Has your MF investment worked out?

To begin with, my apologies to all my readers, many of who have enquired of me as to why I was not writing in my blog, for my long absence from the blog. It was caused by a random occurrence of several factors – a couple of trips abroad, some mentoring work for B school students, my son’s starting of his professional career, my parents visiting Hyderabad etc. Let us see whether I am able to keep up this new resolution !!

Let me take up something which a lot of people have been asking me for much of this year. Has it been beneficial to invest in Equity MF over the years? Many people had started the MF investments through SIP, being lured or convinced by agents or advisors, thinking that an annualized return of 12-15 % on an average was a given. Yes, it was understood that equity as an asset class will be having the ups and downs, but over the long run it was kind of given to undestand your money will double every 6 years. A lot of financial planning for most people have been based on this premise over the last 10 years and it is a good time to take stock of how things have panned out.

As I have been dealing with equity for nearly a quarter of a century now, I probably have a lot of knowledge and experience to speak somewhat definiteively of this. In January 2008, Nifty scaled 6000 for the first time before the now famous crash of that year. Even if we assume that Nifty will reach 12000 in January 2020 ( a fairly tall order some may say, though I am hopeful), it would have only doubled in 12 years. This is a return of only 6 % as opposed to the 12 % that most investors have been sold into. Even if you looked at a supposedly stodgy product such as PPF, you would have earned nearly 8 %. More importantly, if you had planned some goal for 15 years in 2010, you are now probably faced with the prospect of being way short of your goal. This is fine if you have 20 plus years of your career left but for people in their 40’s and 50’s this is a fairly tough situation. People who are interested in financial independence and looking at doing different things will now need to re-evaluate their options.

Does this mean that the MF investment has been wrong? Not at all – equity as an asset class is really the only sensible way to beat inflation in a country like India and MF is a good vehicle for this. Also, though Nifty returns are only 6 % annually, most of us invested in well managed active funds and these returns are somewhat better, though nowhere near the 12-15 % that were touted without any real sense. With the changes in MF categories by SEBI, it may also make more sense to stick to funds that invest in the top 150 or 200 companies, unless you have a lot of time on your hands. Finally, do not put all your eggs in one basket, invest in fixed income products and other instruments that can serve as a hedge and provide you stable returns even if unglamorous.

The above is all very fine for people starting now but what of people who have been investing for long and have now not got enough in their kitty for their goals? They will definitely need to work out different strategies – I will take up one case study from a person who wanted some advice from me recently.

Bottom line – MF investments are good for your financial life but you need to do these by being more aware of it as compared to before. The old method of deciding on a SIP amount and letting it be in the auto mode will not work any more.

My cash flows and investment plans in 2019

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 ha e happened in the earlier one. In my previous posts I had outlined how 2018 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 2019.

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 2 vacations outside India, 2 full vacations in India as well as several shorter trips for leisure or family issues. 2019 looks similar as we already have a planned visit to Phuket in March. Our children are fortunately staying with us now though that may change through the middle of the year. 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 3.5 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 15 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 4 lacs
  • Capital gains from FMP redemption will be about 3 lacs
  • Rental income from our Chennai apartment  will be about 3.6 lacs
  • Income from Debt funds and stock trading will be about 1 lac

The above looks good but what if the markets continue to do badly and the dividends dry up? Well, 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 7 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 2019 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 10 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 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 !!

Good schooling is the best investment you can make for your children

Readers of this blog would have probably noticed that I often hold a contrarian position to normally accepted views. This remains true in the case of children’s education. While most people will tell you to be conservative on the schooling part and invest the available money for their college, which is very likely to be expensive, I hold the view that schooling is really the most important part of a child’s education. Of course, if you are fortunate enough to get a great school which does not charge you much then, nothing like it. However, if that is not the case then go ahead and spend what is required.

Not that all schools that do not charge a bomb are necessarily bad – I know of several well run Kendriya Vidyalaya and other government schools that provide excellent education. My own children studied in a low profile neighborhood private school in Chennai when we were there and it was a pretty good school too. However, with the kind of competition that the current and next generation of children will have to face, it is becoming imperative that they are put in a school which not only gives them a good holistic education, but also prepares them to be well rounded personalities capable of taking on the global stage. A few years back, knowing good English would have been considered enough to get along well in life. Nowadays you need to be smart, articulate, well groomed, preferably knowing a foreign language and having a couple of serious hobbies. All these of course are in addition to the fact that you need to do rather well in studies. After all, the good colleges in Delhi will not even allow you to apply if you do not score above 95 % in your 12th Boards.

I do not want to come across as an elitist here but the fact of life is most of the Government schools and the lower profile private ones, while providing great basic education at times, are simply not equipped to take care of the kind of personality development that is required to make our children successful in the future. The schools that do have such resources and bandwidth will obviously need to charge more for their ability to do such stuff. I am not really talking about the slew of schools that term themselves as international schools, but the good Public schools that are available today in every major city in India. They will cost a fair bit today – I did a quick estimate with a friend and saw that for his two children, who are in classes 2nd and 9th, the average monthly expenditure is about 25000. If you add other non-school related expenses, the cost of education per child probably comes to 2 lacs per year.

This is very different from what I spent on my children when we were in Chennai – the annual education related expenses there used to be to the tune of about 70000 for both of them. On the flip side, the school only gave opportunities for extra-curricular activities to students who were clearly good to begin with. My daughter, who is good at public speaking got to represent the school almost regularly from the beginning. My son, on the other hand, was somewhat of an introvert and the school made little or no attempt to develop these skills in him. Of course, with about 50 people in each section the teachers would also have a herculean task, hence it must have been easier to promote people who were good to start with.

When we shifted to Hyderabad my wife and I were keen to put them in a good public school. This was made difficult by the fact we were shifting mid session in December. Fortunately, there were 2 vacancies in the respective classes in one of the reputed public schools there. Though reluctant at first the Principal asked them to take a test by seeing their earlier results  ( both were toppers with hardly ever getting less than 95 in any subject ). Their performance in the tests and my agreeing to fork out about 2 lacs for admission and related expenditure got them into the school. Once there, my daughter continued to do well as usual and topped the school both in her 10th and 12th Boards. She went on to Study Engineering from BITS and was a topper there, secured a placement in Accenture, joined XLRI in their BM program after a superlative performance in XAT, did rather well there as one of the top students and has now started her corporate career in a Consulting organization.

The transformation in my son was remarkable. He was always good in academics, but the attention that he received in terms of other activities developed him greatly in sports and other pursuits. So much so, that he started singing once in a while in the school assembly. His communication skills and general smartness also underwent a good deal of change. When he was in 12th he sat for the NDA exam and got through SSB to secure an all India rank of 20th in the merit list. A lot of the credit will go to him but I do not think that unless he joined his school in Hyderabad, he would have excelled in this way. Of course, he also got into IIM Indore IPM program which has only 60 open seats and BITS, so he was in a dilemma. Finally he joined BITS and is doing a dual degree in Msc Maths and BE Computer Science. Right now he is in his final year and doing an internship with a company in Hyderabad. He has plans to start in a suitable job by middle of next year.

In my own case, though I have studied Engineering and MBA from two of the best institutes in India ( Jadavpur university and IIM Calcutta ), I strongly believe my robust foundation built through St Xavier’s school has really helped me to achieve whatever I have achieved in my life. A good school does much more than producing a good student who will do well in the board exams. It actually develops people and makes them capable of handling whatever life has to throw at them. It also produces better citizens with the right kind of attitude to take the country forward in more ways than one.

For readers who have heard from others that all schools are the same – do not believe an iota of it. There are many good schools but not all schools are good. Also, while exorbitant fees do not a good school make, it is a reality that to provide good facilities, infrastructure and teaching quality, such schools will need to charge high fees. My recommendation to all parents who are looking to admit their children to school next year – go ahead and identify a good school and admit them there, even if it costs more than what you thought is reasonable. Of course, you need to be able to afford it.

It can very well turn out to be the best decision that you will ever make for your child.

Stock ideas for potential gains this Diwali

Now that the markets seem to have stabilised a little over the last 2 weeks, there is a return of investor interest in terms of making new Diwali investments. The Muharat trading is traditionally supposed to be a good omen for the rest of the year and with so many stocks being battered down in 2018, there are quite a few opportunities in terms of investing in some that will potentially give good returns in next few months.

I have been going over a lot of expert picks and have also gone over a lot of data recently, to come up with a few stock names that make a lot of sense to invest in. These look good from both a technical and a fundamental standpoint and most can give a return of 6 – 10 % in the coming months. With our markets being hostage to liquidity as well as political news in election season, the risks cannot be disregarded altogether, but life has to go on and these picks are more likely to do well than many others.

So without further ado, here are my suggestions of stocks along with their target prices :-

  • Hindalco with a target price of 258
  • HDFC with a target price of 1910
  • Sterlite Tech with a target price of 390
  • Raymond with a target price of 790
  • CEAT Tyres with a target price of 1260
  • Vedanta with a target price of 235
  • IB Real Estate with a target price of 99
  • HDFC Standard Life with a target price of 430
  • Hero Motocorp with a target price of 3200
  • Intense Technologies with a target price of 75

You will need to do a bit of reading and fact finding on these stocks, mainly in terms of their Q2 results before you take the plunge. As always, buy on dips and in small lots when you are building up the portfolio. Look at this portfolio as a means of making some money between this Diwali and the next ( or well before that ). For long term portfolio building, the considerations are very different and you can read my posts on the secondary portfolio I am currently building.

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

Current markets – how have they impacted your financial plans?

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 September 27th 2018. 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 12.96
  • 10 year return on the Sensex is 14.18
  • 7 year return on the Sensex is 12.99
  • 5 year return on the Sensex is 11.40

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.

PPF versus ELSS is a false comparison

As most of the readers of this blog know, I have been a great fan of PPF over a long time now. Apart from the obvious EEE benefits that it brings to the table, I use PPF as a great foundation to my portfolio. Once it had crossed the 15 year period with a substantial corpus, the benefits of compounding are visibly evident every year and it is a great hedge against any forced distress sale of my equity assets in the event of a market crash.

PPF has been in the news last week as the interest rates for Small Savings Schemes were increased for the next quarter. While this was always on the cards, many investors were skeptical as to whether the government will actually do it. In this case, I think the government was somewhat forced to do it as there are many other reasons why the policy rates need to be hiked. Be that as it may, the reality is that PPF and other schemes will have fluctuating rates over the next decade or so. I see the rates being at a median of 8.5 % with a spread of 0.7 % either way, depending on the situation.

As usual, there were a lot of articles in blogs and postings in Facebook and WhatsApp groups as to whether one should invest in PPF or ELSS for 80 C benefits. This is a very old debate but as the blog has a lot of new readers this year, let me try and address it once more. Firstly, the comparison by itself makes no sense. People are comparing on returns and then coming to the conclusion that ELSS will make you a great deal richer if you invest for 10 years etc. As the English proverb says you cannot compare Apples with Oranges for they are very different fruits in every manner. PPF is a classical debt product and has compounding as the basic benefit, even though the rate of returns will be conservative. ELSS is an Equity product with inherent risk and volatility, having the potential of high returns over a long term duration. This essentially means that their presence in your investment plans must be for very different reasons – just because they both qualify for 80 C exemptions they cannot be compared directly.

Secondly, it makes great sense to invest in both even if it means you exhaust your 80 C limits. If you are having a PF account and cover about 1 lac through it then look at investing the rest 50 K in PPF. I am assuming here that you can invest in equity separately and, if so, look at other MF schemes for your equity investments. There is no need to invest in ELSS just for the 80 C exemptions. Of course, If you do not have surplus after 80 C investments then try to divide your investments between PPF and ELSS. In my opinion even investors who have a PF account must open a PPF account. You can decide on the investment amount based on your context.

Thirdly, some people compare the lock in period of 3 years versus 15 years and so on. Again the comparison is baseless for we are comparing products from two very different asset classes. In any event, for most investors, these are long term investments for future goals and they do not really want to redeem these investments in the next 3 years etc. In fact, the 15 year lock in period of PPF can be seen as an advantage here as you will be having a long term debt product where you can invest every year.

Fourthly, let me give you an example on the returns front, so that people understand the basic difference between the two products :-

  • Assume that an investor has 50 lacs in a PPF account today and he also has 50 lacs in a MF portfolio. He has built this over the last 15 years or so.
  • Let us take the current PPF rate of 8 % and Equity returns at 12 %.
  • In 9 years time PPF will be 1 crore and Equity MF portfolio will be 1.38 crores. After paying taxes on Capital gains for MF, it will be about 1.34 crores.
  • However, let us just assume that in the 7th year the MF portfolio tanks by 15 % as there is a market crash. In the 8th year there is no increase and in the 9th year it again tanks by 10 %. This is not unusual, can happen very easily with equities.
  • In this case, the equity MF portfolio will be at 76 lacs by the end of 9th year.

The point is, equity as an asset class has both volatility and risk as it’s characteristic and the investor needs to understand this. In the above example, if you had a goal of 1 crore in 9 years then PPF will get you there. Equity MF can also get you there handsomely with a big surplus BUT there is a risk that you may not reach your goal too. This is the most important reason for investing in debt products such as PPF. They prevent you from redeeming your equity portfolio at the wrong time due to your needing money for one of your life goals.

So there you have it – next time an expert tells you to junk PPF and put all your money into ELSS, explain to him why that is a bad idea. As I said, you do not need equity or debt investments, both should be part of your portfolio. In fact, PPF is a must have investment and you can have any MF schemes based on your preference, it does not have to be ELSS.

Should you invest in Tata Capital NCD’s

While debt investments are a must in any investment portfolio, in the current financial climate it is a somewhat difficult task to get the right type of returns. The tried and tested avenues are giving low returns right now and the ones with higher returns, such as some Corporate FD’s, come with their fair share of risks attached. In this scenario, people looking at fixed income for their regular retirement expenditure are the hardest hit.

Tata Capital Financial Services Limited ( TCFSL ) is a trusted name in the area of financial services and they are coming up with some Non Convertible Debenture (NCD) which may well be worth a look. Let us first look at the salient features of these NCD’s and then I will outline as to whether it will be a good idea to invest in them.

  • Issue size is Rs 6000 crores in secured redeemable NCD and the face value of each NCD is Rs 1000 . Unsecured, subordinate rated NCD part is Rs 1500 crores.
  • Issue opens today and will close on September 21st. However, allotment is on first come first served basis.
  • Minimum lot is 10 debentures and you can increase it by any amount thereafter.
  • The NCD’s will be listed in both BSE and NSE.
  • 3 year, 5 year and 10 year coupon rates for retail investors are 8.8 %, 8.9 % and 9.1 % respectively.
  • The 10 year NCD invests in Unsecured, subordinated, rated and listed securities.
  • Retail investors can invest up to Rs 10 lacs in this issue, HNI investors can put in more money than that. Coupon rates for both categories are the same.
  • Ratings of these NCD’s are AAA from both CRSIL and CARE.
  • You must have a Demat account to invest in these NCD’s.
  • Income from these will be treated as interest income and treated accordingly for the purposes of taxation.
  • Capital gains will follow taxation treatment for Debt investments – your slab rate without indexation if held for lass than a year and 10 % without indexation if held for more than a year.
  • There will be no TDS on paid out interest, which is annual in nature.

Based on the above, who should look at investing in these NCD’s? I think it will make sense to people who are looking for regular passive income, whether they are in the FI state or retired. Choose the secured route and 5 years tenure only, I am generally uncomfortable with unsecured securities.

For retired people who have maxed out their VVY, SCSS, Tax free bonds and PPF from where they get regular income and still need some amount to run their regular expenses, this can be a really good option. As the payout is annual, you can use it for goals which are annual in nature – examples can be a vacation, health insurance premium etc. The company is a completely trustworthy one and you need not have any worries about your payments. Go ahead and invest in this with confidence.

For others too, if you are looking at 89000 Rs every year for some expenditure, it will be a good idea to invest. It will work out the best for people in the 10 % or 20 % tax bracket. In any case you are having FD’s then it is a good idea to put the money here.

I will be happy to answer any queries on this investment.