My experiences of owning a Timeshare

I have got a lot of feedback on my last post where I have suggested that for people loving travel and vacations, a Timeshare is indeed a good investment. This is really a lifestyle and experience issue and cannot be viewed solely though the prism of financial calculations. Yes, it is quite expensive and one can get a holiday in a fairly good hotel at the price you will be paying for it today. However, there is much more to it and I think it will be useful for readers to know about my experiences to understand about it.

Let me start with the circumstances in which I bought my Timeshare unit. This was in 1996 November when we lived in Noida. An invitation from the Royal Goan Beach Club ( RGBC ) had taken Lipi and me to attend their presentation. It was early days of Timeshare in India and we knew quite less about it. Though the hard sell element was present in the efforts of RGBC, it seemed to me that there were some good points in what they were proposing. In summary the deal and the associated benefits were as follows:-

  • 1.1 lacs for a Studio unit in their new unit Haathi Mahal in Goa. This was in the White season. A welcome week in Goa to another of their resorts were part of the deal.
  • AMC to be paid every year. 
  • RCI membership for the first year was free and had to be paid for after that.
  • The week could be exchanged well within RCI as it had reasonably high trading power, being in Goa and the White season.
  • The lease of the week was for 99 years, which enabled it to be used by later generations too.

Now at that time the amount of 1.1 lacs was quite high and one could argue that keeping it in a FD will give you 12000 per year which could be used for your vacations. However, the prospect of a defined vacation every year, at a place of our choosing, seemed rather attractive and we went for it. As we were able to pay off the amount in cash and credit card, the final amount was discounted to 96000 Rs.

We went for our first welcome week to Goa in March 1997 and enjoyed ourselves thoroughly. The studio apartment had cooking arrangements and this helped with Rinki being only 2 years then. Starting from 1999 till this year we have taken a vacation every year. A few of these have been to Goa but they have mostly been to other places in India through RCI exchanges. We have been to places such as Coorg, Ooty, Munnar, Manali, Jodhpur, Khandala, Puri, Bhimtal, Kumbhalgarh, Mussoorie, Shimla over the years. In the past couple of years it has been just Lipi and me but till the children went off to college it was always the four of us. We needed to upgrade to a 1 bedroom apartment in those years.

It will be apt to say that all such vacations were a source of joy then and remain great memories even today. We did go for other trips too but a one week vacation in a nice resort where you can both relax and be active in anything you like is a different experience, from the short and hurried trips where you are always short of time. Also, contrary to many Timeshare horror stories I read about, my experiences with both RCI and RGBC have been quite positive. Yes, they do charge a great deal of money but their service standards are excellent and the dealings quite professional.

With the children out of home now, Lipi and I have plans to visit more places outside India. RGBC has Karma resorts in Thailand, Bali, Greece and Australia all of which are great vacation choices. Of course, through RCI we will be able to have a much wider choice too. Assuming we will not be keen to travel a lot after the next 10 years or so the children can continue to use it, pretty much over their lifetime. 

The bottom line – I think the investment in Timeshare has been a great personal investment for me and my family. The experiences have enriched our lives immensely ans it has clearly been something that cannot be measured with money.

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Timeshare – the pros and cons

There are very few products which cause as much debate as Timeshare – maybe in the financial products world you can find an analogy with ULIP or LIC policies !! Let me try to describe in this post what Timeshare is and whether it is an investment that is worth considering. Before starting off let me state upfront that this will potentially be of use to people who are fond of travel and want to holiday at least 1-2 weeks in a year.

The basic concept of Timeshare is simple – a company builds a resort with different types of unit sizes and sells it to the public at large, normally in a minimum lot of 1 week. There is an initial price you pay depending on the unit size and the season of your week. Typical unit sizes are Studio, 1 bedroom and 2 bedroom. The seasons are Red, White and Blue in the decreasing order of popularity. The price will obviously be the highest for a 2BR unit week in the Red season etc. When you buy the Timeshare week, it entitles you to using that week for a period of time in the future, normally 25 years or 33 years.

Apart from the one time costs, there is a annual maintenance charge that you will need to pay for the entire duration of the agreement. For a top end Timeshare company such as Mahindra or Karma Resorts, a studio apartment in the Red week can cost as much as 5 lacs plus along with an AMC of about 20000 per year. That will seem like a whole lot of money and rightly so. Let us see what you get in return.

  • You can use your week at your home resort every year. This can be in the week you own or some other week which is available.
  • If your company has other resorts in the country or outside it then you will be able to use your week in those too, subject to availability.
  • It is possible to exchange your week for going to a resort not owned by your company. This can be done by becoming a member of RCI and paying some exchange fee. So you may own a week in Mahindra Manali and may be able to exchange it through RCI for a resort in Canada or Australia. There are RCI fees and exchange fees for foreign resorts are about 9500 but on the whole, it opens up the whole world for you.
  • The quality of the resorts from good companies are top notch. These are 4 or 5 star properties and spending a week with your family there will be worthwhile. The units normally have cooking arrangements so it is possible to economize a bit on eating out during the period of your vacation.
  • Note that this is very different from the normal travel we do which is 2-3 days at one place and spent largely on sight seeing. 
  • The very nature of Timeshare ensures you need to plan ahead – this is helpful in creating your own plans and the family can look forward to the vacations with a sense of excitement.
  • You need not go every year and can club two weeks if you want to take a longer holiday but in a more infrequent fashion.
  • In case you prefer shorter holidays it is possible to opt for RCI points, where you can choose the number of days and exchange accordingly.

So what are the cons apart from the obvious expense issue? Well, for one this is only suited to people and families who are keen on vacations in a regular manner. If you do not enjoy travel then this is likely to prove not very useful for you. Also, if you want to view things through the financial prism always, then you will find this to be expensive. A back of the envelope calculation will show the following:-

  • 500000 a year can earn about 35000 in conservative instruments.
  • With AMC, RCI and exchange fees you are spending another 35000 a year.
  • In today’s rates even the best resorts in India can be hired for a week at cheaper rates. However, this may well change quite soon.

The point however is flexibility that you get with these memberships. For example, you can get a bonus week in Bali for a 2 Bedroom unit at 20000. Just imagine the cost of a 6 member family going for a week there. There are other benefits such as cruise vacations which turn out to be a lot cheaper than it would otherwise.

At the end of the day it is not a financial issue but a lifestyle issue. The benefit of a high end vacation, year after year, when your family has growing children cannot be overstated. They will have a great time with Games, swimming pool and other activities. We found it quite safe to leave them in the resorts when they were a little grown up.

Will I recommend a Timeshare from a good company – absolutely. I do not think their can be a better investment for your travel and lifestyle needs.

 

Equity returns and time – Nail the lie

I normally do not try to join issues with what is said in the social media, even if I happen to think that it is blatantly wrong. After all people who read such stuff are adults and they should be able to take responsibility for their own actions. If they are unable to distinguish between sensible and senseless postings then they only have themselves to blame.

Over the last few months however, I have noticed a trend of people advising several others as to what is a correct time frame for investing in equities. These are couched in a variety of ways but the general trend is like this:-

  • You should invest in equity only for the long term, ideally 15 years or more and never less than 10 years.
  • Any expense you are planning in the next 10 years or so must always be in lower risk debt instruments and even better in FD or RD.
  • 3 years or so before your goal is reached, withdraw from equity and put all your money in safe debt funds or FD etc so that it is assured.
  • Just saw an actual financial plan where the planner has asked the investor to put money in debt funds for his son’s education that is 10 years away.

Let me make it clear once and for all. There is NO substantive evidence that equity gives better returns only over the long term. Looking at data for our markets and trying to search for deep significance there is a joke as these are only 2 decades old with meaningful regulation. If we want to really understand the characteristics of equity as an asset class then we will need to look at global markets and understand how they have behaved over several decades. A little study of the same will reveal that:-

  • Long term stagnation of the market is not uncommon, the most recent example being the Japanese markets.
  • Over a longer time frame the volatility of returns get dampened but that is a probable occurrence and never a guarantee.
  • Markets can give great returns over short periods like 3 years – witness our markets between 2013 and 2016. In fact sometimes even 4-5 months are enough, like we have seen in this year itself.

Based on this you should not have any hesitation in putting money in equity for any term really. Of course, you do not put all your money there – you need 3 portfolios of Debt, MF and Stocks. There can be several plans on how to do this but a simple one is as follows.

  • PF and PPF / SSY will normally suffice for debt. Ideally PF is for retirement and PPF/SSY for providing cover to other goals such as children’s education etc.
  • MF portfolio to cater for remaining retirement corpus and other goals.
  • Stocks with any surplus available after above two.

When you need cash, simply see where does it make sense to take it out of. For example in 2008 or 2015 it would have made sense to withdraw from your PPF. Right now it is logical to redeem some MF units or stocks. Do not be rigid and think that each goal is mapped to some stocks or MF etc. Money does not have any linkages, important thing is the amount and the logic.

Change your investment philosophy and plan as above and you will see you are doing far better than whatever your present plan is. And, while you are at it, do not invest in MF through the SIP route, that is another thing which makes no sense at all !!

A contrarian case study on retirement

I have been writing this blog for more than a month now and have come across many individuals, with different and unique financial situations. I also get pulled in for advice on how to deal with several financial issues. I think it will be a good idea to share some real life situations with my readers so that it helps them in their financial journey.

The first one that comes to mind is of a recently retired person who was introduced to me by a friend. For the purposes of this discussion we will call him Aloke. Some background of Aloke will be in order before we get to the case itself.

  • Aloke is an Engineer by profession and has worked in different manufacturing companies for about 35 years before retiring last year.
  • His wife is a homemaker and he has one son who is a CA, working now in a reputed audit firm in Mumbai.
  • Aloke has a 3 BHK apartment in West Hyderabad and wants to settle there.
  • He has never been in equity, most of his investments were in PF and PPF. All expenses except the apartment was always from his active income or from FD / RD which he had set up for larger expenses.
  • His current expenses are 5 lacs a year and he thinks if that is adjusted for inflation he will be pretty ok with it.
  • He got his PF in 2013 which amounted to about 1 crore. He had put all of it into Tax free bonds that were giving an interest of 9 % then.
  • His PPF is presently having 45 lacs.

Aloke came to me as he was confused with all kinds of strategies that were being told to him by financial planners. Many wanted him to sell his funds in the secondary market and put the money into different buckets etc. This is an amazingly bad idea as he is getting a tax free income of 9 lacs and will be getting it for the next 17 years !!

Here is what I suggested to him.

  • Continue with the current situation till the tenure of the tax free bonds run out. By that time he will be 80 years old.
  • For the surplus each year, put 1.5 lacs into PPF and the rest in a multi cap mutual fund such as ICICI Value Discovery or SBI Emerging Blue Chip.
  • Assuming 6 % annual inflation, Aloke will be able to carry on the MF investment till year 6 by which his investment will be about 9 lacs.
  • PPF can be carried out till year 9 when his expenses will get to 9 lacs a year.
  • From the years 10 through 17 he will need to withdraw from his MF fully and PPF partially to fund extra 32 lacs of expenses.
  • At the end of 17 years, when Aloke is 80, he  will have 1.5 crores in PPF and 1 crore from redemption of tax free bonds.
  • Even with annual expenses of 20 lacs then, this will definitely last him comfortably till the rest of his lifetime.

Understand that the plan is specific to Aloke who does not really want any risks, does not want to worry about taxes and is comfortable with his present lifestyle. It is not always important to have 5 crores or chase equity returns. There is a financial plan present for each person and situation, you just need to use some knowledge to get there.

My stock portfolio – highest return stocks

As readers know by now, I have 3 portfolios namely Debt, Mutual funds and stocks. My Debt equity allocation is roughly 1:1 and between stocks and MF it is about 3:2 in terms of the current portfolio. It is interesting to note that my investments in stocks and MF have been nearly the same over the years. This means that my annualised returns from my stock portfolio is considerably more than that of my MF portfolio.

This brings me to the reason as to why you must have both an MF and a stock portfolio. Stocks can grow from the underlying business doing well. However, they can also grow through bonus issues, splits, mergers, acquisitions and Value unlocking to existing shareholders. In fact, stocks where I have the highest returns are mostly through these routes. More on that latter but first let me outline how I measure the success of any stock in my portfolio. I understand that XIRR calculations will be the easiest way to do this but I just take the multiple by which the current price is to the average purchase price. This is as I have realised that over a long time period this is a pretty accurate measure.

With that said here are the highest multiples in my stock portfolio:-

  • HCL Tech, Adani Ports, CG Consumer, Reliance, Aditya Birla Fashion, L & T, Ultratech Cement where returns are from 200 times to 15000 times. This is clearly caused by the fact that I paid virtually nothing in acquiring these stocks. For example I got 66 HCL Tech shares as I has HCL InfoSystems shares. With Bonus and Split these have now frown to be 264 shares. I got Ultratech Cement as I was holding L & T shares.
  • Multiples of 75 through 125 are achieved in the following shares. The gains are due to selecting the right company at the right price as well as related corporate action such as bonuses and splits etc. 
    • Berger Paints
    • Kansai Nerolac
    • Titan
    • Cadila
    • Piramal Enterprises
    • BPCL
  • Multiples of 50 through 75 are achieved in the following shares.
    • Vinati Organics
    • Maruti 
    • PVR
    • Apollo Hospitals
    • Himatsingka Seide
    • TVS Motors
    • Apollo Tyres
    • TCS
    • Bata
  • Multiples of 25 through 50 are achieved in the following shares.
    • Arvind
    • DRL
    • Tata Motors
    • M & M
    • Petronet LNG
    • Greaves Cotton
    • HPCL
    • HUL
    • MRPL
    • Hindustan Zinc
    • Mindtree
    • Tata Chemicals
    • PC Jeweller
    • Bharat Forge
    • Sun Pharma

I am a little reluctant to provide actual figures but you will be able to understand the scale of the gains. Just as an example, my buying price in Berger Paints is 19.63 and the stock is trading at 262 now. Of course, I have had several spectacular failures too such as Unitech, Kingfisher Airlines, Teledata, Karuturi Global etc. On the balance things have worked out rather well and enabled me to achieve a state of Financial independence by the time my son had just started his Graduation course.

My recommendation is you start with a stock portfolio right now if you have not done so already. You have to do it on your own learning from Facebook groups or Blogs will not be enough. Start small if you are conservative at heart but do get started.

I knew very little about stocks when I did and it has really worked well for me.

Balanced funds vs Diversified equity funds

While I have always felt that this is really not even a debate, there are many readers who really think that it is possible to get better returns from a Balanced funds as compared to a diversified equity fund. Well, that will be a great thing if it were true. After all, the holy grail of all investors is to have a product which reduces risks and gives you similar or better returns than the riskier counterparts !!

Instead of getting into the past histories and data, let me try tackling this issue with a simple example. Assume the following scenario:-

  • You are investing in a balanced fund X and a pure equity fund Y simultaneously.
  • Fund house and manager are the same and you do it for a period of 10 years.
  • For Balanced fund 65 % is in equity, the rest is in debt.
  • As the FM is the same, the portfolio invested in is also the same. So if your investment is 10000 Rs a month, 6500 Rs will go to equity.
  • Let us assume a return of 12 % in equity and 9 % in debt over the 10 year period. These are logically conservative but will serve to illustrate the point.
  • Corpus reached for pure equity fund Y in 10 years will be 23.23 lacs.
  • Blended rate of return for fund X is 65 % of 12 % + 35 % of 9 % or 10.95 %.
  • Corpus reached for Balanced fund X in 10 years will be 21.83 lacs.

Note that I have assumed a high rate for debt and a relatively low rate for equity returns. If you increase this difference the performance gap will be more obvious. So, if this is the case why is it that some Balanced funds have better returns? The answers can be again arrived at if you think a little objectively:-

  1. The FM of a Balanced fund may take lower risks with the portfolio. This has more to do with the nature and mandate of these funds.
  2. The above will help in a market not doing well but equally it will under perform quite a bit in a bull market.
  3. In a bear market the riskier stocks can get battered quite badly. As such the recovery for these will also take much longer. Again the risk is on 100 % of the portfolio as opposed to the Balanced fund where the risk is on 65 % only.

However, this does not say anything favourable for the Balanced funds. You might as well invest whatever you want to in Debt instruments and the rest in Equity. That is a more logical way of doing it without getting into the hybrid instruments. You should only look at Balanced funds in the situations I have stated in the last post.

Imagine this too – with declining rates and improving equity markets it is quite possible to have equity returns at 15 % and debt returns at 8 %. In this scenario you will get a blended rate of 12.55 % which is about 2.5 % less than the pure equity fund rate.

Of course, at the end of the day it is your money and your plan.

The real risks for your MF portfolio

Now that the markets seem to be on steroids all our MF portfolios, whether created through the SIP route or otherwise, will have done very well. In good times one will not like to hear about potential risks and downsides, yet this is really the time when the damage to the portfolio can be most significant. I thought it will be a good idea to outline what are the real risks in building and maintaining a MF portfolio . Understanding these risks will help us to figure out ways in which we can mitigate them.

The first and commonest risk is investors not putting in enough money to build up the MF portfolio. Let us see why this happens and what can be done about it.

  • Investors do not understand the present cost of the goal and the associated inflation prevalent for that category. You need to find out some hard data and then apply the most logical inflation figure. Do not worry if the amount seems fantastic, it is better to be prepared. If you do not need it at the time of goal, use it for other things.
  • Investors starting early set up a lower investment amount monthly and do not necessarily change it with increasing income. Do remember that it is always better to invest more than to invest less. Use a calculator that lets you input your initial amount as well as an annual percentage increase to check where you are reaching.
  • As many investors have only a lesser amount to invest when they get started, they assume optimistic returns to reach the goals. Equity is the best investment avenue for the long term but do make sure that you are not thinking of 15 % returns and above. My suggestion will be to look at 12 % returns, if you do better it’s a bonus.

The second risk has to do with the mode of investment. Most investors end up doing a monthly SIP on a fixed date, without understanding that it is a completely wrong way to buy equity. I have explained this quite thoroughly in several posts in my blog. People who are interested can read the same to get the right way in which they can invest in MF units.

The third risk is in not understanding how an annual review is absolutely important to ensure that you are holding the right MF. Do not go by reputation of the fund or fund manager, performance of the fund has to be the only criteria. There are several choices available to you and no real need to be married to a fund. A corollary to this risk is not to be satisfied by the return you had estimated for your goals. Sure, you may be able to meet your goals with a return of 12 %, but if many funds are doing much better then there is really no point in sticking to your fund.

The fourth risk is in not understanding the impact of a market crash on your portfolio. Let me give a personal example here. By end 2007 my stock portfolio had reached a value that I was expecting only by 2010. This gave me the feeling that I would be able to achieve my state of financial independence a lot earlier than the plan of 2012. The market crash of 2008, nearly halved my portfolio value and I had to change my plans to some extent. At that time almost all of my investment apart from PPF was in equity. You need to follow an asset allocation appropriate to your context so that all eggs are not in the fragile equity basket.Remember that whatever your acquisition price, your entire portfolio in equity is subject to the vagaries of the markets.

The final risk is redeeming equity at the wrong time in order to meet the goals. All of us know that we should not do this, but if your goal is at hand and you do not have alternate sources of money you may have no other option. A way out of this is to go with the 3 portfolio model I have suggested in my blog. Read the posts in order to get a better understanding as to how it can be implemented.

MF is a great investment vehicle and it will work greatly for you at most times, as long as you understand the risks involved in it and handle these in an appropriate manner.