Earning money through value – A personal perspective

What with one thing or the other, I have been totally irregular with my blog this year and have been almost absent for the last two months or so. Part of it is due to my busy schedule in a variety of things and the rest is linked to my life situation. There are however, several ideas I have which can be converted into significant and meaningful blog posts and let me try and do it more often from now on.

In the last post I had written about how money actually comes to you or anyone from other people and you need to provide value in order to earn money. That blog post had a very good readership and several readers commented on it. Let me try and expand this more on the current post. I will take my own example and this should help readers get into my thought process. Some of this was not evident to me as I went through life but experience leads to knowledge and wisdom, so I have a very clear perspective on how things transpired for me in life as I went along.

For people who know about me I an from a middle class family based out of Durgapur in West Bengal. My father worked in SAIL and we had a fairly comfortable existence with a family of 5 , though not a luxurious one. Education was always a priority and I was a good student completing my schooling from St. Xavier’s school, going on to get a BE degree in Computer Science & Engineering from Jadavpur university, ending up with an MBA from IIM Calcutta. Like most people, I was creating some intrinsic value through all this education in the hope that there will be companies who will give me jobs based on their needs of such value. I did have 7 such jobs when I graduated from my Engineering but decided not to take up any as I had got admission into IIMC. On my graduation from IIMC I received 2 job offers from HCL and Wipro, deciding to join the former.

Over the next two decades, life was a roller coaster ride on both the personal and the professional front and I lived through it enjoying it immensely. On the personal front getting married to my wife Lipi, births of my two children and their growing up, moving from Delhi to Chennai and now Hyderabad, travel and vacations all made life enriching. On the professional front progress was hectic as I was part of management in just 4 years and progressed swiftly to top management cadre in another 4 years time. My first CEO role was in 12 years time and I worked for another 15 years in similar Executive positions. The knowledge, skills and expertise I was able to gain through my initial education and later on through my experience and performance in the various job roles helped me in securing these positions and earn a certain amount of money.

After 27 years of corporate life, I realized that doing what I did for 15 years at CXO level was taking its toll on me. I was still pretty good at what I did but I did not enjoy it any more. I also wanted to add value to more people rather than restricting myself to just one company as the CEO etc. I also wanted more time to myself for pursuing the many interests that I had. While I had always been able to maintain a very decent work-life balance, when one gets to 50 there is a clear feeling of time passing by rather quickly. I therefore quit the regular corporate grind and started a Management Consultancy practice where I worked with SME companies in the IT/ITES areas to help them formulate and implement growth strategies. Here again my corporate experience as CXO provided the value that such companies were looking at and they were prepared to pay for it. This mode also gave me enough time to follow my interests and passions.

Over the years I had been very interested in personal finance, stock markets and investments in general. This helped me in organizing my finances in such a manner that I was truly financially independent. In real terms it means I do not really need an active income to maintain my lifestyle but can fund it from whatever assets I currently have. As I wanted to share my experiences and knowledge with others, I started this blog in 2015 and it has been a pretty successful one. A lot of people saw value in it and reached out to me for helping them with their financial planning. Though I do not do this professionally I am happy to do it for people who approach me.

Training on a variety of topics including high end management area has been a long standing interest of mine. I developed a framework on Strategy planning and Execution courtesy my being CXO of so many companies and currently offer workshops in these to companies for bringing about change in the way their management people think and act. There has also been an abiding interest in Education over the years, B school education being at the center stage of it. I have been mentoring people for B school admissions informally for the last 5 years and have started to do it formally this year. Food, travel, sports and performing arts are the other interests i have.

So if I am looking to earn money out of all my knowledge, skills, expertise and interests how can I do it in tangible terms? Look out for the next post as this one has got rather long. I promise the wait this time will be a much shorter one.

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 !!

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.

 

2018 in perspective – life and finances

What with one thing and another, I have not written any blog post for quite a while now. At such times, when I feel lazy to pen down something, it is invariably the responses from the readers that gets me going again. Human ego is an amazing thing and just the feeling there are enough people to read your post is itself quite gratifying in many ways!!

2018 has been a very interesting year and I was looking at it in different perspectives in the last week. As I have written in several of my blog posts, one must look at life events and lifestyle choices in a holistic manner and plan for them – finance is a way to support these events and choices, so it necessarily plays a supporting role and not a determining one. In simpler words, availability of money and investing for the same is important but the key issue is what you are needing it for. It is this need for money that is unique to each individual, yet we often disregard this fundamental aspect. Viewed in this context, it makes sense to review the major life situations first and then look at the finances next.

To begin with, professionally the year was not really a very satisfying one for me. I had begun an assignment with an SME company under certain understanding but the owner of the company did not stick to his part of the deal. While I am sure these things happen from time to time, it was a first for me and to that extent a disappointing experience. A good learning will be to choose engagements more carefully next year. In terms of the venture idea I have been toying with, I did manage to get some ideas formulated and it is in a good spot to move ahead now, lot to be done next year. Overall though, both in terms of the activities and active income generation the year was not as good as I had hoped it would be.

On the personal front however, a lot of good things happened in 2018 and it was probably one of the best years for our family. At our stage in life a lot gets defined by how well the children are doing and this year both of them have excelled in their careers. My daughter Rinki completed her MBA from XLRI and has joined a company of her choice, where she is doing rather well. My son Ronju is in his last internship as part of his course work in BITS and he has already got a job offer. In effect, both of them are financially independent and do not need my financial support any longer. As a family, we were also staying together after a long time as both my children worked in Hyderabad for the past few months. 

Travel has been a constant theme for both Lipi and me, this year was no different. We started off with a trip to Khajuraho in February, went to Goa for a week in March with our children, visited Purulia in West Bengal for two short trips, had a family vacation to Bali in May, celebrated our silver anniversary with a Mauritius trip in September and wound up the year with an absolutely delightful trip to MP in December. As you can well imagine, all of this were rather expensive and my travel budget shot through the roof. Be that as it may, all the travel was great fun and I will do it again if I get half the chance !!

On that note, let me transition to my finances for the year. Despite my relative shortfall in active income, the cushion I had with my passive income was good enough for all my expenditure. The bulk of my cash inflows came from the below sources :-

  • Interest from Tax free bonds, InvIT funds and POMIS.
  • Dividends from Stocks and Equity Mutual funds.
  • Capital Gains made through maturity of FMP schemes.
  • Maturity proceeds of an LIC policy.
  • Rental income from my Chennai apartment.

Of course, there were other passive income such as from PPF and Debt funds but I have just let them grow as usual. Unless absolutely needed I do not want to utilize any of these for the next decade or so. For this year my passive income from part of my portfolio was enough to take care of my expenses with enhanced travel and even let me do some new investments in a secondary portfolio of stocks.

So far so good then, but what about the 2019 plans and beyond? Well, let me write about it in my next post.

College education of children – A personal perspective

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

Let me give a brief background for new readers here. My daughter Rinki had graduated from BITS Pilani, Hyderabad campus with BE in ENI in June 2016. After her graduation in 2016, she had joined XLRI for their BM program and has now completed her course there. She has started her corporate career a few months back and is fortunately living with us in Hyderabad. My son Ronju is in the final year of  a 5 year dual degree course from BITS Pilani, Goa campus in Msc Maths and BE Computer Science. He will graduate in 2019 from there. As part of his course, he needs to do 2 paid internships in his final 2 semesters and is in the first one of them right now. If you are interested in knowing more about the overall costs and how I arranged for the funds etc, you can read up several posts available in the blog under “Education” category.

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

  • In her first year 2012-2013, Tuition fee was 70000 per semester or 1.4 lacs in the year.
  • In 2013-2014, it was 78000 per semester or 1.56 lacs for the year.
  • In 2014-2015, it was 89000 per semester or 1.78 lacs for the year.
  • In 2015-2016, it was 101000 per semester or 2.02 lacs for the year.

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

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

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

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

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

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

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

I am happy to spend this amount on giving a good education to my children as it is going to be a huge competitive differentiating aspect. In fact, this is borne out by what they are currently doing. At ages 24 and 21, they are financially independent of me and are pursuing a career of their choice. However, I was able to help them in doing so as I prepared for the same in terms of my planning. Even then the inflation was surprisingly high and I had to rejig some of my plans.

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

Long term performance of MF – personal example #2

I am currently writing a series on real life MF performances on my blog. The first post of the series was about my portfolio created through monthly SIP between April 2008 and March 2010. Around the same time another portfolio was started by my wife and this too ran for the same period. Of course, in her case there was one fund which continued for 3 years but that will not change the analysis much.

So here is the portfolio and the performance of individual MF schemes in it:-

  • ABSL Frontline Equity fund has XIRR of 12.65 % and has been down nearly 4.75 % this year.
  • HDFC Top 100 fund ( earlier HDFC Top 200 ) has XIRR of 12.07 % and has been down nearly 1.21 % this year.
  • ICICI Prudential Value Discovery fund has XIRR of 18.63 % and has been down only 0.37 % this year.
  • DSP Equity fund  has XIRR of 11.04 % and has been down nearly 10.76 % this year.
  • IDFC Multi Cap fund ( earlier IDFC Premier Equity ) has XIRR of 16.07 % and is down 8.78 % this year.
  • UTI Dividend Yield fund has XIRR of 11.91 % and is up 1.61 % this year !!
  • Sundaram Small Cap fund has XIRR of 11.08 % and is down 31.54 % this year.
  • The overall XIRR of the portfolio is 14.35 %

Now, at first glance, this appears quite good and most MF investors will be happy to get such a result. However, when we buy into equity we need to look a little deeper to get a clear picture. So here then are some critical points to consider.

  • Starting on a positive note, the portfolio XIRR was about 20 % just 2 months back !!
  • Note that these purchases through SIP were between April 2008 and March 2010 ( March 2011 for one fund ), a great time to invest in MF.
  • The data clearly shows our markets have performed well over 10 years – after all Sensex was below 10000 in 2009 and has been to 37000 this year.
  • So even with the best buying price and the best market performance ( discount the last 2 months ) we are looking at a return of less than 18 % over 10 years.
  • Consider also that these are some of the best funds of that time and fairly reputed now too. 
  • These are all regular funds so the expenses are higher as compared to Direct.

Summing up, it is good to invest in MF regularly and if you can do it at a time when the markets are in a downward trend then all the better. However, under most conditions you should temper down your expectations of XIRR to 12 %. If you get more than that it is a bonus but any plan with a return expectation which is greater does not make sense.

In my other posts on this series, I will provide more data and insights on this.

Long term performance of MF – personal example #1

Over the years I have been very impressed in seeing how investors have taken to investing in MF schemes. The success assumes more significance if you consider that Indian investors were rather averse to equity and retail participation in our stock markets have been a very poor percentage, in low single digits even today. Marketing of MF as an investment vehicle has a lot to do with the success and there are a few themes that are hammered incessantly, be it in advertisements or by financial planners or MF distributors.

The first of this is the long term performance of MF schemes and the second is the value of regular investments through SIP mode. So much so that most planners work with an XIRR of 12 to 18 %, depending on the type of MF being invested in. This is clearly not a good way to sell as the risks of the equity markets are greatly downplayed. The proof of the pudding is however always in the eating, so it is important to check this against some real data to see how it works. In this post and a few following ones I will aim to do that.

My own investment with MF dates back to 2001 when I did a few investments in Franklin Bluechip fund and ICICI Technology fund. While I will cover those in a future post, let me look at the investments that I did between 2008 and 2010 for an MF portfolio. I started the investments as the stock markets were really down and we wanted to look at some alternative to our normally heavy stock buying. From a market perspective it seemed a great idea and we obviously had time on our side – we did not want to take the money out for the next 10 years and maybe much more than that.

Cut to 2018 October, when I did a review of how the investments had fared in 10 years. I will just give the MF scheme names and XIRR here as the invested amounts are nor really relevant for the purpose of understanding long term performance.

So here is the portfolio and the performance of individual MF schemes in it:-

  • Reliance Value fund ( earlier Reliance Regular Savings Equity ) has XIRR of 12.6 % and has been down nearly 12.6 % this year.
  • L & T Equity fund has XIRR of 13.36 % and has been down nearly 5.5 % this year.
  • HDFC Mid Cap Opportunities fund has XIRR of 20.84 % and has been down nearly 14 % this year.
  • DSP Small Cap fund ( earlier DSP BR Micro Cap)  has XIRR of 21.06 % and has been down nearly 26 % this year.
  • The overall XIRR of the portfolio is 15.28 %

Now, at first glance, this appears quite good and most MF investors will be happy to get such a result. However, when we buy into equity we need to look a little deeper to get a clear picture. So here then are some critical points to consider.

  • Starting on a positive note, the portfolio XIRR was about 20 % just 2 months back !!
  • Note that these purchases through SIP were between April 2008 and March 2010, a great time to invest in MF.
  • The data clearly shows our markets have performed well over 10 years – after all Sensex was below 10000 in 2009 and has been to 37000 this year.
  • So even with the best buying price and the best market performance ( discount the last 2 months ) we are looking at a return of less than 18 % over 10 years.
  • Consider also that these are some of the best funds of that time and fairly reputed now too. 
  • These are all regular funds so the expenses are higher as compared to Direct.

Summing up, it is good to invest in MF regularly and if you can do it at a time when the markets are in a downward trend then all the better. However, under most conditions you should temper down your expectations of XIRR to 12 %. If you get more than that it is a bonus but any plan with a return expectation which is greater does not make sense.

In my other posts on this series, I will provide more data and insights on this.