Active equity investing must be the new paradigm

For a long time investors have been told worldwide and especially so in India that it was good to keep investing in equity regularly without worrying about the ups and sowns of the markets. I must say that most of the people who started investing after 2008 had been quite benefited by the same too. The markets generally went up over the years and the MF schemes largely did well, at least till 2017 or so. However, as the last few traumatic months have taught us, investors cannot trust the passive mode of investing any longer.

Let us understand the issue with MF portfolios in light of what happened this year. I will try to illustrate my point with 5 year and 3 year returns of some of the more popular MF schemes :-

  • ABSL Frontline Equity has 3 years return of 1.5 % and 5 years return of 5.3 %
  • HDFC Top 100 has 3 years return of 1.3 % and 5 years return of 4.7 %
  • ICICI Value Discovery has 3.4 % for 3 years and 4.4 % for 5 years

Note that these were the apple’s eye of the finiancial planners 5 years back and they pushed these schemes for most people. These have lost favor now but most of you who are having investments in MF over 7 years or so will be having them. Obviously these have not worked out too well when the average PPF returns were more than 8 % in the corresponding period and even today’s lowly FD rates are more than 5.5 %.

Some people may start wondering whether equity is worth it at all or not but that will be akin to throwing out the baby with the bathwater. What we really need is active investment in equity, the passive investment model of keeping on investing in an SIP mode and having blind trust obviously does not work. Some of the elements of active investing will need to be as follows :-

  • Do not have a SIP mechanism like the one you have now. Invest regularly every year or even every month BUT vary your purchases of units based on the market state. This is something I have recommended in the blog for a long time and you can read some of my older posts as to how this can be done.
  • If you are investing for a particular goal in your SIP portfolio, have a hybrid fund or a pure debt product such as PPF linked to the goal. Whenever you have a high market gain, redeem some money from your SIP portfolio and put it into the hybrid fund or PPF. This step protects your gain and serves as a hedge against you having to distress sell your SIP portfolio, should the markets tank and your goal is at hand.
  • Review your SIP portfolio annually and be ruthless about weeding out the non performing MF schemes. 

What about the Stock portfolio then, if you do have one? My belief is you should only get into a stock portfolio if you understand it reasonably well, are willing to learn and can afford to spend time on it. The passive mode of buying some good stocks and forgetting about them will not really work. For every exciting story you read about on the internet, there are hundreds of failures that never get talked about. A stock portfolio will be a great thing to have for people who can manage it actively. If you are one of them go ahead, there will be risks associated but the rewards are great too.

One may ask whether it is possible to do active investing with a full time career and other family responsibilities. If you are finding it tough then engage a financial planner BUT explain to him clearly as to how you want things to be handled. Do not agree to the passive mode of investing, what happened in 2008 and 2020 may well happen again.

On a personal note, I am happy to say that I am starting 2 HELP engagements with this week and both people have been long term readers of my blog 🙂 People interested in knowing more about HELP can search for the posts in the blog. I am looking to sign up 3 more people in August, so write to me at rajshekhar_roy@yahoo.co.uk if you are interested.

Market crashes can derail your financial planning totally

Over the years, I have believed in my 2 asset theory for investments as an ideal combination for financial planning and it has worked out well for me. Several people have asked me at different times, especially when the markets are going gung ho, as to why I am interested in Debt when equity is doing so very well. I am sure the events that unfolded in 2020 have made them much wiser now.

Equity as an asset class will always go through it’s ups and downs and that is really not an issue. Your financial planning framework will normally have a plan for equity over 15-20 years and even more. For such terms it should work out quite well, if your return expectations are modest, let us say in the region of 10-11 % or so. However, what happens when you are close to your goals and you suddenly have a market crash like we had in 2008 and again in 2020 ? Your goal is looming large and your portfolio may have just shrunk by more than 30 % in a matter of days. This is not just a doomsday prediction, it happened for many investors just a few months back. In order to make things clearer, let me take a real life example.

A person who is engaged with me for the HELP program now, had a goal for his daughter’s education in 2022 of an amount 1 crore. This was for an undersgraduate program in an US university. The portfolio of his MF plan had reached about 75 lacs and he was quite confident of getting to that amount. However, the crash got it down to 53 lacs or so and he is now struggling to get back on track. I only wish he had started the HELP engagement earlier in the year, I would have made him aware of the risks.

So what went wrong with his planning that he had done by paying a considerable amount of money to a financial planner? His planner and he had accounted for falls in the equity markets but not for a crash. Most plans can take a 10-15 % cut in portfolio value for a year or so, but not a 40 % crash of the markets. Given time and patience, it is likely the markets will recover but your goals are in real danger if they are close by. The only real solutions are two techniques – firstly, you can provide yourself a backup debt portfolio and secondly, you can use the good times to put money in your goal fund out of the gains you have made. I will discuss both of these in future posts, you can search my blog for earlier posts in these topics also.

Finally, some readers have asked me as to whether I undertake Financial planning and if I can do it for them. My answer as always is the same – I am only having the HELP program to offer people who reach out to me. It is a comprehensive program that looks into life planning and financial planning is a part of it. If you are interested in knowing about it, read my blog posts that talk about it and write to me at rajshekhar_roy@yahoo.co.uk with your details. I will get back to you.

How the financial planners got it wrong for you?

Over the last one month I have got several messages from readers of this blog and people I know otherwise as to how their financial plan have gone totally wrong just in the space of a few trading sessions. Most people are shell shocked and are wondering how the basic strategy of SIP which was seemingly invincible has shattered so completely. While I agree that the current sell off is something no one could possibly have anticipated, the seeds of such a risky financial planning was sown much earlier through the SIP route.

The last time the stock markets in India went for a roller coaster ride was in the years 2008 through 2010 but not too many of the current investors were investing then. The whole idea of financial planning through SIP was started in full force after the 2008 January market crash. Investment in MF through SIP was touted as a big thing for planning your finances in order to meet long term goals of individuals. In the initial days SIP was promoted by many financial planners as a reverse EMI, only something that helped you build a financial asset as opposed to a home etc. The reason it became a huge success was the secular bull run that our markets had till very recently. Yes, there were many times when short term corrections were there but these were seen as opportunities to invest more in the markets.

Once the markets kept rising after 2010, the early adaptors of SIP saw great gains on their early investments and word of mouth advertisement along with the proliferation of MF agents with aggressive sales tactics ensured that it became the default choice of all the people coming into the workforce. Over the years the myth got propagated that SIP was almost like an investment in a bank FD only with a return of 12 % or more !! The investors lost sight of the risks that are part and parcel of every market. This was almost like an accident waiting to happen and it did, only the scale of it was swift and brutal. The plan of the financial planners was quite a good one, insomuch as investment in equity as an asset class for the long term is quite inevitable in a high inflation economy that we are. The error of judgement on their part is to get overly greedy and recommend that almost all investible surplus be put into equity. Investors not only kept increasing their SIP amounts but some also went into direct equity without knowing a great deal about the market and not having enough time to do adequate research.

The situation could have had a much better outcome had asset allocation been followed properly and people had 40 % of their assets in various debt instruments. Sadly, PPF and other small savings schemes were seen as stodgy and boring and even if some investors did go for debt, their choices were types such as the Credit risk funds etc which had their own problems too. The overall impact today is that the XIRR of a 10 year SIP is lower than those of PPF returns. Yes, this will become better over a period of time but a lot of the gains over the last few years have now been frittered away.

A lot of people who are readers of the blog have wanted me to advice them as to what they should do now? I am happy to answer any specific queries that you have, feel free to send it to me here or in the Facebook group. Some of you have also wanted to know if I can provide my HELP services to them. As I have said before, I do this only for a few people but in the current situation I am happy to take on a few more people. You can read about HELP program here and understand about the work I have done so far here. The people wanting to interact with me can mail me at rajshekhar_roy@yahoo.co.uk

Watch out this space for my next posts which will contain more action plans as to how you can deal with your personal finance issues now.

Personal finance has not seen such tough times before in India

These are very tough times for the whole world and especially for India. Over the last 5 weeks or so, I have been putting off writing any blog posts as I was waiting for the market to stabilize. However, the way things have been going on, that does not look to be anywhere in sight. I have also got several requests from people wanting me to write a few posts and have therefore decided to honor those requests.

To begin with it is important to understand that the situation we see today is unprecedented in the personal finance space. I have been investing for myself over 3 decades now, having started in 1988 when I joined my first job after having finished my MBA from IIM Calcutta. In this long journey there have been several ups and downs that have taken place including years such as 1990, 2001, 2008 – 2010 where the stock markets have gone through a roller coaster ride. In most of the cases the markets have bounced back over a period of time and the maxim that over a medium or long term the markets will mitigate the risks have always worked out well. Even this time many financial planners and MF houses are trying to assure investors with these same words. I am sorry to say otherwise, but the current situation will not see any quick turnaround and people thinking it will be business as usual soon, are clearly not understanding the impact.

Let me try and explain in a few points why I think so :-

  • The Covid-19 impact is worldwide and it is long term. Given the current context of losses of lives throughout the globe, the last thing countries are thinking of is business. Any return to normalcy cannot be expected unless the infections cease to occur and that seems to be 3-6 months away even as per the optimistic estimates.
  • The current problem in India is on all fronts – with MSME companies, with larger units, with migrant laborers, with exports, with manufacturing, with services etc. In short all aspects of demand and supply are affected adversely in the current situation. Also remember that we were hardly doing very well prior to the lockdown.
  • The deep cuts suffered by the indices and all kinds of stocks are actually just the tip of the iceberg. I am convinced there is more pain left in the markets yet and, what is more, I see no real possibility of the markets coming back to February 2020 levels in the next 2 years or so. It will be nice if it happens but chances are remote.
  • India will need to spend significantly to counter the effects of the virus, in supporting the jobless people through cash and kind, in providing incentives and support to the industry to be back on its feet. Our production capacity as well as demand has been seriously compromised and even if the virus goes away in the next month, it will take us more than a year to get back where we were. So in effect, the whole financial year is kind of lost to the virus if we are lucky. If we are not lucky then it can well be one more year or even worse.
  • I will specifically write about personal finance investments in terms of equity and debt asset classes, but I hope the above has given you an idea about why I feel the situation will not improve in the short run.

A lot of people who are readers of the blog have wanted me to advice them as to what they should do now? I am happy to answer any specific queries that you have, feel free to send it to me here or in the Facebook group. Some of you have also wanted to know if I can provide my HELP services to them. As I have said before, I do this only for a few people but in the current situation I am happy to take on a few more people. You can read about HELP program here and understand about the work I have done so far here. The people wanting to interact with me can mail me at rajshekhar_roy@yahoo.co.uk

Watch out this space for my next posts which will contain more action plans as to how you can deal with your personal finance issues now.

Do you need HELP ?

I have been writing this blog for over 4 years now and one of the most common queries that I get from readers is whether I provide any Financial Planning services. Let me be upfront about this at the start – I do not provide such services in the way they are normally understood, nor am I a SEBI registered Financial Planner. In fact, I have absolutely no intention of being one too as I do not see this as my profession.

However, I do provide a service to select people who approach me directly. I have given the acronym of HELP to it. The expanded form is Holistic Engagement in Life Planning. In this post I will explain about this service and explain as to how interested people can avail of my services for this. As I have explained in several posts of my blog, life planning must precede financial planning. As an individual or as someone responsible for your family well being, you will need to plan the important life events as well as the lifestyle choices you want to maintain. Note that the typical financial planning process assumes that people will by and large plan for typical goals such as children’s education, marriage, own retirement etc. I find this a completely unsuitable way of doing things as the life of each individual is unique and needs to be catered as such.

So what is HELP then? As I said, the starting point is to take stock of your life in terms of where you are today and what are your dreams as a family – individually and collectively. So if you are a family of 4 with two teenaged son and daughter, your dreams could look like this when you are 42 years old :-

  • Son wants to take up a career in Bio technology, daughter wants to be a film maker.
  • Your wife is 38 and gave up her career for her kids 10 years back – she now wants to open up a boutique of her own in the next 3 years.
  • You are interested in starting your Consultancy practice by the time you are 50 and for that you need to be financially independent.
  • All of you like travelling and want to take a domestic vacation every year apart from short trips and also an international vacation every alternate year.

The idea of HELP is to bring out these life goals and lifestyle choices clearly, so that it can be determined what kind of financial support these would require and how can that be organized. Yes, the last part will involve financial planning but it will be in a very different way than just how to buy MF through SIP etc. 

As I said, I have provided HELP to several people and all these were people who have approached me after reading my blog. Some examples will make interesting reading:-

  • Advised a Colonel in Indian army as to how he could fulfill his dream of migrating to Canada in a teaching role.
  • A software professional in Kolkata was worried about longevity of job and worked out an alternate plan should such an event occur.
  • Got several people started on building a stock portfolio from scratch.
  • Helped a mid career software professional to join a startup as it was more aligned to what he wanted to do in life.
  • Motivated a frustrated career CEO to organize his money to become financially free and move on to training people, something he really enjoyed.

Note that in all of these cases, the people already had a financial plan made through a SEBI accredited Financial planner but they were not happy with their life and lifestyle.

The question that will definitely be asked is why am I the right person to do this? Let me start by giving some background of myself :-

  • BE in Computer Science & Engg from Jadavpur university, Kolkata in 1986.
  • PGDM from IIM Calcutta in 1988, with major in Marketing and Systems.
  • Overall experience of 31 years plus, 27 years in regular corporate roles and nearly 4 years now in my Consultancy practice.
  • I have worked almost entirely in the software services and BPO space.
  • Have worked as a CXO for 15 years plus, nearly half of this in 2 publicly listed companies.
  • Lived in Kolkata, Delhi, Chennai and Hyderabad besides having travelled widely all through the world for my work.
  • Have been financially independent since 2014 and writing a blog since 2015 June. The blog has had views in excess of 4 lacs till date.
  • My daughter is BE from BITS, PGDBM from XLRI and working in a Consultancy firm now. My son is from BITS with  a dual degree – Msc Maths + BE in Computer Science. He is now working in an MNC in Bangalore.
  • I am associated with helping students in career counselling for Engineering / MBA.
  • Am in the Hyderabad panel for IIMC admissions.

I believe in the Indian context, I am one of the few people who are able to deliver a service such as HELP. This has been proven by the 10 situations where this is done.

So if you are interested in knowing more about this, how do you get started? Well, the first step will be to write to me at rajshekhar_roy@yahoo.co.uk expressing your interest to avail of this. I will then ask a few questions over mail to assess your current situation and then we can have an introductory call. After this I will let you know if I can do this for you and what will it cost.

Typical duration for the complete exercise is 1 month, with 2 interactions over phone per week and costs depend on the individual situation, there is a one time fee for the first year. Yearly reviews after first year will be 25 % of the year 1 costs.

If you reach out to me, do not get offended on my inability to take you up ( if that happens ). I am doing this to add real value to the lives of the people and therefore cannot spread myself too thin.

Look forward to hearing from some of you – believe me, your life will undergo a serious transformation once you go through this exercise.

My cash flows and investment plans for 2020

The start of a new year is always full of excitement and hope. There are new opportunities to explore and you hope for a lot of significant events to take place in the year, irrespective of what may have happened in the earlier one. In my previous posts I had outlined how 2019 was a fairly poor one both for my own active income generation as well as for the markets. In this post let me talk about my plans for 2020.

One must always start with the cash flow outlook for the year. Fortunately, with both my children becoming financially independent of me now, courtesy their careers, my major head of cash outflow is gone now. Currently their college education fees are all done and even though Ronju may get into a B school sometime in the future, we can always look at it through Education loans. On the flip side our expenses on travel are ever increasing due to the number of trips as well as the way we travel. Last year we had 3 vacations outside India, 2 full vacations in India as well as several shorter trips for leisure or family issues. 2020 looks similar as we already have a planned to visit somewhere out of India in March. Our daughter is fortunately staying with us now and our son is closeby in Bangalore. Based on all these I am looking at cash outflow in these terms :-

  • Regular household expenditure likely to be in the range of 6 lacs
  • Travel expenses can be estimated at 6 lacs to be on the safe side.
  • Family support will be in the region of 2 lacs.
  • Rent for our Hyderabad apartment is around 3.5 lacs.
  • So overall cash flows required will be in the range of 17.5 lacs

Against these the cash inflows I am expecting in 2019 are as follows :-

  • Interest from Tax free bonds, InvIT funds and POMIS will be about 4 lacs
  • Dividends from Stocks and Equity MF schemes will be about 3 lacs
  • Capital gains from FMP redemption will be about 2 lacs
  • Rental income from our Chennai apartment  will be about 4 lacs
  • Income from Debt funds and stock trading will be about 1 lac
  • Repayment of an earlier loan will be about 3.5 lacs

The above looks good but what if the markets continue to do badly and the dividends dry up? The first line of defense will of course be my active income generation through my Consulting practice and Mentoring services. Additionally, as a backup plan I have the PPF accounts of both me and my wife. At present it earns about 5 lacs in interest per year and I can dip into it if needed. Another way could be to redeem some of my Debt MF schemes, to the extent I need the money. A final option will be to sell some stock that is doing really well but I do not feel this will be needed.

What about investments then? Well, in my present stage of life I am not looking at too much investment obviously. Even then, I had started a secondary stock portfolio in 2018 and have invested about 11 lacs in it so far. My idea is to let this portfolio grow and also do selective trading in it, something I have wanted to do for a long time. I do not want to do this on my primary stock portfolio where the plan is to have it for the really long term. Based on all of these the new investments I plan to do in 2020 are as follows :-

  • 3 lacs in the two PPF accounts that we have.
  • Put all FMP redemption money in Hybrid funds – this will be about 10 lacs in the year 2019. Part of this may also be used in my secondary stock portfolio.
  • Build the Secondary stock portfolio to at least 14 lacs by putting in a minimum of 3 lacs in this year.
  • Look at any interesting NFO themes as they become available.
  • Keep adding to my Primary stock portfolio based on available money.

Where will the money for this come from? Well, what ever income I have from my Consultancy practice and Mentoring services will all be invested in above avenues as my passive income is adequate to take care of my cash flow needs.

So things look rather good right now, hoping that the markets will recover this year !!

Where should you be putting your money in 2020?

To begin with let me wish all my readers a very happy and prosperous 2020. I wish this year is a good one for you in your life as well as the financial space. Though I have not written much lately, I saw that yesterday’s post was my 500th one in the blog and that gave me a lot of satisfaction, especially as many readers have told me from time to time that they have found several of my posts quite helpful in their financial journey.

So what does 2020 have in store for us? At a fundamental level one has to realize that the situation in India is a study in contrasts right now. We have a government seemingly under siege but yet acting as though they are in a hurry to get contentious issues pushed through, an opposition that was in disarray but have now got a fresh lease of life due to the controversial decisions of the government, stock markets at a lifetime high yet several stocks are languishing rather badly, big plans on investments in infrastructure and other areas but employment situation and IIP/GDP numbers are poor. In very simple terms we are poised for great growth as a country but the risks that are associated with such growth possibilities are also substantial. The good thing is 2020 will give us a very clear direction as to which way we are going and that will set th tone for the decade.

Where should you be putting your money in 2020? This can be answered depending on whether you are an optimist or a pessimist about the India story. For a long time now the stock markets have been pining to see earning growth for companies and this year will be a make or break year in that regard. Corporate governance and banking regulations have been in the news for all the wrong reasons and the current steps taken for getting these corrected will also come to fruition this year. At the present point in time both debt and equity markets do not inspire a great deal of confidence, real estate is good only in pockets and that is not a good idea for most investors, commodities have their own risk and though Gold has shown good performance it is not a mainline investment choice. So this is the situation you must navigate through to bring your financial ship ashore. Let us see what are the basic strategies you can have in the year, depending on which stage of life you are. I am only discussing strategies here, will do a separate post on product types that you can invest in soon.

  • For people in their twenties who have just joined the workforce and are yet to have responsibilities of family etc, this is the time to take risks. You need to understand the long term benefits of equity investing and put a fair bit of your money there. Do not get into direct stocks unless you are interested in the markets and have time for it. There are several MF schemes that have good performance and portfolio, choose a set of them and invest through SIP. At the same time you should open a PPF account or an NPS account, depending on your inclination. The PF account of the workplace is there by default and you need to keep it going at full contribution. You can look at the idea of buying a house if you are likely to stay in a place for 5 years or so, do not do it otherwise.
  • For people in their thirties who have been working for 8-10 years, family responsibilities would have kicked in, they are likely to be married with 1 or 2 children. Much of the investment choices will be as above with two important differences. Firstly, with the MF SIPs having run for some time now, you need to institute an annual review in order to weed out the non-performers. Secondly, based on the goals coming up in the next decade, plan your debt portfolio in such a way that it acts as a hedge against equity doing badly for a few years. This will also be a good time to buy a house if you will get to stay there for some years.
  • For people in their forties, the chldren would have grown up and either in high school or getting ready for college. While the investment pattern remains the same, redeeming the correct investments for the goals is critical. Normally these will be from your MF SIPs but if the markets have done poorly 2-3 years prior to your goal year then you must look at alternatives. Try to use your Debt portfolio or look at other options such as educational loan etc.
  • For people in their fifties, the children are in college or have graduated from there. Given that you are now in an FI state and may be retiring soon, it is important to create a passive income stream that takes care of your regular expenses. Keep your equity MF portfolio going you need it for beating inflation over the long retirement years.However, you must have easy access to the next 5 years expenditure at all times without having to do a distress sell in equity.
  • For people in their sixties and above continue with the above strategy and keep the equity portfolio going for as long as you can.

People wanting to contact me with any questions or for HELP can write to me at rajshekhar_roy@yahoo.co.uk

My personal finance audit of 2019

First things first – I got a number of messages yesterday on my post and all of them expressed happiness that I had started wiriting posts for the blog once more. Even though I am normally not someone to worry about either boquets or brickbats, it was nice to read such messages. As I said, I wanted to do a post on my personal finance audit for the year 2019. The year may have been listless in terms of the investment scenario in the country but on a personal level it was enriching in many ways.

For those who have read my posts earlier in the blog, my current life situation is broadly known so I am not repeating it here, only talking about the changes in 2019. For new readers, you will have to make an effort and read some of my older posts. Let me start with how life was for our family in 2019 and then I will come to the personal finance part. Through the year, I was engaged with mentoring of B school aspirants and found it to be a very worthwhile calling. I mentored 57 people for last year admissions, 25 people for CAT 2019 and am currently mentoring another 25 for next year admission season. It is something that lets me have some active income and , more importantly, lets me do things at my own pace and engage in things I love. I have a lot of time to watch movies, sports, attend cultural performances, travel in India and outside etc.While I am not dependent on this income, it is nice to have and allows me to travel with less worries. Travel is something my wife is also fond of and this year we had a fair bit of it – we went to Phuket in March, Turkey in May and Eastern Europe in July. Apart from this we also visited Corbett National Park in October and Baroda ( Champaner, Statue of Unity) in December. Our daughter Rinki is currently in Hyderabad and this is a great source of Joy to both me and my wife. Our son Ronju is working in Bangalore and the good thing is we are able to meet up every 2 months or so.

With the children being on their own, as far as financial issues go, a lot of our expenses in 2019 centred around travel. Overall expenses were in the range of 15 lacs, out of which more than 7 lacs was travel related. We also bought some consumer durables such as a Washing machine and Android TV in the year. From this perspective, 2019 may not be a very representative year as we are unlikely to have 3 trips outside India every year. On the other hand, we are probably going to be active travellers for the next 5 years or so, therefore it will make sense to budget for a fair bit of travel till 2025 or so. The true worth of financial independence is the ability to indulge a bit on the things you love to do, without having to worry about the financial repurcussions constantly. The cash outflow of 15 lacs, while quite high from the budget and unexpected for me, was also fortunately possible to meet from my cash inflows of the year.

Let us look at the inflows for the year then :-

  • Rental income from my Chennai apartment was 4 lacs
  • Loan repayment by someone for the year was 3 lacs
  • Interest from tax free bonds and InvIt were to the tune of 3.25 lacs
  • Dividends from my stock portfolio and MF portfolio amounted to 2.75 lacs
  • Capital gains from FMP redemption and share buy back was 2 lacs

As you will see from the above I was able to deal with my cash inflow needs quite well in 2019, despite the overall expenses being rather on the higher end. Thankfully, this is also with some amount to spare as I have not considered the following:-

  • Interest from the PPF account of both me and my wife.
  • Return from my Debt fund portfolio
  • My active income through B school mentoring

So from a cash flow perspective, I did rather well in 2019. The situation completely changes though when we come to investments. Through the year, debt returns were rather muted, even some FMP redemptions suffered from this. Equity as an asset class had a very turbulent year and I am more down than up in this, all things considered. As such I need to revise my expectations of return from both these asset classes going forward. Fortunately, I do not have any big financial goal coming up, save travel and as a result, can take a few years of lower return. What should be the return expectations from the two asset classes now? I am reasonably confident that good quality Debt fund returns will still be in the range of 7 % and it will be safe to take equity as 10 %. 

How does 2020 look then? I am hoping that the markets will do better and thankful that I do not have to liquidate my equity portfolio at times like these. Other than that, it will be more of the same as in 2019. In summary 2019 was a rather poor year as far as investments go but we were able to do quite well, thanks to the way our finances are arranged currently. There are however, some changes we will need to do in these, I will be writing another post on this soon.

2019 has been a listless year for personal finance

From time to time I get a lot of requests from my faithful readers on writing more posts and unfortunately in this year i could not really bring myself to do so. One part of the reason was that a lot of things were keeping me busy but the more important reason was the listless nature of the markets and the general situation in the personal finance space, where conventional wisdom was turned on its head.

To be fair 2019 begun rather promisingly as it was felt the Indian economy was close to turning the corner and there were great visions of the markets really taking off should the BJP led NDA won the general elections. As we now know, the first of these happened but not the second one. The markets welcomed the emphatic BJP/NDA win but were very soon shocked with what the new Finance minister Nirmala Sitharaman brought to the table in her first budget. It belied all expectations and started a free fall of the markets that was completely unexpected. This was aided by other bad news on the NPA and Banking front, defaults in the Debt fund space, international headwinds in the form of US China trade issues and, most importantly, the quarter by quarter poor IIP and GDP data. Towards the end of the year, even political and social stability had taken a real hit with BJP unable to form the government in Maharashtra despite a win and losing Jharkhand badly, along with the nationwide CAA protests.

Some of you might be asking as to if I am being unduly critical of the situation given that Sensex and Nifty are at their lifetime highs now. In order to understand the situation fully, look at the following :-

  • How have your SIP investments in Equity MF been performing over the last few years? The growth in the markets have been muted over the past few years and this has put serious strain on the financial plans of most people, for the long term goals. Most people and planners assume an overall annual return of 12 % over 15 years or so and that is nowhere near happening.
  • Due to defaults by companies on loans etc, Debt products have also come under serious strain. In several cases the FMP payouts were not done properly and reduced rates have not been expectedly beneficial to Debt funds too. 
  • Though the headline NIFTY numbers look good but that is due to a few companies doing well in terms of their prices. Look at a stock like Yes Bank and you will get a far truer reflection of the market risks involved today in investing. 
  • The real problem is of course in the mid cap and small cap space where many stocks have been beaten out of shape and will take a long time to recover, some will not recover at all. Most investors who had bet on these categories of MF for their long term goals will really need to rejig their plans now and look at other options.
  • In summary, both equity and debt asset classes are in a not so promising space, the economic indicators are hardly buzzing, the interim measures taken by the government such as corporate tax cuts also have not worked exactly as the investors had hoped they would.

So as 2019 draws to a close, what are the lessons investors can draw from it? It will, of course, depend on which stage of life you are, but some generic conclusions for such stages can be arrived it. A snapshot of possible strategies is given below :-

  • If you are in your twenties and starting off then do not worry too much about the present context, you have time on your side. However, keep your debt portfolio going with PF and possibly PPF or SSY.
  • For people in their thirties a clear action will be to look at their SIP portfolios and do a thorough review. Weed out the medium term non performers and focus more on large cap and diversified funds. Pure mid cap and small cap funds are best avoided unless they have high pedigree and are showing good trends in NAV. If your goals are due in the next 5-7 years you must create an alternate source for it.
  • For people in their forties look at increasing your SIP allocation in order to align with your retirement goals. The SIP returns have been far lower than planned for, so you need to invest more to make up for it. Some of your goals will be on you soon so you must have alternate plans, not redeem your SIPs especially those of mid cap and small cap funds. Have a solid debt allocation so that you can fall back on it as needed.
  • For people in their fifties, do not increase your SIP allocation even if your returns are lower than expected. You need to invest in Debt so as to give more time to your equity investments. Create a fund that will take care of your expenses 5 years after retirement and hopefully help your equity based SIPs to recover.
  • For people in their sixties, return from Debt investments is a major issue. Put as much money you can in SCSS and VVY schemes, use your PPF intelligently and once again let your equity grow as much as you can let it.

As an individual who has attained Financial independence, I am not immune to the market performance, if anything I am more affected by it. In the next post, which I plan to write tomorrow, I will explain my personal situation as envisaged by a recent audit that I carried out.

Wishing all my readers and their families a very happy and prosperous 2020.

My year end investment audit for 2018

Every year I try to take stock of my life and my finances on the last day of the year. It serves two major purposes – firstly, it shows me where I am and what do I need to do in order to get to my desired state and secondly, it gives me an idea as to whether I am doing the right things by my money. 

Any way we look at it, 2018 was a bad year from a financial or investment viewpoint. In the beginning it had not appeared so, especially after the stellar 2017 we had for our markets. January was a good month, corporate earning was looking like turning the corner and politics was largely stable, BJP having won Gujarat despite some hiccups. It was unfortunately to go wrong very soon, the first blow being the equity taxation in the budget. This has been talked about in every budget over the past few years but the markets clearly did not think it would actually happen. Once it did a domino effect of bad news and sentiment followed which has damaged equity portfolios through the year. I will not go into a detailed commentary here but crude oil prices, withdrawal of FII money, BJP losing Karnataka and then the Hindi heartland states, corporate earning being rather flat all played a role to ensure that our markets did very poorly. Even when there was some recovery, it was seen only in the large cap stocks, the mid caps and the small caps have been battered out of shape.

The news was not much better on the Debt front either. The ILFS fiasco affected several debt funds poorly and the returns for this year will be well below par. Short term accrual funds, normally considered the safest bets, also had fairly bad cuts. Redemption from debt funds was sustained over the year and the fund houses were saved by the continuing SIP inflow into equity MF schemes. So, while it was good to see that the Indian retail investor had gained some financial maturity, from a portfolio return perspective there were hardly any financial instruments that you could rely on.

With this backdrop, let us see how my investments have done in 2018 :-

  • My direct stock portfolio suffered in a big way early on, recovered somewhat in July/August period and then went down after that. The large cap stocks are not doing badly now but the mid cap and small caps have tanked quite a bit. On the whole the portfolio would have hardly made any returns after adjusting for inflation, I suspect there may be some losses too.
  • Similarly my Equity MF portfolio has suffered too, more in the mid cap and small cap space while holding on in the large cap space.
  • Thankfully, since both of these portfolios are long term, they are still doing well in the overall sense. Also, given the fact that I do not really have any need to redeem any of my investments, I can wait and hope for things to turn around.
  • The markets and stocks tanking also presented a buying opportunity. I have started a secondary portfolio of stocks which I want to run for 10 years. My plan is to invest about 10 lacs in it and so far I have done about 7 lacs. There are some posts in my blog on this and you can go through those for more details.
  • I do have a few open ended debt funds and they have not done well. During the year some of my FMP schemes had matured and I invested the principal amounts into hybrid schemes such as Balanced funds and Equity Savings funds.
  • My fixed income instruments were the savior for 2018. The Tax free bonds, InvIT funds, PPF, POMIS performed as expected and generated the expected cash flows.
  • With the rise of the US Dollar, I sold off some Dollars that I had over the years. I used this money to kick start my secondary stock portfolio.
  • I also received the maturity proceeds of an old LIC policy and this was also used in my secondary stock portfolio.

So what is the overall verdict? This was a year of bad returns and high expenditure due to our travels which included trips to Bali and Mauritius. As I said in yesterday’s post my active income was also not as expected. Despite all of these issues, my cash flows were comfortable and I was even able to invest in a secondary stock portfolio. This gives me the confidence that my asset base is capable of supporting my financial independent state with some leeway. Hopefully next year will get better and the asset base will increase to an even more comfortable state.

What are my cash flow plans for 2019 and how will I plan to invest next year? These will be the subjects of my next 2 posts.

Wishing all my readers a very happy and successful 2019.