Some crystal ball gazing for the next year

If you are an Indian then you are probably seized of the importance that the next 12 months, or even 11, have in store for the country. It is not easy to predict the outcomes in different aspects of life as much of these issues are quite complex in nature. However, it will be safe to say that whatever the outcomes, they are likely to change things for the country in a significant manner. In this post, I will try to do some crystal ball gazing into 4 important areas, namely Society, Politics, Economy and Markets.

Let us look at society first and, I think most of us will agree that we live in very divisive times today. Whether it is division along class lines or on community lines, there is a lot of basic mistrust that people have for each other today. This is manifested in the bitter invective political parties come up with, in communal skirmishes in several parts of India, lynchings on suspicion of kidnapping children and so on. The law and order machinery has pretty much broken down with rapes, assault and mob lynchings being a daily occurrence, as opposed to the exception they used to be earlier. The society is also divided along class lines – industrialists perpetrating big financial frauds on the banks seem to get away, while indigent farmers have to commit suicide as they are not able to pay small loans back to the banks. Nothing seems to be sacred any more – army men are pelted with stones, anti national slogans are shouted in the name of freedom and people cynically debate as to whether one needs to stand up to the national anthem.

Unfortunately, over the next 11 months or so I think the society is going to get more polarised along communal, caste and class lines. With the BJP in power, the right wing fringe groups have got emboldened and violence has become a way of life for both these people and the ones they oppose. For the political parties a divisive agenda is the only way to bring out a good electoral outcome and they will not do anything else. The court judgement on the Ram Mandir issue will add to the polarised atmosphere of the country and the movement towards an Uniform Civil Code will heighten communal tensions. The only way is to tighten law and order by being tough to all perpetrators of crime, without fear or favour. However, in an election year that will never really happen.

Politics is, of course, at the core of everything that is happening in our society today. For both BJP and the opposition the 2019 elections will be a game changing one. When BJP lost unexpectedly in 2004, it took them 10 years to come back in power, even though the UPA ran a shoddy and corrupt government. The opposition knows they have been lucky not to have their misdeeds exposed and judged in the current term of the government, but their luck will not hold if BJP gets another term. With this backdrop both sides will do everything possible, both fair and foul, to win at all costs. The by poll results have shown that if the opposition comes together, it is tough for the BJP to win in today’s scenario. However, a lot of this can change in the next 11 months, BJP will hope it does.

My assessment is that the opposition will never agree to the simultaneous election idea that BJP is so keen on. Congress knows that it has chances in MP and Chattishgarh, with Rajasthan almost certainly going to them. It therefore makes sense for them to show BJP on a losing wicket when it goes for the Lok sabha elections. The only way BJP has out of this is to hold elections in January or so and get these 3 states as well as Andhra Pradesh and Telangana clubbed. This has a definite element of risk as Bajpayee had found out in 2004 and many in the BJP will remember that lesson. In any case, BJP will probably have to bite the proverbial bullet as the alternative is certainly worse. Whichever way it decides to go, I cannot see it getting anything more than 250 and anything less than 200 seats. If it is the former then there will be enough parties who will tag along for them to form a government. However, anything less than 230 will really mean a Karnataka like situation where everyone will come together to keep the BJP from power. I think 250 is a possibility but for that to happen large sections of the society will need to support the BJP as they did in 2014 – the health program, MSP pricing, Kashmir having President’s rule, possible solution to Ram Mandir are all geared towards this.

What of the economy then? It is now clear that the corporate results are on the way up, though in a slow trajectory. The tax collections are fairly robust and the initial glitches with GST are improving now. Good measures like the bankruptcy code and declaring absconders as fugitives will make sure that people do not take banks for a ride. However, the expenses of the exchequer have increased manifold due to the Universal health scheme as well as the MSP increases. This, along with the refusal to reduce taxes on Petrol/ Diesel will unfortunately create an inflationary impact in the economy. The RBI may well be forced to increase the interest rates and coupled with the depreciating Rupee against the US Dollar, there is a good chance that the economic recovery might get stymied. The government is hoping that the effects of this will be only visible after the elections but people who know will be able to see this portent quite clearly.

Finally, how will the markets fare in all of these. Right now, I see the Nifty being in a range of 10000 to 10800, with a possible negative bias. If elections are held separately and BJP loses the assemblies then a fall to 9000 and below is quite feasible. In the event of BJP losing in the Lok Sabha and being unable to form the government, a 20-25 % downside from the 10000 figure is reasonable to expect. On the other hand the relief will be palpable if BJP somehow comes back to power and a rally to 11000 plus, maybe nearing 12000 can be expected.

So there you have it – a swing of 8000 to 12000 is possible. This is the kind of excitement that many expert investors seek in the markets in order to make money. For most of us though, such volatility is really not desirable. How should they deal with their investments in this turbulent period?

I will write about investor strategies in the next few posts.

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Building an Equity Mutual fund portfolio from scratch

In some of my blog posts this year, I have written about how one can build a Mutual fund portfolio with the new categories that SEBI has come up with. However, I still get a lot of enquiries on how investors, especially new ones, should go about building an MF portfolio. In this post let me show you how to build one from scratch.

Before we get into looking at the types a starting investor should invest in and what funds he can look at, let us first recap the types of equity funds SEBI has come up with.

  • Multi cap fund
  • Large cap fund
  • Large & Mid cap fund
  • Mid cap fund
  • Small cap fund
  • Dividend yield fund
  • Value fund / Contra fund
  • Focused fund
  • Sectoral/Thematic fund
  • ELSS

For an experienced investor all of these fund categories may have some use or the other in their portfolio. However, if you are at the starting point of your investment journey then my recommendation will be that you only look at 3 fundamental categories along with an ELSS fund for tax saving for the first 5 years or so. In fact, I will want you to forget the ELSS if you have enough money to invest in your MF portfolio and some good debt investment like PPF separately.

Ok, so without further ado, here are the fund types you need to have in your portfolio and some of the schemes which you can choose from.

  • Large cap fund
    • HDFC Top 100
    • ICICI Prudential Blue chip fund
    • ABSL Front Line Equity fund

 

  • Mid cap fund
    • HDFC Mid cap opportunities
    • Franklin Prima fund
    • DSP BR Mid cap fund

 

  • Small cap fund
    • DSP BR Small cap fund
    • Franklin India Smaller companies fund
    • HDFC Small cap fund
 Let us now see how you can create a portfolio from scratch. I will only outline the process here and if you are interested you can go through the various posts in my blog to get more details on the concepts and reasoning behind those.
  1. Based on your life goals, identify the time line for each major goal and understand how much of financial commitment they would require at those times. For example the college education of your son may need an amount of 40 lacs in 10 years.
  2. Once you know the time lines and the amounts, look up an SIP calculator and calculate the SIP amount you will need to invest every month. Use a return of 12 % to be on the conservative side. In the above example, to get 40 lacs in 10 years time at 12 % XIRR, you will need to do a monthly SIP of 17388 Rs.
  3. Do the above for all your goals and add up these amounts. This will give you the total monthly investment you need to do all your financial goals comfortably.
  4. Now look at your age to decide on your risk taking ability and therefore the ideal asset allocation. My suggestion will be the following :
    1. If you are less than 35 years old put 40 % in Mid cap funds, 35 % in Small cap funds and 25 % in Large cap funds.
    2. If you are between 35 and 45 years old put 30 % in Mid cap funds, 25 % in Small cap funds and 45 % in Large cap funds.
    3. If you are above 45 years old put 20 % in Mid cap funds, 20 % in Small cap funds and 60 % in Large cap funds.
  5. Once you have decided on the allocation, just pick out one fund out of each category and start investing. Do not worry about which fund as all of these are good and in the long run it does not really matter which one you have chosen. However, try to make sure that you have funds from at least 2 fund houses, preferably 3.
  6. A sample selection can be ICICI Prudential Blue chip for Large cap, HDFC Mid cap Opportunities for Mid cap and DSP BR Small cap fund for Small cap.
  7. Once you have decided on the monthly amounts, just set up an automated SIP and let the money get invested every month.
  8. You will need to do an annual review but that is a different story altogether.

I hope most people would have found this useful. Recently I was approached by a reader who wanted me to create a portfolio for him. I will share this in another post.

 

Close ended NFO’s open now – should you subscribe?

Over the last few years and especially in 2017 and 2018 many of the Fund houses have come up with a slew of close ended NFO’s. These come with a variety of themes and associated terminology. For example ICICI calls them Value Fund series, Sundaram calls them Micro cap series and Axis calls them Equity advantage series. In this post let us look at why these are in vogue now, what are the pros and cons and finally whether it is a good idea to invest in them.

The first issue is relatively simple to answer : new products get developed based on the likelihood of their success. With a lot of retail and institutional buyers pumping in money, there is always a demand for newer types of funds to invest in. For fund houses, it is an opportunity to have a specific charter which may not be possible to fulfil through their regular funds. For example, one of the ICICI value series funds only wanted to invest in Pharma and IT sectors as these were beaten down significantly over the last six months or so. Now this could be done in one of their existing funds too but for a fund manager to churn the portfolio by selling stocks that are doing well is not always an easy decision to take. Using fresh money in taking such calls is relatively simple. The trend started by end 2014 or so with ICICI and has now percolated to several others.

What are the pros and cons of such funds? Well, for one the mandates here have a lot more clarity compared to a vanilla large cap or mid cap fund. The fact that it is close ended, normally for 3 years, means that the fund manager has time at his disposal to take the calls he wants to take. On the flip side you will not have access to your money for 3 years and this is a problem unless you can definitely do without it for this time. A greater problem may be your inability to shift in case you are not happy with the performance. From my viewpoint, I do not see both these issues as a serious one. Firstly, you should be investing in equity for a much longer term than 3 years. Secondly, the Fund manager is way more qualified to deal with short term performance issues.

Let me now give some details of an investment that I made in one such fund. While the experience may not be repeated for all funds, it does offer certain insights:-

  • I purchased ICICI Prudential Value Fund series 2 on 6/12/2013. Invested amount was 2 lacs in the Dividend option.
  • The idea was to get some regular income as I planned to go for my consultancy practice sometime in 2014.
  • Though it was a 3 year fund, it has now been rolled over and will mature on 31/12/2018.
  • So far total dividends have amounted to 2 lacs
  • Current value of the fund is nearly 2.1 lacs

I think it can be said quite safely that this worked out quite well. In fact, I have invested in several follow up NFO from ICICI. Apart from ICICI I have also tried out Axis, Birla Sunlife, Sundaram and UTI for close ended funds. From a personal perspective it works well for me as I got tax free income and also growth from it. With the change in taxation, the returns will be lower but it is still a better bet than most of the other options.

You should be investing in these funds under the following situations:-

  • You have some income requirement every year. Instead of doing FD you can go for close ended funds with dividend option. Note that the dividend is not guaranteed.
  • You have a goal after 3-4 years. This is ideal for such situations. However, in such a case choose the Growth option.
  • You have come into some money and do not want to decide on allocation for 2-3 years as you may need the money then. Go for the growth option here too.
  • Make sure you understand the mandate and therefore the associated risk profile. A micro cap series from Sundaram will obviously be more risky as compared to the Value fund series of ICICI. However, the rewards will vary in a similar trend too.

If you are interested in these funds after reading this post, do consider the following NFO’s that are ongoing now :-

  • ICICI Pru Pharma, Healthcare and Diagnostics fund
  • ICICI Pru Bharat Consumption fund – Series 3
  • Tata Value Fund – Series 1

All of these funds have interesting themes and are likely to do quite well over the 3 year period. Personally I have put 1 lac in each of the ICICI funds.

People having surplus money and waiting to invest in some suitable avenue should take hold of this opportunity.

Are we still in a Bull market?

In several discussions about our stock markets, the inevitable question that comes up is – Are we still in a Bull market? At times the people asking the question are really not aware of what a Bull or a Bear market is, they are merely articulating what they have read somewhere or heard on the TV channels. In this post let me try and define these a little, in the context of our markets over the last 15 years or so.

So let us start with the basics – the long term returns for Nifty has been in the range of 14% over the last 3 decades or so. You can define a Bull market as a period of time where the returns were significantly higher than this. In the 2003-2007 period the returns were in excess of 30% as Nifty went from about 2000 to 6000 odd levels. This period can therefore be definitely classified as a Bull market. The corporate profits grew 4 times in this period and the PE ratios approached the high 20’s by the time the run ended.

Contrast this to the period 2008 to 2015. The annualized return on the Nifty was well below the 14% mark. Though the markets went up and down the overall trend was negative. Volumes were generally muted and the overall sentiment was a negative one. This was very clearly a Bear phase of the market. This phase ended in 2015 December and since 2016 beginning we are in a Bull phase again.

It is important to note that in a Bull market there is often a possibility of fairly deep corrections, often more than 10% and at times even to the extent of 30%. In the last Bull run of 2003-2007 there were more than 10 such corrections. The recovery of the markets from such corrections ranged between 2 and 6 months. Even in the present Bull market which started in 2016 there have been 3 instances of such deep corrections. In each of these cases there was recovery in the markets and it went up more than it had fallen.

So, coming back to the main question of the post, are we still in a Bull market? There is a very interesting twist to this answer. For front line stocks ( say top 100 ) the profit multipliers have not been great yet and neither are the PE ratios at a very high level. So the indicators do not signify an end to the Bull market soon. From all available data it seems likely that the run will last till 2020 end or even more. Of course, unexpected events such as the incumbent government losing power can signal an abrupt end to it. In the meantime there will be deep cuts from time to time and investors should use it as an opportunity to buy more.

The broader markets with Mid cap and Small cap stocks are a different story though. Here the individual stocks have been battered down quite badly, in some cases being down by 40 to 60 % from their peak price. Though the recovery may yet happen, it is likely to be rather slow. In case it goes into a deep time correction without recovery then we will have to say that a Bear run has started for this part of the market. As Indian companies grow at different levels this may well become the norm where different part of the markets exhibit different buying levels and interest.

On the whole though, I am inclined to think that we are in a Bull run for the overall market – maybe more so for the large caps and less so for the others. Unless BJP loses 2019 polls, it is very likely that the run will continue till 2022 which will be the mid point of the next government.

MF schemes with highest assets – should you invest in these?

I have been away from writing the blog for a while as my children are at home now and we had been to Bali for a vacation. It was nice to see that several readers have inquired as to when I am going to resume writing the blog. With all the interesting things happening in the markets I think this is a good time to start writing again.

Over the past few months the SEBI mandated categorization of MF schemes have now happened, thus bringing a lot of standardization for the investors. I was looking at the MF schemes that have been the most popular over the years. Now, just because the schemes have been invested in it does not mean that you must do so. At the same time there is a lot of value to these schemes being supported over the years by investors.

The following 6 schemes have the highest AUM, all of them above 20000 crores:-

  • HDFC Prudence fund
  • HDFC Equity fund
  • HDFC Mid Cap Opportunities fund
  • ABSL Frontline Equity fund
  • Kotak Select Focus fund
  • SBI Blue Chip fund

Should you be investing in these funds? For that it is important to look at the following issues:-

  • Fund manager credentials and longevity are normally good for all these funds.
  • With a larger AUM the flexibility of the fund manager to make quick changes according to the market situation is limited.
  • The mandate of the fund becomes critical in these situations. With the SEBI definitions in place a pure large cap fund will find it difficult to generate differential returns.
  • It will be imperative to look at the past records of these funds especially for the last year or so where the markets have gone through a volatile period.
  • While most of the existing investors can remain invested in these schemes for some more time the real issue is whether new investors should get into these or not.

Based on the above, it will be fair to say that both HDFC Prudence as well as HDFC Equity have really not performed well compared to both the Benchmarks and Peer group funds. If you are looking at a large cup fund you will be better advised to stick with the ABSL or SBI variant. However, for investors with a longer term time horizon, Kotak Select and HDFC Mid cap will be significantly better options.

Of course, there are several other great schemes where the AUM is not as high as these six funds but these are doing as well or better. I have some posts on these in my blog and you can go through them to build your own high performance MF portfolio.

A trip to Bali – Beaches and bonding

The regular readers of my blog will understand that travel is one thing which keeps me going. Fortunately, my family members are also keen on it and this has enabled us to visit several destinations, both mainstream and offbeat, where we have spent some great family vacations. This year we already had one in Goa and were not planning for another one so soon.

The genesis of our trip to Bali was the realisation that it will become tough to get a travel window for our whole family once the children start their professional careers. Lipi was particularly keen that we go somewhere outside India this time, since our last such trip was to Thailand way back in 2008. What with the issues of getting visas, Bali seemed to be the best option. Given the paucity of time again, it seemed a good idea to go for a packaged trip rather than plan one on our own. We were able to get Yatra.com to customise a trip for us. They were covering the airfare, accommodation and 2 full day tours in Bali along with the airport transfers for 42000 Rs per person which looked fine. We made the payments through our credit cards, got the required voucher printouts and were ready to take off.

The Air Asia flights have only hand luggage as per the ticket rules and the weight cannot exceed 7 Kgs. This meant each one of us had a single piece of luggage and had to make choices on what to carry – the good part was all of us were travelling light. The journey to Bali was a good one and we used the layover in KL to have breakfast at McDonald’s. KL airport has good WiFi and, as is the wont with every family nowadays, all four of us were busy with our phones for the rest of the waiting. The airport in Bali has a runway adjoining the sea and the descent of the aircraft was quite a nice view. Immigration was a breeze as they just stamp your passport and we were soon on our way to the hotel. In the short distance we had to travel, I was quite impressed with the sculptures on the road crossings – they were from Hindu mythology and mostly from the epics Ramayana and Mahabharata. Bali is having a majority Hindu population and they have evidently preserved their heritage and culture rather well. We need to take lessons from them.

Our hotel was in Kuta area which is a bustling place having markets and other commercial establishments. The hotel itself was pretty good with nice rooms, a well appointed Gym, 3 nice restaurants, a nice Spa and most importantly a great location with Supermarkets, fast food joints like KFC and Domino’s as well as good local restaurants. We went to the Kuta beach in the evening and it turned out to be quite a happening place. You walk through a busy market to reach the beach and there are several restaurants as well as some shacks proffering Beer and cold drinks. The beach itself was crowded but quite clean and the sunset was out of the world. I have seen several sunsets all over the world and the first one in Indian ocean  was somewhat special. A restaurant served us a drink named Kuta Sunset, which was quite apt. We also had a Seafood Pizza and some Fried chicken while we watched the sunset. After coming back to the hotel we turned in early as the next 2 days would be busy ones.

We started the second day with a hearty breakfast that had everything from Cornflakes to Muffins/Croissants and Nasi Goreng too. By 10 AM we were off to our whole day tour. The first part was covering several villages where artisans made jewellery and clothing. In the afternoon we went to the Kintamani viewpoint from where you can see Mount Batur which has a Volcano crater at the summit. The whole mountain area and the lake was great viewing and there are many restaurants where you can sit on the terrace and have your lunch with observing the views. The fish that we ordered was not cooked properly but the day was otherwise so good that we took it in our stride. Next we went to a Coffee plantation where we saw how Luwak coffee was made and saw the Civets that play a key role in it. We also got to sample many different kinds of Coffee which was truly an unique experience. The journey back to the hotel was a long one and we had dinner at KFC before calling it a day.

The next day we covered two important points of Bali. The Tanah Lot temple is for the Sand and Sea and gives you great views of the Indian ocean along with the rocks on the shore. The sculptures have definite Indian influence and it makes you realise how far Indian civilisation had traversed in the ancient days. You would think that better views of the Indian ocean are probably not possible but that will change once you go to the next point which is the Uluwatu temple complex. This is situated at a height and the cliffs give you a great view of the ocean. The monkeys in the temple complex are a menace and apparently snatch everything from food to eyeglasses to hats. Rinki and I had a nice time exploring the area and taking in the myriad hues of the sea from different viewpoints. The coup DE grace was definitely the Kecak Fire dance depicting scenes from the Ramayana, specifically the burning of Lanka by Hanuman. The dancers were superbly skilled and watching them perform as the sun sets on the Indian ocean is a heady experience. The trip back to the hotel was again a long one but the lingering memories of the dance kept us preoccupied. We wanted to try out some local cuisine that dinner while Ronju was hell bent on a Burger, which is his staple diet whenever possible. A compromise was reached where we let him go to his favourite haunt, namely KFC, while we searched for an Oriental restaurant. We managed one where Kung Pao Chicken and the local delicacy Braised pork went superbly well with the Noodles.

After our exertions of the first 2 days we wanted to take day 3 easy. I was all for going to see the Rice terrace that Bali is famous for but gave in to a more sedate day as Lipi was feeling a bit under the weather. Rinki and I spent some time on the terrace swimming pool in the morning, before we went off to have a pizza lunch at Domino’s. In the afternoon I took the children for a last look at the Kuta beach. Sitting in the shade with them and talking while nursing a cold beer was good fun. We managed to catch a great sunset once more and the children went frolicking in the beach once the sun’s rays had tempered down a bit. Ronju had his customary burger at Wendy’s this time and after we got back we went to another dinner – this time with all 4 of us.

Next day we were on our way back, again with a layover in KL. It was a smooth journey and the trip was a greatly enjoyable one. The best thing about Bali is the ease of getting there and familiarity with many things Indian. We will be back again as the Timeshare we have with Karma, entitles us to a few resorts there.

My personal experiences on children’s college education

May is that time of the year when all parents of college going children have to figure out ways and means of arranging the fees for the upcoming semester, term or year in college, as the case may be. I have been in this situation for 6 years now and am likely to be in it for a few years more, given that I have two children.

Let me give a brief background for new readers here. My daughter Rinki has graduated from BITS Pilani, Hyderabad campus with BE in ENI. After her graduation in 2016, she had joined XLRI for their BM program and has now completed her course there. My son Ronju is doing a 5 year dual degree course from BITS Pilani, Goa campus in Msc Maths and BE Computer Science. He will graduate in 2019 from there. If you are interested in knowing more about the overall costs and how I arranged for the funds etc, you can read up several posts available in the blog under “Education” category.

In this post I particularly wanted to discuss about the overall costs of a college degree in BITS and the inflationary nature within the course. Unlike some colleges, which give you a total figure for the 4 or 5 year course when you join, BITS only talks of the first year costs and then increases it every year. They have been transparent to say that the fees can increase by up to 15 % a year and, more often than not, it actually increases by that much. Let me take the component of the Tuition fee and see how it increased during the time Rinki was in college :-

  • In her first year 2012-2013, Tuition fee was 70000 per semester or 1.4 lacs in the year.
  • In 2013-2014, it was 78000 per semester or 1.56 lacs for the year.
  • In 2014-2015, it was 89000 per semester or 1.78 lacs for the year.
  • In 2015-2016, it was 101000 per semester or 2.02 lacs for the year.
  • In 2016-2017 it was 113000 per semester or 2.26 lacs for the year.
  • In 2017-2018 it was 130000 per semester or 2.60 lacs for the year.
  • In 2018-2019 the proposed fees are 159000 per semester of 3.18 lacs for the year. This has led to a lot of student protests and BITS may be forced to reduce it somewhat now.

Now apart from these there were Admission fees, hostel fees, mess fees, personal expenses, travel, practice school fees etc. From my notes I can see that the total expenses for her college degree was approximately 12 lacs.

At XLRI the overall costs are in the range of 24 lacs and you can add another 2 lacs or so for travel etc. Therefore her total Education costs in college is about 38 lacs.

For my son Ronju the last 2 years of Rinki will be common. Beyond this the fees for the other 3 years are as follows:-

  • in 2016-2017, it was 1.13 lacs per semester or 2.26 lacs for the year.
  • In 2017-2018, it is 1.30 lacs per semester or 2.60 lacs for the year.
  • in 2018-2019 it will be 1.59 lacs per semester or 3.18 lacs for the year.

Therefore for Ronju’s graduation the overall costs will be in the range of 20 lacs or so. I have not thought about his PG yet, as he is not sure whether he wants to do one. However if it is from a good B school, it will be in the range of 28-30 lacs. Assuming this to be the case, his total costs of college education will be in the range of 50 lacs or so.

From the above data you will be getting a pretty good picture of the educational inflation too. In 5 years the tuition fees has increased from 1.4 lacs to 3 lacs. The other costs have also increased and as you can see, a 4 year course for BITS starting today will easily cost more than 22 lacs or so, all things considered. Just the Tuition fees will be 18 lacs or so.

How will this look if your child is starting college after 15 years? Well, at an inflation of 15 % the tuition fees alone will be 1.8 crores. I know this sounds fantastic, but remember just 10 years back the Tuition fees of BITS was 50000 a year and it has gone up more than 5 times.

I am happy to spend this amount on giving a good education to my children as it is going to be a huge competitive differentiating aspect. However, I was able to do so as I prepared for the same in terms of my planning. Even then the inflation was surprisingly high and I had to rejig some of my plans.

You need to work on your plans right now and put them in place.