Can you cope with a job loss?

One of the negative fallout of the opening up of the Indian economy has been the possibility of a job loss in the private sector. Fortunately, the government and public sector jobs are relatively insulated from this right now but, in the years to come, they may well be affected by it to some extent too. As the job growth is almost entirely in the private sector, coping with job losses becomes an important consideration for many people.

Job losses can be there for many reasons. The first and the most probable reason is that the company decides to stop doing what it is doing or scale down operations significantly in India. The second can be the company decides to move it’s operations within India and some Employees may not want to relocate. The third can be due to reasons of misconduct, financial or otherwise. Finally, there can be an issue of individual performance or the job role in question can simply become redundant.

It is important to understand two aspects very clearly when we are talking of a job loss. Firstly, apart from a few higher end jobs and some MNC’s, there is virtually no safety net available when it comes to job loss. All that you may get paid is about 2-3 months of your salary and you have to deal with the rest of it yourself. Secondly, most people do not understand that a job loss is very much a possibility even if they are individually doing well in their respective jobs. A vast majority of job losses are because of economic and structural reasons, not because of misconduct and performance issues.

As they say, prevention is better than cure and there are a few preventive measures that you can take to minimize the possibility of a job loss. To begin with understand the overall business of your company and how is it doing. That will make you aware of the potential risks of a possible cut down in expenses, which normally lead to job losses. Next focus on your own performance and understand the importance of your job role’s relevance and importance to your company. Corporate organizations are largely selfish entities, if you are useful to them they are unlikely to let you go. Thirdly try to add value to yourself by learning new things, both formally and informally. This will not only help in getting better in your current job but also assist greatly in getting a new one when you need it.

No one can be truly prepared for a job loss as it will always come as a shock, no matter how and when it happens. However, if you have a reasonable value in the job market you will be able to find an appropriate job sooner or later. In terms of financial safety net, there are a few things that you need to be conscious about at all times.

  • Minimize your loans and ideal situation is with no loans. If you are having to pay a high EMI then the anxiety you face will be high and you will be more likely to make wrong decisions.
  • Have a Contingency fund of 6-8 months expenses that you can tap into easily. This needs to be separate from your general investment plans, so that you do not get a feeling you are depleting your future resources.
  • Focus on necessary expenditure and avoid buying assets. You may get a fairly big sum of money as settlement but do not be tempted to spend it on an asset purchase or a vacation.
  • You need to ensure that your family understands the situation but at the same time, take care that they are not overwhelmed by it.
  • Continue your insurance payments and if you did not have a Health insurance of your own, then get one quickly.
  • Continue your regular investments in MF etc if you can but stop it if it is proving to be a burden.

The ideal situation will be for you to find a job in the 2-3 month period that you have in your current job. However, if you are in an industry where jobs are relatively less or if you are on the wrong side of 40, this may be easier said than done. In such a situation you have to dig in for the medium haul if not the long one. I will try to cover the financial strategies to deal with such a situation in the next post.

Whether it is for the Employee or the Employer, a job loss is an undesirable situation. However, if you are able to cope with it well without reacting negatively or in panic you will come through it with flying colors. As a CEO, I have unfortunately had situations where I had to let people go. While some of the people had tough times, most of them emerged from the experience in a better manner and have had fairly successful careers.

Remember a job loss is only a road block that can only delay you from where you want to reach. Unless you let it affect you badly, it will not be able to stop you from reaching your destination.

Investment plans – function of resources?

This post is inspired by a couple of comments that I received on my blog recently. The first requested me to write about investment plans for people who may be earning in the range of 5 to 8 lacs per year, not having the ability to invest in a large amount of SIP or otherwise every month. The second was telling me that my plans, while they made sense for me, would not work for others who did not have similar resources as they had not been in careers where they got to be CEO etc.

The larger point to be addressed here is this – is the investment plan linked to the situation in life you are in or to the amount of resources that you bring to the table? At a basic level the aspirations that we have must be grounded to the situation we are in. If my net worth is 2 crores, I obviously cannot aspire to stay in a villa worth 2 crores today. So my aspirations must be aligned to my situation both in life as well as financially. However, the investment plan is a different issue altogether. I am convinced that the investment plan must remain the same, though the dimensions and scale of it will change based on the resources that you can bring to the table.

Let me look at a person just starting his career after graduation. We will assume that he gets a salary of 4 lacs annually, which is quite realistic in today’s context. I have deliberately taken a person who is graduating from a mid level college with a fairly low salary. How should he go about his investments, assuming he is 22 when he starts working? Here is what I would like him to do:-

  • Assuming he is able to save only 10000 for investment after his expenses, PF and insurance, he should start with either MF or a PPF account.
  • For most of the next 8 years or so, his investments should continue to be in PPF and MF. If you take a growth of 9% annually in his salary ( quite conservative ), he will be getting about 8 lacs when he is 30.
  • While his expenses will grow and he may need to pay some taxes ( minimal ), I expect his investment capacity per month to be 30000 now. Ideally he should maximize his PPF contribution and put the rest in MF.
  • Over the next 3 decades, he should keep doing the same. Additionally, he can go in for stocks when he has some extra money. Remember that after the initial stable job, he can also look at additional qualifications as well as a job change.
  • The investment constraint that he has in the initial 15 years or so due to his limited income and starting off a family etc, will go off by the time he is 40 or so. This is the time he can maximize his investments and put money in stocks etc.
  • Having started PPF account earlier, albeit not being able to contribute fully in the starting years, he can have a reasonable amount there when his children’s college education is there. Of course, if the market is doing well then he should redeem his MF investments, the PPF is just a hedge. For the girl child an SSY account is a must.
  • PF is strictly for retirement, not to be touched for any other purpose.
  • The scale of investment can change quite drastically if he makes some strategic job changes and gets into the higher paying bracket.

Now assume the same person is from an IIT / IIM kind of college. He will then probably start at a salary of at least 10-12 lacs annually. Does this change the strategy? Not at all – he will still invest in the same manner, though his scale will be quite different. Now if he is able to invest 3 lacs a year, he will probably maximize his PPF contribution and buy ELSS schemes for the remaining money.

Investment strategy through the 3 portfolios will remain the same for every investor – the proportion you put in each of the 3 portfolios and the amounts that you invest over the years is a function of your life situation and your investment capability. Have a solid debt portfolio for stability and possible hedging, an MF portfolio for your goals and a stock portfolio for the creation of significant wealth you may need towards the end of your life.

Keep your investment plan simple with this framework and tweak only the dimensions and scale. You will be quite all right.

A different take on financial planning

I have been away on a vacation to the Rann Utsav in Kutch for the last few days. It was a great experience and I would definitely recommend it for the readers who have not been to it so far. As I had some time to myself I reflected on several aspects of my life and that included the blog. Of late, I have been thinking a lot on the way traditional financial planning is done and feel that a different take on it may be more beneficial to investors.

The normal or regular way of goal based financial planning is quite well known to all the readers of this blog. It is also documented through several posts here and elsewhere. I am therefore not repeating the process here, read up the posts under this category, if you want to know more about it. Now, while goal based planning is all right, in order to understand the future amount that will be needed for an inflation linked goal, the issue I have is when we link our investments to it.

Why do I see goal based investing as a problem? Here are some reasons:-

  • The assumption of returns is flawed and can make your financial plan go completely haywire. You may think investing 10000 per month with XIRR of 12% over 15 years is going to get you somewhere. An event like 2008 0r even the last 2 months can completely get it skewed.
  • At times the inflation assumptions are meaningless. For example IIT or NIT fees can go through a sea change in the next 2 years. IIM fees have gone through the roof in the last 4 years or so. If any investor had planned for these with an education inflation of 10% or so, he will clearly have inadequate money for these goals today.

What can you then do to take care of it? Well, my suggestion will be to implement the 3 portfolio strategy rigorously. I am again not explaining it in detail here, as it is quite well documented in many of my earlier blog posts. In terms of concrete strategies, here is what you can look to follow:-

  • Largely stick to your PF and PPF for debt investments. If you have a daughter, definitely look at having an SSY account for her.
  • Have a MF portfolio as suggested in my blog. Invest regularly in it through appropriate tracking of relevant indices, do not go for a monthly SIP. In general the MF portfolio should be able to meet most of your financial goals except for retirement, where the debt will form an important part.
  • Any surplus after the above 2 must go to direct stocks. This is to be used mostly in cases where long term care etc becomes necessary at ages of 80 plus.

More importantly, live your life as you want to in between the years 30 and 50. You will have enough money to invest and the invested money will grow. There is really no need to get obsessed about it. Your needs and responsibilities will come down a lot in the later part of your life and your investment capacity will multiply several times when your children have finished their studies and are on their own.

Bottom line – forget goal based investing and invest as much as you can. Equity investing is less about the amount of money put in and more about when you put it in. As the years go by you will also be able to put in more money. So stop playing with calculators and checking your portfolio values everyday, there is more to life than this anyway.

Your MF investments – strategic options

Several people have asked me over the last few months as to how I am so confident about the Nifty levels suffering major cuts. To be honest, it was really not that difficult to predict as almost all contributing factors were in the negative. My expectations that the Nifty will find support in between 7200 and 7500 have not held though and it now seems that 6800 or even lower levels are possible shortly.

As I said in the last post, your portfolio has been damaged quite a bit by the current cuts and recovery will be a long and painful process. If you are investing for specific financial goals linked to your MF portfolio, you need to assess the impact and estimate what should be your SIP amount now so that the goal can be reached on time with a fairly modest XIRR of not more than 12 %. In fact even this may be a difficult thing in the next few years.

Even before you go into the specific strategies for your MF portfolio, you need to look at the other 2 portfolios of stocks and debt. For those who do not have a stock portfolio, this will be a great time to start with one. You can read up some posts elsewhere in the blog as to how you can get started. Over a period of time this will be a great contributor to your wealth. As far as debt portfolio goes, people who do not have a reasonable amount of it will have realized the great value that it provides as a hedge as well as in ensuring that you do not have to sell your equity investments in the wrong time. Actively look at investments like the Tax free bonds. The so called experts who were sneering at these earlier may well be queuing up to but these now.

Coming down to the specific strategies in terms of your current MF portfolio and ongoing investments, here is what I think you should be doing:-

  • Your MF units are already down on NAV and if the market recovers they will increase in value. However, buying new units at progressively higher prices will only mean that your average acquisition price increases, which cannot be a good idea.
  • Given the current market levels, it is reasonable to assume that the markets will recover in the second half of 2016. As such buying through SIP does not make sense.
  • You can look at buying most of your MF investments between now and April/May.
  • In case you have some surplus money from bonus, arrears or variable pay it will make sense to invest more in MF at this juncture. That will average out your purchase price and make your recovery relatively faster.
  • It is in bad times that you get to see the true performance of a fund. If your fund is a laggard, be ruthless about it and shift to another one. The only thing that matters is how well it has weathered the downturn, do not be swayed by who is the fund manager or how many experts are asking you to stick to the fund.
  • Use this opportunity to get out of the SIP mode and start making logical choice on MF purchases some 4-6 times a year. It is far more effective than SIP.

As long as you are able to do the above in a sustained manner, the crisis can yet be turned into a possible opportunity in creating better investment options for yourself.

 

Your MF investments – understand the impact

I had wanted to follow up the post of yesterday by outlining some practical strategies that investors might follow in order to mitigate the risks associated with MF investments through SIP in a highly volatile market over years. However, on seeing a few posts in Facebook groups which are clearing misleading people, it seemed to me that it will be worthwhile to spend some time in giving a concrete example.

Before I do that, let me state the surmise of the arguments presented by people who want others to continue doing SIP as if nothing has happened. Firstly, it is said that over the long term the market volatility will cease to matter. For example, if you look at an MF performance for the last 20 years or so, this can be demonstrated. As an academic exercise this is intellectually flawed as it takes only one set of data point available for the Indian markets. As a practical advise, it is useless for doing the same thing when situations have changed dramatically, without any reassessment of the situation, is hopelessly inadequate. Secondly, the crux of the argument is equities are still the best bet, even if the XIRR of your investments done through SIP is in deep red. This seems completely lopsided to me. Simple reason is this – money does not have a different class based on the asset class it is invested in, you need to base your investment decisions on a clear basis of asset class relative returns, not on some romantic notions propounded by blog writers.

So let me take an example in the real world to show you how there is an impact. We will take a situation where a person starts investing in 2008, so that his money has had the best chance to grow through SIP. The following is the example background:-

  • In 2008 Ravi wanted to invest in MF through SIP for his son Ajay who was 3 years old at that time. Ravi estimated he would need the money in 15 years, which was sufficiently long term for equity returns to do well.
  • Estimated costs in 2008 for an Engineering course in a private college was 5 lacs. Ravi took 12 % educational inflation and arrived at a cost of 27.36 lacs in 2023, when he would need the money for Ajay.
  • His planner told him that with a 12 % XIRR, he would need to invest 5478 Rs per month in order to reach his goal.
  • Ravi started his investment in mid 2008 by doing an SIP of 5500 Rs in a popular diversified equity fund, which seemingly had the least volatility when compared to it’s peers.

Most of us know what happened to the markets from 2008 till today so I will not get into details regarding those. For much of the time Ravi had concerns about getting a 12 % XIRR but his worries were allayed greatly in 2014 when the spectacular rise in the markets made him think that he will achieve his targets 2-3 years earlier.

Cut to the present – let us see how things stand now and how will it affect the future. 

  • From 2008 till now, the XIRR of his fund has been a mere 7 % and this may actually get worse in the coming months.
  • His investment value is currently pegged at 6.52 lacs, assuming 71/2 years of investment time.
  • If we take his son’s age to be 10 1/2 years now and start with a base figure of 6.52 lacs, how much will Ravi need to invest if he has to reach the goal of 27.36 lacs in the next 7 1/2 years?
  • If Ravi still assumes a growth of 12 % his monthly SIP will be 8362 Rs.
  • If he is more conservative now and wants to take 10 % XIRR for the current value growth and future SIP then he will need to put in 10538 Rs every month.

This is the impact in real financial terms, never mind what people tell you otherwise. You need to do this exercise for yourself in order to understand how you have been impacted and how your investment needs to change in future for achieving your goals.

In the next post I will get back to what can possibly be done for existing investors.

Your MF investments – Time to take stock

I am quite sure this post will have many people unhappy, but it is important to understand the impact that many investor portfolios have now had, due to the continuous sell off in the markets. Given that there seems to be no real slow down in the carnage and even the 7000 levels of Nifty not looking safe, it is high time that investors take stock of their MF portfolios that they have built assiduously through the SIP mode over the years.

To start with you can do this exercise for your portfolio:-

  1. Look at the current XIRR as of today and if possible plot the XIRR over the last few months. You would probably see that, even for the best of funds, the XIRR would have come down from 15-18 % to a figure of 7-8%.
  2. If your fund selection was not good to begin with the situation will be much worse.
  3. In case of the investments of 2014 April to about 2015 August, the investments made through SIP or otherwise are likely to be in the deep red.
  4. Understand one thing clearly – it does not matter what time or price you bought your units, what matters now is only the value of your portfolio.
  5. Recalculate your SIP amount for the goals with current portfolio value as the base and 10 % XIRR. You may be surprised to see how much more SIP you need to do in order to reach your earlier goals.

The whole idea of investors doing well when the markets tank in a disastrous manner is unfortunately only true for new investors. For all long term investors a brutal cut in the markets will only result in serious destruction of wealth. This is more worrisome for people who have their financial goals coming up in the next 2-3 years. However, even for those who have a long term horizon of 15 years or so, the current destruction of their portfolio definitely has a serious impact on the amount of corpus they will end up with.

Based on the above, what should be the strategy for the current year as well as going forward? For starters we need to recognize the problem for what it is, not be lured by 15-18 % tax free returns on equity – life unfortunately, is not so simple. Next we must have a debt portfolio as a hedge so that we do not indulge in distress selling. Thirdly, it may be prudent to clean up your portfolio of unwanted funds, while you can.

Let me get into the details of such strategies in the next post.

SSY -objections linked to inadequate knowledge

In the last couple of years I have been actively part of the financial groups in Facebook and some related blogs, one aspect has always surprised me. Most people have an opinion on any aspect of personal finance which, while not bad by itself, becomes a negative when they have inadequate knowledge and furthermore try to influence others through it. I read a lot of comments on the SSY scheme, both for my post as well as in some of the Facebook groups where such a discussion took place. Instead of trying to address each one of those, I have decided to write this post.

The first objection is in terms of the duration of the scheme. Most people have a problem with the fact that it is for 21 years which is very long. My responses are as follows:-

  • If you are doing this when your daughter is a new born or even in her first few years, the scheme is an ideal one. You will mostly need money for your daughter’s graduation, post graduation or her marriage.
  • While each individual situation is unique graduation at the age of 18, post graduation at the age of 21/22 and marriage at an age of 25/26 should really be par for the course for most modern women.
  • The scheme allows withdrawal of 50 % of the corpus at 18 years which can be used for the graduation related expenses.
  • After passing 10th class up to 50% of the balance in the account in the preceding year can be withdrawn foe Education purposes. It is possible to do this one time or once a year. This is ideal for expenses related to 11th and 12th classes/coaching in addition to regular graduation expenses.
  • The duration of 21 years actually ensures that you have the money when you need it.
  • Even if theoretically,you cannot withdraw the money for her marriage if she gets married early, the money can be used later for some other purpose.

The second objection is on what are the terms and whether the amount garnered over the years will be significant. my responses are as follows:-

  • The contributions for 14 years is a little strange but it does not really detract from the benefits of the scheme.
  • If you put 1.5 lacs every year for 14 years then the amount after 21 years will be 80 lacs.
  • Assuming you want to spend 10 lacs in your daughters marriage today and take inflation at 10 %, you will need about 74 lacs after 21 years.
  • As mentioned before you can use 50 % of the account balance when she reaches the age of 18.
  • Most importantly, the safety factor is unparalleled. MF returns can be good but if you have a year like 2008, 2011 or 2015 much of it can be wiped out.

The third objection centers around whether the terms of the scheme regarding interest rates and tax treatment can change. This is always a possibility and can never be ignored completely. However, with all the national focus on the girl child it will be very difficult for any government to make major changes in the scheme. It is far more likely that the LTCG exemption in equity can be withdrawn by some future government.

The fourth objection is that you have to keep running the account for 21 years, so this is not useful for people whose daughters are already more than 5 years old etc. This is simply not true in factual terms. You can close the account when your daughter gets married even if the duration is less than 21 years. However, unless this is the only source of your funds, keep the account running for as long as possible to get the EEE benefits.

Finally there is the SIP in MF brigade who see all solutions through only that avenue. As I have said many times earlier, comparing asset classes like debt and equity for investments make no sense at all. You need both and the right way to invest is in the 3 portfolios of debt, MF and stocks. SSY is the best debt instrument available today along with PPF. So, the issue is not whether you should do SSY or MF, you need to do both. Also, understand that though SSY is for the girl child, if you have met her goals through other means before the account matures, then the money can be used for any other purpose.

If you are having a daughter, this could be the best gift that you give her at 21. Whichever way she wants to use the money, she will appreciate your thoughtfulness and foresight.