How to buy mid cap MF now

Many readers have written to me saying that they now understand why SIP is really not the right way to invest in equity. In my last post I had written about a possible method that could be used for buying large cap funds. I am quite encouraged by the feedback and also the curiosity shown by readers as to how they could go ahead and purchase funds of other categories. Let me address it in this post.

For purposes of simplicity we will assume that the MF in question is a mid cap fund. It does not really matter which one, you can very well go with any of the top 5 or any of the long standing funds. For those readers who always insist on names, look at HDFC Mid cap, Sundaram Select Mid cap or some similar fund. The other assumption we will make is that the NAV of the fund is aligned to the Nifty Mid 100 index. Note that you can use some other index or even the fund NAV in question. The principle of the argument however remains the same.

Based on this let us look at how things currently are for the Nifty Mid 100:-

  • 1 year and YTD returns on the Nifty Mid 100 are 6.3% and 9.42% respectively. So your SIP investments in the mid cap MF of your choice is giving decent returns to you.
  • The above means if you buy it today, as opposed to an investment in June 2015 or January 2016 you will be worse off. Understand that a SIP is buying units at progressively higher rates in 2016.
  • Current Nifty Mid 100 level is higher than 30, 50, 150 and 200 DMA. This being the case it is a bad idea to buy units of your mid cap MF now.
  • Your first buying point can be when Nifty mid 100 levels go lower than 50 DMA which is about 13235 for the Nifty Mid 100. In simple terms it means that any SIP in mid cap funds do not make sense unless the above happens.
  • 200 DMA for Nifty Mid 100 is about 12881 and if the Nifty Mid 100 levels approach this figure it will be a great time to buy your mid cap MF.
  • How do I know that Nifty Mid 100 will go down by 500 points or 1000 points? Well, neither I nor anyone else can say this definitively. However, the current uncertain global economic situation, food inflation not coming down, corporate earning still not getting robust growth etc almost guarantees that Nifty Mid 100 will not go up in a linear direction. It may either be range bound with a range of 13000 – 14000 or there can be a deeper correction post Q1 results with it going down to 12500 or so.
  • Remember that a mid cap index is necessarily more volatile as compare to a Nifty or Sensex, so a 1000 point drop is not very difficult in the 2-3 month period.

In the above situation, readers can follow the mid cap MF buying method that I have planned to use for the rest of 2016:-

  1. Stop all SIP in Mid cap MF, SIP works in very few market situation and this is not one of those situations.
  2. Wait till July end to see the impact of Q1 results on Nifty Mid 100. Put 25-40% of your 6 month investment if Nifty Mid 100 goes to 13250 or below.
  3. Keep tracking Nifty Mid 100 for any news based correction and check if it is moving towards 13000.
  4. In any case if Nifty Mid 100 is below 200 DMA start putting more investment in mid cap MF.
  5. You need to make a maximum of 4 purchases in these 6 months. Tracking nifty is quite easy, just check in MoneyControl for the DMA figures.

I hope this has given you a good idea as to how you can get this done. I will be happy to answer any queries or clarifications that you may need.

In the next post I will write about how to purchase small caps now.

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How to buy large cap MF now

Many readers have written to me saying that they now understand why SIP is really not the right way to invest in equity.I feel quite happy to hear this because it demonstrates in some small way that my blog has been successful to a degree. However the next question is how then to invest in MF schemes. Let me address it in this post.

For purposes of simplicity we will assume that the MF in question is a large cap fund. It does not really matter which one, you can very well go with any of the top 5 or any of the long standing funds. For those readers who always insist on names, look at ICICI Focused Blue chip, Franklin Blue chip or some similar fund. The other assumption we will make is that the NAV of the fund is aligned to the Nifty index. 

Based on this let us look at how things currently are for the Nifty:-

  • 1 year and YTD returns on the Nifty are in the negative. So your SIP investments in the large cap MF of your choice is giving negative returns to you.
  • The above means if you buy it today, as opposed to an investment in June 2015 or January 2016 you will be better off.
  • Current Nifty level is higher than 30. 50. 150 and 200 DMA. This being the case it is a bad idea to buy units of your large cap MF now.
  • Your first buying point can be when Nifty levels go lower than 50 DMA which is about 8000 for the Nifty. In simple terms it means that any SIP in large cap funds do not make sense unless the above happens.
  • 200 DMA for Nifty is about 7778 and if the Nifty levels approach this figure it will be a great time to buy your large cap MF.
  • How do I know that Nifty will go down by 300 points or 600 points? Well, neither I nor anyone else can say this definitively. However, the current uncertain global economic situation, food inflation not coming down, corporate earning still not getting robust growth etc almost guarantees that Nifty will not go up in a linear direction. It may either be range bound with a range of 7800 – 8300 or there can be a deeper correction post Q1 results with it going down to 7500 or so.

In the above situation, readers can follow the large cap MF buying method that I have planned to use for the rest of 2016:-

  1. Stop all SIP in large cap MF, SIP works in very few market situation and this is not one of those situations.
  2. Wait till July end to see the impact of Q1 results on Nifty. Put 25-40% of your 6 month investment if Nifty goes to 7800 or below.
  3. Keep tracking Nifty for any news based correction and check if it is moving towards 7500.
  4. In any case if Nifty is below 200 DMA start putting more investment in large cap MF.
  5. You need to make a maximum of 4 purchases in these 6 months. Tracking nifty is quite easy, just check in MoneyControl for the DMA figures.

I hope this has given you a good idea as to how you can get this done. I will be happy to answer any queries or clarifications that you may need.

How to invest in rest of 2016

One month back, things were decidedly looking good for the Indian markets. The domestic political scenario seemed to have stabilised with BJP win in Assam, the losses of Congress meant a somewhat reduced opposition in Rajya sabha that would help the passing of GST bill, the economy seemed to be on the right track with the corporate earning showing some turnaround with the quarterly results and prediction was bright on the monsoon front. Nifty seemed quite stable in the 8200 range and a march to 9000 was deemed to be possible by many analysts, over the rest of 2016.

Things seem to have unravelled fairly dramatically over the last month through. The exit of the RBI Governor, UK exiting the European Union and the FII reaction to all of this suddenly makes it a dicey situation for our markets. 9000 on the Nifty is clearly a far cry now, those same analysts are now talking once again of 7000 being breached. How should this affect your investments for the rest of the year?

Let me take the debt portfolio first as the changes here will be minimal. Assuming you are investing in PF, PPF and SSY you should continue to do so. People looking at regular income may want to lock in their money at the current interest rates. With the exit of the current RBI Governor, it is quite possible that there will be more aggressive rate cuts over the next few months. It is not improbable that the interest rates may well go south of 7 percent for most fixed income instruments. In such a scenario, if your debt products such as FMP or other types of debt MF are maturing, you will do well to look at alternative products which can give you slightly better returns. I think it is time to look at products such as Arbitrage funds, Equity Savings funds, Monthly Income Plans and other hybrid funds. Keep in mind that with indexation benefits coming down, taxes will rise in this.

What about MF investments? I sincerely hope many of you have stopped SIP by now, so that you have not been buying units at 8000 plus Nifty levels.Anyway, in the next 6 months the Nifty and other indices will definitely go down and this will present good opportunities of buying MF. You do not want to lose out on this by doing SIP – look at it this way, why buy units at 8200 when you can buy much more with the same money when Nifty comes down to 7500. I think there will be a Nifty level of 7500 in the next 2 months, just wait for it and put in your MF investments at this time. In simple terms if your SIP amount is 25000 Rs per month, keep it in your bank and when Nifty comes to 7500 invest all of it in one shot. What will happen if Nifty does not reach 7500 even by October or so? Well in that case you wait for a level just higher than it and invest at 7800 or so. Remember that buying equity is dependent on level and not on time, therefore buying at 7800 levels of Nifty in December is way better than buying in July with Nifty at 8200 or so.

Finally about stocks – again, I hope you are either having a stock portfolio or thinking about starting one. In the latter case, this is a great time to start. You will find a great deal of information in this blog both for understanding why and how to invest in stocks as well as several posts which will give you practical guidelines as to how you can build a long term stock portfolio. Forget about listening to the voices of negativity, shake off your inertia and go for it now.

The second half of the year will be very interesting times for our markets. How you invest in this period will have a significant bearing on the overall wealth creation for you.

ULIP #2 – understand the charges

What are the relevant charges that need to be understood when you are looking at ULIP as an investment option? Well, there are essentially 5 charges which you need to be cognisant about. Let us take a look at the charges and what they mean.

  1. Premium allocation charges : This charge is linked to distribution expenses and underwriting costs for the insurance. In the older ULIP these charges were very significant for two reasons. Firstly, these charges were quite high and secondly, the bulk of these charges were front loaded, to be deducted in the first year. So much so, that nearly 65 % of the first year premium. No wonder ULIP was hated by most investors when they found this out, especially since many of them were not clearly told this by agents who sold it to them.
  2. Policy administration charges: These are mainly for the documentation and other administrative charges linked with the insurance part of the ULIP.
  3. Mortality charges : These are also linked to the insurance of the investor.
  4. Fund management charges: This is similar to the Expense Ratio of Mutual Funds and deals with expenses related to investment related expenses.
  5. Surrender charges : Relevant only when you want to discontinue the ULIP.

The first of these charges are linked to how the ULIP is sold. In case you are buying it from an agent like a bank, expect it to be high, even though after IRDA has got into the act it has become way more reasonable compared to before. However, for many ULIP that you can buy online nowadays these charges are non existent. The other change is that even where the charges are there, front loading like in the past is not really there. This means, much of your money now actually goes into buying the units which is a sea change from the past.

The next 3 charges are in the form of cancelled units and is normally done monthly. IRDA has put caps on the charges and the Fund management charges can today be a maximum of 1.35%, a cost that is significantly lower than the Expense ratio of most MF. Now, IRDA has also stipulated as to how much your overall returns can come down due to all these charges. For example a 15 year ULIP, the overall reduction can be a maximum of 2.25% and this is 3% in case of a 10 year ULIP.

What do these changes realistically mean for you as an investor? Well, it opens up another investment possibility apart from the regular avenues you are already using. In the next post I will outline how you may be able to use ULIP effectively.

ULIP #1 – understand the product

Of late I have seen a lot of articles and posts in the social media denouncing ULIP as a product and actively discouraging all readers to have anything to do with it. I am no supporter of ULIP, as I had a bad experience with it myself many years back, but it really seems odd to me that people pronounce judgement without having knowledge of the basic features of the product or knowing how it works. The objective of this post is not to encourage readers to go ahead and invest in ULIP but to give them sufficient accurate knowledge so that they are able to judge for themselves.

So let us start from the beginning. As we all know ULIP is a combination of insurance and investment which are clearly two different product classes. Why was such a product formed in the first place? Well, some smart person thought that if insurance, which many people view as a necessary evil, could be spruced up with an investment attraction there may be many takers. The idea was to give good returns to the investors while providing a certain amount of investment cover. Initially it worked quite well but the problems were with the way charges were defined for the product. We will cover this in a later post but the indiscriminate wrong selling of this product has earned it a bad name and deservedly so. But the basic idea of two product classes being blended is not a bad idea as such. Think of it and you will see several types of MF categories which do exactly that. Be it Balanced funds, MIP, some types of FMP the logic is basically the same.

How does the product work? Like any insurance product, there are certain charges that are used up to provide the insurance cover. The remaining part is used for investment, much like what any fund manager in a MF scheme. The underlying asset class that both MF and ULIP invest in is equity, so there is really no scope of differentiation in returns. As insurance is normally a long term product, ULIP was also designed to be a long term product initially. This was done by restricting any withdrawal prior to 3 years but, more importantly, by ensuring that due to the high upfront charges the investor had to stay invested for a longer term if he wanted to get good returns. While the policy was good in intent, the implementation by the distributors was quite terrible. A huge amount of the first year premium was diverted towards the charges that went to the distributors.

Once IRDA as the regulator got into the act, most of the players were forced to clean up their act. The charges were rationalised, the withdrawals were made simpler and in general there was much greater transparency. In addition to this ULIPs had to compete with the ever growing popularity of MF. This meant that the focus on performance and returns was much more important than before.

All this has meant ULIP is a far better product today than many give it credit for. In order to understand the why part of it you need to be clear about the charges and how they have changed. I will cover it in the next post.

 

Education loan for my daughter

Now that Rinki has finally got admitted and started in the BM program in XLRI, I thought it will be a good idea to update the readers on the final outcome of it. I hope some of you have read the earlier posts on the considerations of Education loan and how I went about deciding on the same. If you have not read those posts, maybe you want to do so now.

To give the background of the costs involved in XLRI BM program and my thought process in going for the loan, let me outline the basic aspects:-

  • Total cost of the course for payment to XLRI is 21.04 lacs. Assuming some expenses for travel and other personal needs the total requirement will probably be 22 lacs.
  • My understanding with both my children has always been that I would take care of their Graduation costs, irrespective of the expenses and if they wanted to do a Post Graduate education they would be responsible for it. Rinki was always comfortable with this approach and knew that she will be taking up an Educational loan.
  • The XLRI BM program which she got into is the most expensive program of it’s kind in the country and several banks approached her for giving the loan up to 25 lacs.
  • As i was uncomfortable about paying a high amount for interest, I wanted to pay part of this 22 lacs on my own. Rinki could pay it back, based on her situation after she finished squaring off the loan with the bank first.
  • I had to pay the initial 5.42 lacs for confirming the application in April. Apart from this there are 2 other instalments in 2016 that I plan to pay.
  • So I was looking Rinki to take a loan of 12 lacs. The rate was 9.45 % floating based on the MCLR at present.

We had been approached by several banks as soon as she got an offer from XLRI. Though most of them had similar terms, we preferred SBI Scholar loan as Rinki already had an SBI account in her name which she could use. All banks were fine with having any one of the parents as a co-borrower, irrespective of their income levels. We decided to have Lipi as the co-borrower as it involved far less documentation that way. All the documentation needed as per the checklist was collected by us before we left Hyderabad for Jamshedpur.

The loan process itself was very smooth in Jamshedpur XLRI branch of SBI. We were very impressed with the branch manager for the way he and his staff ran the branch as well as his personal accessibility. The process was efficient in checking the required documentation and for people who needed help in filling up the form, people from the bank stepped up quite willingly. Yes, it was business for them but you do not see such levels of service even in many private banks.The branch manager was available to clear any doubt. For example, I was told that we should take the second instalment money from the bank as the sanctioned loan had to be activated within 3 months. I was uncomfortable with that as it would increase the interest burden considerably. When I approached the Branch manager he told me to take a small amount as a loan and pay the rest through our own resources. 

The sanctioning of the loan was done on the same day which was fairly amazing. The repayment duration Rinki has chosen is 5 years. Assuming she takes the entire 12 lacs, the EMI will come to about 26000 Rs. Given the jobs she will be aiming for, this should not pose an issue. In fact, she is keen to pay off the loan early if she can. The overall interest burden is about 3 lacs plus and as there is no pre-payment penalty, paying off the loan amount early will go a long way in reduction of this amount.

As far as the amount paid by me is concerned, I have told Rinki that she can look at it after she finishes her bank loan. In reality, I have a different plan for this but that can be taken up later on when the time comes.

One year of writing the blog

It is said that one week is a long time in politics and, if Indian politics is any indication, we can probably take the saying to be fairly accurate. I do not know what is the right time frame for assessing the performance of a blog. However, I feel one year will be a good time to take stock of my experiences with the blog.

So how did it all get started? Well, when I wanted to get out of my regular corporate career and get started on my own Consultancy, getting my own financial situation organised was a top priority. This led me to think through the financial aspects a lot more than before and I started to realise that financial independence was an imperative for all people, it did not really matter whether they wanted to retire early or not. My following some Facebook groups and other blogs caused the realisation that there were hardly any good information available in the public domain that could guide investors in reaching the desired state of financial independence for themselves. The final push came through my daughter Rinki, who pointed out that if I felt there was some valuable knowledge to share then I should not shy away from the effort.

The response to the blog has really been stupendous, in fact I still find it difficult to believe that so many people read it, say that they have benefited from it, engage with me actively in terms of queries and suggestions and have changed their investing styles based on what they have learnt from the blog. More than the numbers, it is the interaction and engagement that I have had with many people I do not really know at all, which is really a rather humbling experience. It had inspired me to work hard initially to create a knowledge store which will be of use to many investors for a long time to come.

Of course, there have been some detractors too but that comes with the territory. In my investment life I have always tried to follow my gut instincts based on common sense and fundamental principles and it is that same sense that I have tried to bring to the blog. In the investment advice given in the blogs and Facebook groups, the only solution given is to invest in equity MF and only through SIP. This is completely flawed and I have tried to point it out in many of my posts, much to the consternation of the MF and SIP brigade.

What has been the greatest source of satisfaction in writing the blog. Well, there are several but the ones I can think of instantly are as follows:-

  • Several readers have understood how they could be financially independent and have started their journey towards the same goal.
  • Many investors have seen the flawed approach of investing in MF through SIP and have started looking at my suggestions of how it can be done otherwise.
  • My blog has inspired many people to get started on a direct stocks portfolio. I believe this is important for retirement which cannot be done well only through the MF route.
  • I have been able to remove the stigma from products such as PPF and SSY to a great extent. These are good products and must find place in your portfolio. The bashing that they get in social media is due to the half baked knowledge of the authors, rather than any intrinsic deficiencies with the products themselves.
  • Readers of my blogs understand the characteristics of equity and debt as asset classes and are able to see where these fit into their portfolio.

These are very interesting times and there will be a lot of changes in the investment landscape in India over the next 2-3 years. I plan to continue the blog and take up writing on such opportunities that can pave the road for financial freedom of my readers.

Finally, I would like to thank all my readers for having made the blog what it is today. Had it not been for their response this may not have lasted the time that it has. I look forward to a similar level of support over the next year and hopefully beyond it.