a couple of planners got rather upset with me when I expressed my opinion that people who think equity returns compound are obviously not having any financial expertise. One particular person said that I should stop all criticism unless I came up with specific examples and could name the planners promoting lies and half-truths.

Well, it is not my idea to name and shame people in the blog. I believe that each individual needs to be careful about where he or she is getting the money advise from, more so if it is paid for. However, I received a very interesting email from a leading Financial services company yesterday which I wanted to share with all the readers. Note that I am reproducing the email here exactly as I received it, just deleting the line which names the company. Here it is :-

In our experience, any further delay can cost you more than what you can afford!

One of simplest ways to get started is through SIPs. An SIP helps you build wealth by investing small sums of money every month, over a period of time. The wealth accumulation of an SIP is based on the power of compounding.

Below scenario as an example shows us that when it comes to fulfilling your financial dreams, time is more valuable than money!

 Scenario 1: Person starts today-

 SIP (Systematic Investment Plan) Amount: INR 21,000
Investment Period (in years): 10
ROR (Rate of Return)/annum: 10%
Total Sum: INR 43,01,745

 Scenario 2: Person defers by six months-

 SIP (Systematic Investment Plan) Amount: INR 21,000
Investment Period (in years): 9 ½
ROR (Rate of Return)/annum: 10%
Total Sum: INR 39,70,388

 So, when you start today, you actually save INR 3,31,355 (Total Sum in Scenario 1- Total Sum in Scenario 2)!

What are the basic problems with what these guys are saying. Here are some basic ones:-

  • They cannot even do basic Maths. In scenario 2 the investment made is lower by 1,26,000 which they have very conveniently forgotten to mention.
  • Rate of return per year is nicely taken to be 10 %, without even mentioning the risks associated with equity. The investments are treated like a recurring deposit with 10 % interest. If only like were that simple.
  • No consideration given to purchase price depending on market levels. It is quite possible that in the first 6 months the markets were at very high levels and the units available were quite low.
  • The intent is to convince the buyer that equity pretty much works like debt only with a much higher return that is tax free too !! In fact it is copied from a commonly used example for debt, in order to show the impact of compounding.

Now, what will such planners advise you when they do not even understand the basic characteristics of equity as an asset class? Or maybe they understand it but feel if they share the truth with you, you will not go in for SIP anyway? In either case, you will be well advised to steer clear of them. Financial planning and investment does require a certain level of knowledge but any reasonably successful professional in any field can acquire that fairly quickly.

For starters you can read some of the posts available in this and other good blogs. Take control of your money and make it work hard for you – after all you have worked quite hard for it.