My cash flows and investments in April

April has been a good month for our markets with all the major indices hitting a lifetime high. My Stock and MF portfolio have done rather well and while I am not one to keep looking at my net worth every day, it does feel good to see it grow well in this month. For all people with an asset allocation strategy in place, this will be a good time to shift some money to debt. However, the question is which debt instruments will really work out in the current situation, where the interest rates are probably bottoming out?

I think it will be a good idea to outline my own situation in terms of the cash flows in April and how I have invested them in the month. These situations and decisions are unique to me but it can be definitely useful learning to some of the readers. Let me start with the cash inflow first. The month of April had significant cash inflows for me from the sources given below:-

  • My active Management consultancy income from the software company where I work currently as Chief Strategy Officer.
  • Some consultancy income from a couple of holistic life plans I have made for 2 people who had reached out to me.
  • Rent from my Chennai apartment which largely goes into paying for our current apartment in Hyderabad.
  • Interest income from tax free bonds
  • Dividend income from stocks in my portfolio
  • Dividend income from some MF schemes in my portfolio
  • Redemption proceeds of some FMP schemes on their maturity

My regular expenses that require cash outflow are as follows:-

  • Household expenses including rent for our apartment.
  • Amount sent to my parents every month for supplementing their income.
  • Expenses incurred on my children, separate from their college fees.
  • Any discretionary expenses including travel, entertainment and gifts.
  • Contribution to 2 charities of our choice.

As of now my passive income is enough to meet the above expenses in an ongoing manner and therefore my active income is almost totally invested. Besides for the FMP redemption proceeds, I invest the principal and use the capital gains as part of passive income. In April, the FMP redemption principal was to the tune of 11 lacs and this needed me to decide where should I put it back.

The investments I have done in April are as follows:-

  • PPF contribution to the maximum for my wife and me.
  • FMP plans from Reliance, Sundaram and BSL.
  • MIP from BSL
  • ICICI Value Fund series 12
  • Sundaram Micro cap fund series 11

Why have I invested in the following and will I be doing the same in May? The answer to the second part is no, as I look into each month separately now, keeping the overall asset allocation in mind. 

The first part has a more complex answer and I will try to provide it in the next post.



Asset allocation is an imperative now

One of the main reasons stock market and other bubbles get created is that we all love good times and good stories. It gives us an emotional kick to see that a stock that we hold has gone up by 10 % in a couple of trading sessions and the MF portfolio we hold has been clocking impressive gains over the last few months. In our heart of hearts and also in our rational minds we do know that the party will end, sooner rather than later, but it is far more exciting to believe that it somehow will not.

We all understand asset allocation at a fundamental level so I am not going into details. However, in simple terms for most portfolios of investors, the following need to be kept in mind when we are looking at asset allocation:-

  • Assuming you have 2 main asset classes Debt and Equity, decide on an asset allocation for yourself. 
  • In my view you must have at least 35% in Debt. This is fairly easy once you take your PF account money into consideration.
  • Periodically review to see if the allocation has got skewed by more than 5 %. In such cases sell from the higher asset and buy into the lower one.
  • For example, right now due to the run up in the markets your equity allocation may be 72% and debt 28 %. Sell off some equity and put it into a debt product such as Liquid fund etc. This provides your partial hedge against a market downturn.
  • What to sell? Again, look at stocks or MF which have run up the most and use your judgement as to which looks like the best bet.

What is my take on the current situation? I feel that there is a little more steam left in the markets yet, the Nifty may well reach 9000 levels by next month. However, beyond that there is every likelihood of a correction to 8500 levels and below.I do not believe that we will really see a crash in the Indian markets in the near future.

Based on the above premise take a serious look at your asset allocation this week and next. It is tough to sell something which is doing so well but you are really protecting some gains and limiting your future losses by doing so. Many people may tell you that you should simply hold and that the gains will again come back in the future. However, that is speculative and asset allocation is a way better strategy which is also a proven one.

I am sure you have never done it in the case of your MF portfolio built up through SIP – one more reason why the way SIP is done and administered, leaves a real lot to be desired.

Current markets – Impact on your goals and wealth

As the market situation continues to tumble from bad to worse, many investors who were confident of the long term market story are also getting the jitters. While I do think that personally the current fall is not much of an issue as I do not need to take money out of equity for the next 10 years, I can well understand that it may not be the case for many others. Over a small period of 1 month there has been a serious destruction of wealth for many retail investors and it may indeed take a long time for them to recover it.

Why is the situation different for retail investors today, when such ups and downs have always been part of the markets? Over the last few years the market returns have been good and this made the long term returns look rather optimistic. Many people who started investing in MF though the SIP route, were sucked into believing that a double digit market return over the long run was a given and even 15 % returns over a long term is quite possible. A lot of financial planning for important goals in life were done on this basis and is therefore now a problem in most cases.

Let us look at the Sensex returns over the different time periods till August 27th 2015. This data is from HDFC MF site and the returns if anything are actually much poorer now after the carnage of last week. All returns are in percentages.

  • 15 year return on the Sensex is 12.61.
  • 10 year return on the Sensex is 13.07.
  • 7 year return on the Sensex is 9.06.
  • 5 year return on the Sensex is 7.82.

If you had put your money in an ultra conservative debt product like the PPF, you would have done better in 7 years. However, it does not really work that way as you put money over a period of time and not just one time. To understand the real impact of the market fall, look at the reduction in your portfolio value for the equity portion. For me the reduction has been to the tune of 15 % and I do have a considerable equity portfolio, so even in absolute terms the drop is huge. I had suffered a similar experience in 2008, only the size of my portfolio was much smaller then. I would imagine that for most people investing through SIP in the last 7-10 years, the drop in portfolio value would be between 12 and 18 %.

Is this a passing phase? In other words, will the wealth that you have seemingly lost today come back? Yes, it will as the markets will recover over a period of time, the key question being when. However, this takes a serious toll on your portfolio as the growth goals you had assumed in your financial planning may undergo a serious change now. The extent of the impact is based on how long do you have till your goals and what types of goals these are. While, it will be difficult to address all possible situations, I will try to give some pointers to different categories of people.

If your goals are still a fair distance away, say at least 7 years or more you need to try the following:-

  1. Rejig your financial plan if you had taken 15 % or greater CAGR for equity growth. I would go fairly conservative and 12 % will be the maximum figure.
  2. Check your asset allocation now. For people with significant goals coming up in the next decade make sure that you have at least 40 % in Debt instruments.
  3. Your financial plan must be such that your goals can be met through debt instruments if that becomes necessary.
  4. Look at the possibility of targeted one time investments in MF, based on market situations. SIP does not really work well in a secular bull market and some of the current portfolio losses are a proof of that.

On the other hand if your goals are in the next couple of years, here is what you should be doing:-

  1. In case your goal was financial independence or early retirement, accept the fact that It will probably take more time than what you thought. Continue the current activities you are engaged in for earning active income till you reach a point where such a goal can be actualized.
  2. If your goal is mainly consumption oriented, that is you want to purchase an asset like a car/home or go on a vacation etc. you need to consider postponing the goal. Do not try to get this done by taking more loans than what you can afford, this will reduce your investment capability in a market where you do need to invest.
  3. For other goals that cannot be postponed, such as child’s college admission etc try to mobilize money from your debt portfolio to meet the current required cash flows. In case you cannot do that consider taking an Education loan with the understanding that you will pay it back quickly.
  4. If you do not have a significant debt portfolio start building it by transferring money from sources other than equity to this – for example if any insurance or ULIP policy is maturing then put the proceeds in some debt fund.

In general, the only immunity that you can have in a falling market is your ability of not needing money from your equity portfolio till the time the markets have had a sufficient chance to recover.I have no idea of how much time this will take but in my portfolio I can even wait for 10-15 years if need be, before I touch it for redemption.

I am happy to see many people have got started out here. Also, become a part of my Facebook group Market Musings where a lot more is discussed on the general market situation and also individual stocks.

Interested readers may pls follow my blog on email by clicking on the relevant button on the right hand panel. I will shortly be stopping the practice of posting the links in different Facebook groups. Following the blog will ensure you get intimated whenever there is a new post.

How I plan to invest for now

In the last post I had written about the generic guidelines that one could follow in the current market situation. As is well known, every investment situation is different and the plans for investment will need to cater to this. I thought it will be a good idea to share my own investment plan with readers to give them a real life example on how you can make changes to your investments.

To give a brief background of my current situation for those who do not have an idea yet, I am now running a Consultancy practice in Hyderabad for IT and ITES organizations after having had different corporate roles in the Software space for 27 years, the last 15 years of which were as CEO. Right now I am financially independent as I have a passive income stream that meets my expenses. All of my active income is therefore available for investment purposes, indulgences and charitable causes. If you are interested in knowing more about my investment portfolio, search the blog for relevant posts.

Coming back to how I want to change my investments :-

  • Right now a part of my passive income comes from dividends in Stocks and MF. Though I do not anticipate a major downward revision in this amount, it is possible that the MF dividends will get lower for next FY if the markets continue their downward trend.
  • Fortunately, my passive income has the cushion of about 20 – 30 %, so even with a reduced dividend amount I should still be able to get along quite well. Moreover, some LIC policy maturing in December of this year can be used if needed. As such, there is no real risk to my FI status due to the markets tanking.
  • I currently have SIP in 7 funds that I will reduce to 5. Also, I plan to stop the SIP mode of investment as I believe the markets will go through frequent gyrations before resuming the uptrend sometime in 2016. I therefore want to invest more in my MF now, through tactical one time investments based on the market movements.
  • My plan here is to use my FMP maturity amounts to buy equity for now. This will be both for one time purchase of MF as well as bolstering my stock portfolio for making selective purchases.
  • Once the markets resume their upside trend, I will put money into debt funds to balance out the asset allocation.
  • My plan is to buy stocks which are already part of my portfolio through price triggers. I anticipate there will be several buying opportunities between now and December.
  • My equity portfolio remains for the long term, I do not need to touch it for the next 10 years.

If I look at my net worth it has depleted significantly over the last 2 weeks. However, the losses are notional and as I do not have any plans to redeem from either my stock portfolio or my MF portfolio in the short or medium term, I am quite hopeful of the net worth improving tangibly over the next few years. My expectation is that the Indian economy will do well over a period of time and earning of companies will improve, thereby pushing up stock prices and market indices.

The current market situation is therefore a definite opportunity, though one with fairly painful side effects !!

I am happy to see many people have got started out here. Also, become a part of my Facebook group Market Musings where a lot more is discussed on the general market situation and also individual stocks.

Interested readers may pls follow my blog on email by clicking on the relevant button on the right hand panel. I will shortly be stopping the practice of posting the links in different Facebook groups. Following the blog will ensure you get intimated whenever there is a new post.

How should you invest in current markets?

In the present state of the markets, I am remembered of a saying that was a favorite of my UK Country Manager during my stint in Four Soft as CEO – “Things can get a lot worse and they probably will, before they get better”. It is very likely that things will get worse and eventually turn positive at some point in time. Unfortunately, that does not seem to be very soon as both global and domestic factors seem to be largely negative at this point in time.

So, how should one be investing in the current markets? Is it a time to buy more as the prices get attractive or is it time to be cautious so as to avoid the proverbial falling knife? How do you tackle the psychological impact of seeing your portfolio battered everyday and your Net worth depleting rapidly? More pertinently, if you have a significant goal coming up in the next few months, how should you mobilize funds for meeting those goals? I will attempt to answer these questions in this post and try to relate the answers to my personal perspective.

Let me first tackle the temperament part that you will need to demonstrate as an investor. I will be the first one to agree that it is gut wrenching to see your net worth depleting at a high rate. I went through this in 2008 and therefore have a sense of the history repeating itself here. At such times it is important to remember that when we deal with equity as an asset class, these kind of events are bound to occur once in a while – sometimes for a short time frame but at other times they can be of prolonged duration. If you are the kind of person who worries over the portfolio value every single day, then it may not really be a good idea for you to park most of your money in the equity asset class. Remember, you cannot do very much about your earlier investments now. If you have time on your side then hope that markets will recover, later if not sooner, and wait. Doing things like getting out of equity etc at this stage will be suicidal, as it will be to invest much more in it now without thinking deep.

Now assuming that you have a calm temperament and are clear that you need to let your investments play out in the long term, what should be the strategies in this period of considerable turmoil? If you are having 3 portfolios like me in Debt, MF and stocks then this is what you should be doing:-

  • Keep investing in Debt as per your earlier plan. Do not decrease it believing you are following the Asset allocation principles. Absolutely resist the temptation of bringing in earlier debt investments for buying equity now.
  • While you need to keep your Debt investments going, there is no need to go overboard and put everything in Debt. Remember, asset allocation principles largely hold so as your portfolio value decreases for the equity component you actually need to invest more to maintain the asset allocation.
  • All the MF SIP that you have done over the last 2 years would have plummeted in value now and will probably go down further. Irrespective of the term you had in mind, it will not make any sense to redeem these now.
  • Continue with your SIP as the markets are likely to remain depressed for some time and this favors SIP mode.
  • Use your surplus cash to add to the MF s you are invested in. Market crashes are good opportunities for adding to your existing portfolio. This is also a good time for making one time purchases in MF you were considering for fresh SIP.
  • Add to your existing stock portfolio, whether you are an old or new investor. You must follow the basic rules of being selective in picking good companies, using price triggers to buy, buy in small lots and deploy your money regularly over a period of time. These principles are always important but even more so in these times.
  • You absolutely need to avoid buying on tips or chasing multi-bagger stocks in this market. Remember, it is possible for stocks to lose ALL their value unlike other assets.

So far so good – but what about people who may be having a significant goal coming up or who may even be retiring in the next couple of years or so? They do not really have the time to play long term, do they? Here is what thy should be doing :-

  • For any goal coming up, evaluate the possibility of postponing it. This is especially true for consumption oriented goals such as buying a car, taking a vacation etc that you were hoping to fund by redeeming MF or stocks.
  • If the goal is such that cannot be postponed, such as children’s admission to college then first try to check the possibility of funding it from your active income. This will mean that you have less to invest, but that is far better as compared to the option of redeeming from MF or stocks in this state of the markets.
  • In case your active income cannot support the goal amount, look at redeeming part of your debt portfolio. You can consider debt funds and similar instruments first and thereafter look at PPF. Redeem only the cash that you need today. For example, the college goal may be 15 lacs but in the first year you will only need 4 lacs. Arrange that for now and simply wait for 1 year to take decisions at that time.
  • If you are retired or in a Financially independent state, check how much reduction in dividends etc will impact you. This has to be addressed through other sources and again the last option will be redemption of equity.
  • In general this is a good time to be conservative on discretionary expenditure.

I wanted to cover my personal strategies of investment too but this post has already got too long. Let me come back tomorrow and write on the same.

I am happy to see many people have got started out here. Also, become a part of my Facebook group Market Musings where a lot more is discussed on the general market situation and also individual stocks.

Interested readers may pls follow my blog on email by clicking on the relevant button on the right hand panel. I will shortly be stopping the practice of posting the links in different Facebook groups. Following the blog will ensure you get intimated whenever there is a new post.

The long and short of equity investing

All of us know that equity investment is for the long term, right? As an overall philosophical postulate I find nothing wrong with that statement. The issue is when we try to apply it rigidly without understanding the implications.

First things first – what really is long term? For a person starting his/her investments at 25, long term can easily be seen as 25 years or more. For another person who is 40, long term would probably not be more than 15 years. In general though, most people would agree that a time frame of 15 years or more can be safely taken as long term. Now, if we are saying that equity investments are for the long term, then does it follow that you should not invest in equity if your time horizon is less?

Let us take a little closer look at the actual stock market returns over the last 15 years to understand this better. The following observations will be of interest:-

  • Any rolling period of 5 years or more has never given negative returns. The number of such periods is 11.
  • For the 13 rolling return observations of 3 years or more, only 2 have given negative returns.
  • Average return over 5 year periods is the highest at 17%, for higher periods it ranges between 13 and 16%.
  • Maximum return is the highest for 1 year period at 51% and lowest over 15 year period at 13%.
  • Standard deviation is 0 at 15 years and 24 at 1 year.

How do we interpret these observations? Well, for one it does demonstrate what I have said in several of my posts. Returns from equity are non-linear in nature and hence not really time dependent. You may well get great returns in 2 years and fairly mediocre returns over 5 years. Yes, with longer term the risk does reduce as shown by the standard deviation. But even from this data of last 15 years, it is easy to see that investing in equity can be worthwhile for the shorter time frames too.

So how should you really invest in equity. I have discussed in detail about the 3 portfolio model in my earlier posts, interested readers should make an effort to search for the posts in my blog. But here is what you should essentially do:-

  • Decide on your asset allocation between debt and equity. For the most part, debt can be taken care of through your PF and PPF only, no need to complicate it further.
  • Invest in MF so as to cover all your goals. Retirement will be partly funded by debt investments in PF and PPF.
  • All other amounts you can invest should be put in stocks.
  • Make sure that you do not have to sell from your MF or stocks portfolio in bad times for the market. Your PPF account balance should therefore cover all immediate goals. If the account balance is not adequate add other debt products.

This is all that you need to really do – there is no need to worry about the long term or short term for investing. When there is need for money, you can decide on redemption strategy based on how your 3 portfolios are doing. You just need to maintain your overall asset allocation and just keep investing regularly.

I am happy to see many people have got started out here. Also, become a part of my Facebook group Market Musings where a lot more is discussed on the general market situation and also individual stocks.

Interested readers may pls follow my blog on email by clicking on the relevant button on the right hand panel. I will shortly be stopping the practice of posting the links in different Facebook groups. Following the blog will ensure you get intimated whenever there is a new post.

How to build your 3 portfolios

In the last post I had explained the 3 portfolio strategy and why it will work far better than the traditional way of mapping a portfolio to each goal and trying to manage asset allocation and re-balancing in each portfolio. Assuming that is what you want to do, how do you go about it? Let me give you some pointers in this post.

Before we get to the specifics of building the 3 portfolios, three fundamental aspects of investing need to be kept in mind. They are – you need to start investing as early as possible, invest as much as you can without compromising the lifestyle you want to lead and invest for as long as possible.

For building the debt portfolio, all that you need to do is focus on your PF and PPF. For any person who will start in a job and continue in it for a length of time, the PF part is kind of automatic. You just need to ensure that you simply continue it without any withdrawal till the end of your working life. If you start with a basic salary of 10000 Rs at 24, have a 10 % increase each year and retire at 60, your PF will amount to 2.32 crores at current rates of interest. Do you need to go for NPS instead of PF? I think not as we will anyway have the MF and stocks portfolio for that.

You need to start a PPF account as soon as you start working and contribute the maximum amount you can in it. Keep it going for extended periods with contribution. 30 years with maximum contribution will get you to 2.1 crores in the end and all this money is tax free. Read these posts on PPF if you need to understand more about it. If you are not in a regular job and therefore do not have PF, then make sure your spouse has a PPF account too. Of course, if she is earning then she should have one anyway.

Once you have taken care of debt, you need to build up your MF portfolio. Read the Guide to MF investing to be clear on how to do this. All your goals in your goal time line should really be met from your MF portfolio. However, if redemption from it seems a bad option when your goal is at hand, due to market situation, use money from your PPF instead to fulfill the goal. You can read about redemption strategy in this post. A personal example may also be of interest.

While you can always invest into stocks from the beginning, my recommendation is that you start doing so in a meaningful manner only after you have taken care of your Debt and MF portfolios such that they are now in an “auto-pilot” mode. Any extra money can go into stocks thereafter. This post will help you get started and you may also find these notes useful.

I will be soon writing a series of posts on stock investing which will cover details on all other facets of investing.

Interested readers may pls follow my blog on email by clicking on the relevant button on the right hand panel. I will shortly be stopping the practice of posting the links in different Facebook groups. Following the blog will ensure you get intimated whenever there is a new post.