My stock portfolio – the third set of 5

While most investors may be going through the MF route to buy equity as an asset class, there is a lot of interest in the stock portfolios of seemingly successful investors. This is amply demonstrated by the numerous requests I get for stock tips and readers wanting to know about my portfolio. In the last 2 post I had written about my top 10 holdings. Here I will write about the next 5.

The first in the list is ITC and some observations are below.

  • My motivation for buying the stock was to get a well run mass consumer company in my portfolio. I also have HUL but ITC has performed better over the years.
  • My first purchase was in 2006 August and the last in January 2015. I had also sold off some of my shares in the interim when it hit the figure of 400.
  • The stock has seen a lot of corporate action in terms of bonus and I too got benefited by a 1:1 bonus in 2010 and a 1:2 bonus in 2016.
  • It has normally been a good dividend paying company with 500 % to 850 % rates in the last 4 years.
  • In terms of potential, this is clearly one of the best examples of an Indian company which is benefited from the local consumption story. I think it is quite possible for the stock to double over the next 2-3 years, even with the challenges in the cigarettes business.
  • My investment in the stock is now at an average price of 98 Rs.
  • I do not have any real plans to sell the stock, now or in the near future.

The second in the list is Mindtree and some observations are below.

  • My motivation for buying the stock was mainly to invest in a relatively new IT services company run by a management that had great pedigree.
  • My first purchase was in July 2007 and the final one in September 2008.
  • The stock had declared a 1:1 bonus in 2014 and  in 2016.
  • It has normally paid good dividends in the range of  100 % and more.
  • In terms of potential, the company is facing serious challenges now and this is being reflected in the declining price. However, I think it will recover in this year and it is quite possible for it to reach 1000 levels in a couple of years.
  • My investment in the stock is now at an average price of 134 Rs.
  • I have no plans of selling this stock now or in the near future.

The third in the list is Hindustan Zinc and some observations are below.

  • My motivation for buying the stock was to have a commodity based company in my portfolio and this was one of the better run companies.
  • My first purchase was in 2007 June and the last in March 2009.
  • The stock has not seen corporate action in terms of bonus or splits after my purchases.
  • It has normally been a good dividend paying company and in the last 2 years the dividends have been 300 % and 400 %
  • In terms of potential, this is clearly one of the best examples of an Indian company which has dominated locally and well on course for it’s global journey now. I think it is quite possible for the stock to double over the next 4-5 years.
  • My investment in the stock is now at an average price of 542 Rs and it is about 5 % of my portfolio value at CMP.
  • I do not have any real plans to sell the stock, now or in the near future.

The fourth in the list is TCS and some observations are below.

  • My motivation for buying the stock was it’s prominent place in the IT sector as a major global player.
  • All my purchases of this stock was between January 2008 and June 2009.
  • The stock had seen a bonus of 1:1 in June 2009.
  • It has normally been a great dividend paying company and mostly paid 45 Rs dividend per share in 2016.
  • In terms of potential, this is clearly one of the best examples of an Indian company which has gone global successfully. I think it is quite possible for the stock to double over the next 3-4 years, despite the obvious challenges.
  • My investment in the stock is now at an average price of 399 Rs and it is about 4 % of my portfolio value at CMP.
  • I do not have any real plans to sell the stock, now or in the near future.

The final one in the top 5 list is L & T and some observations are below.

  • I bought some convertible debentures way back in 1992 and this effectively got converted into shares at a value of 60 Rs.
  • The stock has seen bonuses in 2006, 2008 and 2013 where  my numbers went up and I also sold off some at a decent profit.
  • It has normally been a great dividend paying company at around 800 % and more.
  • In terms of potential, this is clearly one of the best examples of an Indian company having made it both locally and globally. I think it is quite possible for the stock to double over the next 2-3 years.
  • My investment in the stock is now at an average price of 20 Rs and it is about 4 % of my portfolio value at CMP.
  • Based on this purchase I also got shares of Ultratech Cement free 🙂
  • I do not have any real plans to sell the stock, now or in the near future.

As you will see from here, investing in good companies and holding them for a long period of time has really worked for me here. There are some other holdings I have that may be of interest to my readers. I will share it in a future post.

My stock portfolio – the next 5

While most investors may be going through the MF route to buy equity as an asset class, there is a lot of interest in the stock portfolios of seemingly successful investors. This is amply demonstrated by the numerous requests I get for stock tips and readers wanting to know about my portfolio. In the last post I had written about my top 5 holdings. Here I will write about the next 5.

The first in the list is Kansai Nerolac and some observations are below.

  • My motivation for buying the stock was to get a Paint company in my portfolio. As I wanted to get a growth oriented company I chose this over Asian Paints.
  • My first purchase was in 2008 January and the last in January 2009.
  • The stock has seen a lot of corporate action in terms of bonus and I too got benefited by a 1:1 bonus in June 2010.
  • It has normally been a good dividend paying company at 100 % and in the past 2 years this has gone up too.
  • In terms of potential, this is clearly one of the best examples of an Indian company which is benefited from the local consumption story. I think it is quite possible for the stock to double over the next 2-3 years.
  • My investment in the stock is now at an average price of 29 Rs and it is about 5 % of my portfolio value at CMP.
  • I do not have any real plans to sell the stock, now or in the near future.

The second in the list is TVS Motor and some observations are below.

  • My motivation for buying the stock was mainly to participate in the two wheeler segment and I chose it over Hero Motocorp.
  • My first purchase was in October 2006 and the final one in December 2006.
  • The stock had declared a 1:1 bonus in 2010.
  • It has normally paid good dividends in the range of 75 % to 100 % and in the last 2 years this has increased to 200 % plus.
  • In terms of potential, the company is poised to grow aggressively due to the aspirations of our population. It is quite possible for the stock price to double in the next 2 years or so.
  • My investment in the stock is now at an average price of 49 Rs and it is about 5 % of my portfolio value at CMP.
  • I have no plans of selling this stock now or in the near future.

The third in the list is Dr Reddy’s Lab and some observations are below.

  • My motivation for buying the stock was it’s prominent place in the Pharma sector and the focus it had on research as an Indian company.
  • My first purchase was in 2007 June and the last in March 2009.
  • The stock has not seen corporate action in terms of bonus or splits after my purchases.
  • It has normally been a good dividend paying company and in the last 2 years the dividends have been 300 % and 400 %
  • In terms of potential, this is clearly one of the best examples of an Indian company which has dominated locally and well on course for it’s global journey now. I think it is quite possible for the stock to double over the next 4-5 years.
  • My investment in the stock is now at an average price of 542 Rs and it is about 5 % of my portfolio value at CMP.
  • I do not have any real plans to sell the stock, now or in the near future.

The fourth in the list is TCS and some observations are below.

  • My motivation for buying the stock was it’s prominent place in the IT sector as a major global player.
  • All my purchases of this stock was between January 2008 and June 2009.
  • The stock had seen a bonus of 1:1 in June 2009.
  • It has normally been a great dividend paying company and mostly paid 45 Rs dividend per share in 2016.
  • In terms of potential, this is clearly one of the best examples of an Indian company which has gone global successfully. I think it is quite possible for the stock to double over the next 3-4 years, despite the obvious challenges.
  • My investment in the stock is now at an average price of 399 Rs and it is about 4 % of my portfolio value at CMP.
  • I do not have any real plans to sell the stock, now or in the near future.

The final one in the top 5 list is L & T and some observations are below.

  • I bought some convertible debentures way back in 1992 and this effectively got converted into shares at a value of 60 Rs.
  • The stock has seen bonuses in 2006, 2008 and 2013 where  my numbers went up and I also sold off some at a decent profit.
  • It has normally been a great dividend paying company at around 800 % and more.
  • In terms of potential, this is clearly one of the best examples of an Indian company having made it both locally and globally. I think it is quite possible for the stock to double over the next 2-3 years.
  • My investment in the stock is now at an average price of 20 Rs and it is about 4 % of my portfolio value at CMP.
  • Based on this purchase I also got shares of Ultratech Cement free 🙂
  • I do not have any real plans to sell the stock, now or in the near future.

As you will see from here, investing in good companies and holding them for a long period of time has really worked for me here. There are some other holdings I have that may be of interest to my readers. I will share it in a future post.

My stock portfolio -5 top holdings

While most investors may be going through the MF route to buy equity as an asset class, there is a lot of interest in the stock portfolios of seemingly successful investors. This is amply demonstrated by the numerous requests I get for stock tips and readers wanting to know about my portfolio. I had written on this earlier but with the passage of time a few things have changed. So here is a list of my top 5 holdings.

The first in the list is Tata Motors and some observations are below.

  • My motivation for buying the stock was it’s prominent place in the Auto sector along with Maruti as Indian auto companies.
  • My first purchase was in 2007 February and the last in January 2009.
  • The stock has seen a lot of corporate action in terms of bonus earlier but I only witnessed a split in 2011.
  • It has normally been a good dividend paying company at 100 % but in the past 2 years this has come down considerably.
  • In terms of potential, this is clearly one of the best examples of an Indian company which has gone global successfully. I think it is quite possible for the stock to double over the next 2-3 years.
  • My investment in the stock is now at an average price of 109 Rs and it is about 8 % of my portfolio value at CMP.
  • I do not have any real plans to sell the stock, now or in the near future.

The second in the list is Palred Technologies and some observations are below.

  • My motivation for buying the stock was really the options I got as the CEO of Four Soft between 2007 and 2012.
  • These were mostly through allotments over these years.
  • The stock has seen a lot of corporate action in terms of capital reduction and split. Four Soft was also sold off to Kewill and the current business of Palred Technologies is completely different.
  • It has normally never paid dividends but on the selling of the company the shareholders got a special dividend, which for me amounted to more than 10 lacs.
  • In terms of potential, the company is one of the few listed Indian companies in the E-commerce portal area. However, it deals in relatively cheap electronic accessories and is in a low margin business.
  • My investment in the stock is now at an average price of 30 Rs and it is about 7 % of my portfolio value at CMP.
  • I do not see this as a long term success and may sell it whenever I need money.

The third in the list is Maruti Suzuki and some observations are below.

  • My motivation for buying the stock was it’s prominent place in the Auto sector along with Tata Motors as Indian auto companies.
  • My first purchase was in 2007 June and the last in October 2009.
  • The stock has not seen corporate action in terms of bonus or splits.
  • It has normally been a good dividend paying company and in the last 2 years the dividends have been 500 % and 700 %
  • In terms of potential, this is clearly one of the best examples of an Indian company which has dominated locally and started it’s global journey now. I think it is quite possible for the stock to double over the next 4-5 years.
  • My investment in the stock is now at an average price of 678 Rs and it is about 7 % of my portfolio value at CMP.
  • I do not have any real plans to sell the stock, now or in the near future.

The fourth in the list is Infosys and some observations are below.

  • My motivation for buying the stock was it’s prominent place in the IT sector as a major global player.
  • All my purchases of this stock was between June and November 2007.
  • The stock has seen a lot of corporate action in terms of two 1:1 bonuses in the years 2014 and 2015.
  • It has normally been a good dividend paying company and mostly pays dividends at 500 % and beyond.
  • In terms of potential, this is clearly one of the best examples of an Indian company which has gone global successfully. I think it is quite possible for the stock to double over the next 3-4 years, despite the obvious challenges.
  • My investment in the stock is now at an average price of 454 Rs and it is about 7 % of my portfolio value at CMP.
  • I do not have any real plans to sell the stock, now or in the near future.

The final one in the top 5 list is M & M and some observations are below.

  • My motivation for buying the stock was it’s prominent place in the commercial vehicles sector, which is an important one for our economy.
  • My first purchase was in 2007 March and the last in January 2009.
  • The stock has seen a split in 2010 when the face value was reduced to 5 from 10.
  • It has normally been a good dividend paying company at around 200 % and more.
  • In terms of potential, this is clearly one of the best examples of an Indian company catering to a growing local demand. I think it is quite possible for the stock to double over the next 4-5 years.
  • My investment in the stock is now at an average price of 285 Rs and it is about 7 % of my portfolio value at CMP.
  • I do not have any real plans to sell the stock, now or in the near future.

As you will see from here, investing in good companies and holding them for a long period of time has really worked for me here. There are some other holdings I have that may be of interest to my readers. I will share it in a future post.

My Financial independence state – An audit

Many of you who follow the blog will have an idea about my journey in life so far, but let me summarize for new readers. I was born and brought up in Durgapur ( West Bengal ), studied in St Xavier’s school, Jadavpur university and IIM Calcutta, worked till 2014 end in corporate world with 14 years plus at CXO level. Since then I am working in my own Management Consulting practice. I have 2 children who are doing Post graduation ( Rinki is in XLRI and is an Engineer from BITS Hyderabad) and Graduation ( Ronju is doing a dual course in BITS Goa). I have been financially independent since 2014 and thought it would be a good idea to share the stock taking which I did recently.

The interesting fact is that the last three calendar years 2014 through 2016 have been progressively the most expensive years of my life. This flies in the face of conventional wisdom which will tell you to be conservative on spending when you are no longer doing a regular job etc. When I took the plunge in 2014 end, my thinking was as below:-

  • My total expenses in 2014 was equivalent to 200 units in some scale.
  • If I left out children’s college education, the travel to Australia which we went for in October 2014 and my apartment rent in Hyderabad then the expenses would be equivalent to 100 units.
  • Now, my rent was getting covered by the rent of my Chennai apartment, I had a separate fund for my children’s graduation expenses and we would obviously not go for an Australian vacation every year.
  • Based on this it seemed reasonable that my expenses annually would be in the range of 100 units.
  • As my financial assets would generate more passive income than 100 units, I concluded I had achieved the holy grail of financial independence.

At the end of 2015, I was surprised to see that my overall expenses were in the range of 225 units. A closer examination revealed the following :-

  • Education expenses were higher as I had to pay two semester fees for my son instead of the one in 2014.
  • Expenses otherwise on my children were high, courtesy their being typical college students now. Also, Rinki took up a course for her MBA entrance preparations.
  • However, my other expenses were still below 100 units and this was managed easily through my passive income stream.
  • It thus seemed that my assumptions held true for 2015.

2016 was a completely different story though. My overall expenses shot up to 400 units and change. Analysis of this figure showed up the following:-

  • Educational expenses were very high in the year as Rinki got into XLRI and, after a long deliberation, I decided to fund her first year expenses. We could have taken a loan for the entire expenses but this seemed a better idea for us.
  • Other expenses of children continued to grow. I am fine with their having a good time in college as long as they have the right priorities.
  • Our travel increased a lot in the year – we took more vacations and also traveled a fair bit for Rinki’s admission process.
  • With the declining interest rates the cash flows of my parents got impacted adversely. I chipped in with a greater amount than normal this year.
  • We upgraded our timeshare and there was a one time cost of 1.7 lacs for this.
  • Furniture replacement with a new sofa set, Dining table and balcony chairs were an expense this year.
  • Purchasing a new Android tv, new internet connection, new phone for my wife and a recording set top box also happened during the year.
  • In summary, it was a year with great experiences and they often come at a fairly high cost !!

So what is the conclusion I arrived at from all of this? Well, 2016 was definitely not a typical year and I do not think it will ever repeat in our lives. With Rinki getting the rest of her course done through bank loan, asset purchases not really there except for a Fridge and lesser travel the 2017 expenses will be much lower.

At the same time, I am thinking whether my earlier estimate of 100 units needs to be upgraded to something like 125 units. I will write more on this when I do a post on the 2017 outlook for us.

Mutual Funds – lesser known but vital information

No matter which criteria you choose to deploy, Mutual funds have definitely been a great success in our country. They have also been a boon to people who want to take part in equity investment but do not have the time or inclination for stock investing. However, there are several aspects of MF, especially in terms of how they are operated in terms of expenses, that are unknown to most investors. In this post I will try to give information about some such aspects.

The first thing to understand about MF is that the fund house pretty much operates like a normal company with revenues and expenses. Revenues are really the charges that it is able to levy in terms of what is called the Expense Ratio ( ER ). Expenses are the costs that the fund house incurs in running the fund – this includes Employee costs, infrastructure costs, transaction costs, advertising costs etc. Now, as the fund house has multiple funds, these costs are divided among different funds. For example, the same fund manager can manage multiple MF schemes, the infrastructure used is the same, advertising costs are shared etc. However, each MF scheme needs to be profitable on it’s own, otherwise it does not make sense for the fund house to keep the scheme going.

The important thing to note here is that the ER is not linked to the performance of the fund directly. In fact the opposite can be true – as the fund grows in size the ER actually tends to come down as the expenses are spread over more units. Therefore the expense ratio of a newly launched fund is likely to be higher than that of an established fund. One other thing to notice is that earlier to August 2009, any MF buying had an entry load of 2.25 % which was mainly used by the Fund houses to take care of distributor commissions. After SEBI has banned the entry load, now the commissions must be taken care of through the Expense Ratio itself. As such, if you buy the funds directly from the Fund houses through their Direct plans you will have a lower ER as distributor commissions are absent.

If you are having a long term SIP which started before August 2009, you are paying the Entry load even today !! At 20000 Rs per month, this works out to be 5400 Rs annually and over a period of 10 years the amount of money lost is significant. So, stop all such SIP at once and you can start SIP in Direct schemes for the same funds if you want. Similarly, if you have SIP in Regular schemes of MF, stop these and start in Direct schemes of the same funds to avail the lower ER.

There is another reason why you should not let your schemes run for long, especially if these funds are not the ones you are investing in currently. Most earlier funds were bought through some Distributor or the other as there were no Direct funds then. Now for such schemes you continue to pay a Trail commission to the Distributor based on your period of holding. Let us say you Purchased a SIP in HDFC Top 200 from 2012 through 2015 and then stopped it. Even though you are not investing in it now, every year your Distributor gets a Trail commission and will continue to do so as long as you hold the Fund. Now, if you are not particularly happy with the Fund redeem it and put money again in Direct schemes.

Finally, many of us have bought MF for a long time and may not really be organized to remember each investment, especially the smaller ones. You can register yourself for your NSDL or CDSL statements and check out your consolidated holdings in one place. As long as your email id or PAN is linked to our investment it will figure there. Just in case, this is very old and you do not have these linked, you can still do a name search in the repository data to check out the possible schemes. Yes, there will be some duplication of names but it is not difficult to check the right ones belonging to you.

I hope the information here is useful to the readers in sorting out their MF investments. In short, shift to Direct funds and make sure you have information on all your invested schemes. This will help you to work your money in a productive fashion.

Home loan – your options now

Over the past few days there have been significant changes in the home loan rates. Though this was being anticipated for quite some time, it was only with the demonetization impact and with a serious nudge from the PM that SBI went ahead and made a huge cut to their MCLR. Other banks followed suit and the effect has been to see the lowest home loan rates for quite a while. SBI and many are at around 8.65 % and I believe Bank of Baroda is the lowest at 8.35 %.

So if you are thinking of taking a home loan now to buy a house, is it a good time? To begin with if you want to stay in it, that is definitely a good idea. In case you are looking at the purchase as an investment, my suggestion will be that you wait to see how the realty market settles down in the next few months. Look at the following for the loan:-

  • Take a loan that you really need and pay as much as you can on your own. Remember even at lower rates of interest you are paying for the loan.
  • Negotiate on the rates as well as the waiver of processing fees.
  • Do not go for loans with a tenure of more than 15 years, 10 would be preferable.
  • Make sure there are no prepayment penalties associated with the loan.
  • Go for a pure floating rate loan, avoid ones that are part fixed for the first few years etc.

What if you are already having an existing loan? Well, that will depend on the context – see below for how you should go about it.

  • If your loan was taken after April 1, 2016 then it is linked to MCLR. In this case, you do not need to do anything, your rates will get adjusted to the new ones.
  • Remember the MCLR reset is done at different frequencies by different banks. Check with your bank to know when the rates will get reset.
  • In case you have an older loan, it is probably linked to BPLR and you need to look at possible switch. There will be a switching fee associated with the change. This is normally between 0.5 % to 1 % of your outstanding loan amount for most banks and is capped at 10000 Rs.
  • Check the EMI difference you are getting and multiply it with the outstanding tenure in months. If this amount is significantly more than the switching fee you should switch your loan.
  • If, for some reason, your bank is not being cooperative look at other options.
  • When you switch, do not reduce the EMI but ask for a reduction in tenure.
  • As a general strategy continue to prepay whenever you can.

As you would know, I dislike any kind of loans and would suggest you avoid them if possible. However, you do need to take a loan for housing in all probability. Make sure that you are discerning while taking the loan, limit the amount by paying as much as you can on your own and prepay aggressively.

Your home should be a great asset to you, not a liability in the form of an outstanding home loan.

Restructuring my MF portfolio in 2017 – why and how

If you are a regular reader of my blog you will know my 3 portfolio strategy for investment by now. I have portfolios in Debt, Stocks and MF. In the initial part of my working life I invested in mostly debt, the mid part was largely used to build up the stock portfolio and 2008 onward till now it has been largely MF. Of course, once I decided about giving up my regular corporate career in 2012, I boosted my debt portfolio significantly.

Over the years I have bought several MF schemes, initially with one time investments, thereafter with SIP and now back to investing at the right times. I have therefore collected a large number of MF schemes and in several of these the amounts invested are not very significant. The ones where I have done SIP obviously have some decent amounts, but even here there are several funds as my portfolio had changed over my 7 years of SIP.

In the past whenever the markets have gone up significantly, I have thought about cleaning up my MF portfolio. Somehow or the other it has never happened and I am stuck with a multitude of MF schemes, most of which I do not really want to keep. This weekend, I took a look at my MF portfolio after a long time and these were my observations.

  • I am currently investing in 4 MF schemes which are as follows. My plan is to continue investing in these for the future, at least till I have active income to do so:-
    • ICICI Focused Blue chip fund
    • ICICI Value Discovery Fund
    • HDFC Mid cap opportunities Fund
    • DSP BR Micro cap Fund
  • There are some other funds where I have significant investments but have dropped now. I will be keeping these for now but may want to sell them off during any annual review that I undertake. Future investments in these are unlikely:-
    • HDFC Top 200 Fund
    • IDFC Premier Equity Fund
    • Birla SunLife Frontline Equity Fund
    • DSP BR Equity Fund
    • Sundaram Select Mid cap Fund
    • Franklin India Blue Chip Fund
    • UTI Dividend yield Fund
  • There are some Close ended funds such as the ICICI Value Series Funds. I had invested in these as they give regular dividends which is useful to me. I will either continue with them or shift to other similar funds. To give readers an idea, ICICI Value Series 2 has given an XIRR of 30 % plus in the 3 year investment period.
  • Everything else, I want to get red of ASAP.

How do I plan to go about it? I have a feeling that next few weeks may be the best chance if Nifty goes to 8750 etc. Once the quarterly results and budget are through and the state elections happen, our markets are very likely to down to 8000 or even below that on the Nifty. Once I sell all my disposable MF, I will just be in cash and wait for the right opportunity.

What will I be buying with the cash I get? Well, one option is to invest in some of the stocks I had outlined in the last post. I am sure that if I buy these at Nifty levels of 8000 I will definitely see significant returns over the next 3 years etc. Another option will be to space out the stocks and invest in my 4 MF’s .

Unless the NIfty shows a rising trend due to a strong budget, I am finally ready to pull the trigger on this. Even if it keeps rising, I will still sell when it reaches 9000, as I do not believe that is a value at which the Nifty can sustain itself.

Your MF investment plan in 2017

In the 3 portfolio strategy that I advocate, Mutual Funds have a special place. They are an investment vehicle that lets you participate in equity as an asset class, without the necessity of any great understanding of the markets or business. For a person who is stepping into equity investments for the first time, MF offers good learning potential. Being with MF for some time can be an ideal platform to transition into direct stocks.

Unlike debt where your investment strategy and choice of instruments will depend on your stage in life, the MF investment strategy is roughly the same for all kinds of investors albeit with some nuances in approach. I have written about it extensively in the blog on various aspects of MF investing and will therefore not repeat it here. Let me instead outline the key aspects of MF portfolio building that you must follow.

  • Number of funds:  Several people may tell you that you can do all your MF investments with 1-2 funds. Nothing can be further from the truth. Different categories of funds have very differing mandates and in order to get adequate market coverage you need multiple funds in your portfolio.
  • Portfolio composition: My suggested composition will be as follows:-
    • 1 large cap oriented fund
    • 1 multi-cap or diversified equity fund
    • 1 mid cap fund
    • 1 small cap fund
    • 1 international fund with US bias ( optional )
  • Buying mechanism: While SIP is the most common mode of buying there are serious conceptual flaws in this mode. I prefer buying MF based on the relevant indices movement. Read my posts in the blog if you want to invest intelligently. If you do not have the inclination or time then just do SIP, even with the flaws it will work.
  • Relative weights: I personally prefer allocating equal weights to all funds in my portfolio. However, this is an area where your investment attitude should take over. Do what you are most comfortable with and, if needed, change over a period of time. It is ok to allocate 50 % of your money to large caps if you are not a person who can deal with volatility very well. On the other hand if you are comfortable with taking risks allocate more to mid and small caps.
  • Portfolio rejig: Ideally review your portfolio once a year and compare it with your targets and the benchmark indices. If the fund seems to be doing ok, do not change it. Normally I prefer a change only after 2 years even though you may need to act sooner if performance is poor.
  • Choice of funds: I have deliberately kept it till the last as it is one area where investors are most confused about. You do not need calculators or any deep kind of analysis with all kinds of ratios in order to choose MF. There are fairly good ratings done by companies and people who are professionals in handling these. Just go with them, it is not rocket science. Most fund managers invest in the universe of 250 companies or so with most investments going into the top 100 One good fund is really similar to any other.

So that is really all you need to do in building up a good MF portfolio and investing in it. Read my other posts in the blog for details if you want.

MF buying, index levels and 2017 outlook

To begin with, let me state that I was rather impressed by the readership of my last post as well as the comments posted. I have tried to respond to the individual ones but felt that it would be a good idea to address some common issues. Even before getting into it, let me state that I have no pathological dislike for SIP – in fact as a marketing professional, I feel that SIP has been an outstanding marketing success, so much so that many people even think that SIP is` the product they have invested in !! My only objection comes from the basic fact that SIP is a completely wrong way to buy equity as an asset class.

Let us now get to the objections. They are broadly as follows:-

  • SIP is easy for salaried people as otherwise they cannot say whether they will spend the money or not – I hope this issue is addressed through the real life case study that I shared.
  • People will find it difficult to keep track of index levels etc.
  • How do I know that Nifty will simply not keep climbing and reach 9000 and beyond levels, thereby not giving a chance for people to invest in MF.

In order to understand this, we will need to look at historical levels of the Nifty over the last 2 years or so. 

  • On February 7th 2014, Nifty was at 6023. This was the low point of the UPA and it started to rise from there.
  • On May 16th 2014, after the win of Modi and BJP Nifty hit a level of 7203. At that point most analysts predicted 9000 levels quite soon.
  • On March 5th 2015, Nifty hit a level of 8937. For the first part of Modi regime the Nifty had climbed almost non stop with only occasional blips.
  • On Jan 1st 2016, it was at a level of 7963 and kept going down to below 7000 on the day of the budget which was 29th Feb 2016.
  • Nifty ended 2016 at a level of 8185.

You can see from here that the Nifty has really moved nothing in the last 2 years. Yet we expect it to move by 2000 points or so and that too continuously? We might as well believe in fairies and ghosts 🙂

Coming to the current year, we clearly need to understand that the whole rise and fall of Nifty and other indices are largely FII money driven. With the US and some other markets doing well there will be tough choices for the FII brigade as to where they should put in the money. If the stability of the government and the policies that it espouses seem to resonate well in terms of BJP doing well and the economy showing high growth in terms of the corporate earning then Nifty may well climb again. 

So what is likely to happen? Right now, Nifty fair value is sub 8000 but it is very likely it may have a run up in the period till the budget. If it crosses 8600 or so that will be a major victory for the bulls and may push it up even beyond 9000. However, that is unlikely and I think Nifty levels will oscillate between 7900 and 8500 depending on the budget outcome. If BJP loses UP in addition to Punjab then 7900 is very likely to be breached on the downside. In any case, corporate earning in this calendar year will only improve in Q3 or so due to the demonetization effect and therefore Nifty will probably rise in the last 3 months of the year, given the revival of FII interest in our markets.

The route from today is thus likely to be as follows, 8300 – 8000/8500 – 7700/9000, 8400/9500. I personally think a 10 to 12 % return on the Nifty is quite possible from the start of the year when it was around 8185. Given this it is clear that you do not want to buy at levels of 8800 and 9000 and subject your investments to another year of mediocre returns. That is what they had in 2015 and 2016 when you bought at high levels through SIP and are now seeing much lower levels.

From my perspective I bought in 2016 at very near the lows of the year and avoided buying for most part till the very end. In this year too, I am hoping to buy in the sub 8000 levels of the Nifty and hopefully much lower. In order to do this we will need to track the Nifty over the months and have some idea about some directional trend.

The point is, even if you do not get any chance to invest and have the money in Arbitrage funds you will still make 7 – 8 %. This is more than what the Nifty has done over the last 2 years. In reality the markets will always give you opportunities and you just need to be aware of these.

Let me address this in the next post.

Salaried = SIP? Read this case study

Since I wrote about not following SIP about a year ago, I have had many discussions in the blog and in Facebook groups such as AIFW on the subject. A lot of people have tried to convince me why SIP is a right method, despite the concept being completely inadequate for equity as an asset class. I will not go into the arguments or counter arguments as it has been done and dusted as far as I am concerned – if you are interested go through the different posts in the blog. 

However, the other important point many point out is the availability of money to take advantage of the drops in the markets. The argument goes like this – ” It is all very well for you as you have enough money to spare. We get a salary every month and if we do not put the money in SIP, we will probably spend it.” Now, I find it difficult to understand why any person cannot show some self discipline, but that is unique to each person. I was quite happy to see that a reader of my blog asked me a more pertinent question – she wanted to know how she could invest in MF more productively. Having done SIP for 2 years and read my posts she could see that there was enough case to not do SIP in MF.

To give some basic background, this reader lives in Mumbai and works in the advertising industry. Her monthly take home is about 1.5 lacs and she was investing 40,000 per month through SIP in 5 Mutual fund schemes. Over 2015 and 2016, she could see that her nearly 10 lacs invested in these funds have not done greatly. She could also see that there were several times she could have put in money, had she not been doing SIP. Now apart from MF, she also wanted to do 1.5 lacs in PPF annually. Based on this data, I have given her some alternative plans which she can look at in 2017.

  • Firstly she needs to fix the index levels aligned to her funds at which she wants to make a purchase. For example, in Nifty the right level currently will be 8000 and below. This may happen in Jan/Feb and a couple of other times in the year.
  • In order to have the money available, avoid putting in the 1.5 lac in PPF in the beginning of April.
  • As and when markets fall put in the money for MF buying. Look at having 4-6 purchases in the year.
  • She could just keep the money in her savings account but there will be a temptation to spend and also the interest is low.
  • A better way will be to put 12500 per month in PPF, unless you are buying MF that month. If the markets are high you can put more. For example, if you are clear that April is unlikely to be a good month for buying MF, put that amount in PPF.
  • In general, put your SIP amount in an Arbitrage fund with dividend option. You will get decent returns and can shift money from it to buying MF whenever needed.
  • Another way will be to put the money in Liquid fund or some other type of debt fund.
  • The above addresses the issue of parking your money, so that you do not get tempted to spend it. At the same time, you do not buy equity MF at the wrong time.

How has it worked out for the reader in this month? 

  • She understands that a level of 8000 or lower in Nifty will be a good buy for her large cap fund but at 8250 etc she is not interested to buy.
  • She has put the amount of 40000 in a Liquid fund along with the amount of 30000 which she used to save for PPF.
  • In case Nifty consistently stays above 8000 till February beginning, she will put the money once again in the same Liquid fund.
  • At the beginning of each month have an idea of the Nifty level at which she wants to buy. It is all right if it does not reach that level, she will avoid buying.
  • Worst case scenario can be for Nifty to go up consistently through the year. This is unlikely and even in such a case she is anyway taking a monthly call.
  • I think it is very probable that she will buy her units at Nifty level of around 7900 this month itself or the next.

It is a rather simple system which anyone can adopt. Remember, her salary is not an issue here – people having lower or higher salaries just need to scale the model down or up. Do you want to do this? Only you can answer that – if you want your money to work in a more productive manner, consider it seriously.