A long term MF portfolio in the changed regime

As I have said before, I support the initiative taken by SEBI in reducing the clutter of the MF space. The definitions of fund types as well as the regulation on what kind of companies they can invest in the different schemes lends a lot of transparency. In this post let me try and outline an MF portfolio which may be suitable for most investors.

In conceiving this portfolio I have looked at a time horizon of 20 years. This is the kind of time frame where you can take certain amount of volatility in your stride and benefit from the long term India growth story. The types of funds and the possible schemes that one can look at investing are given below. Note that you can mostly look at Direct schemes in order to keep the expenses low. There is really no point in giving off 1 % or more in expenses annually, over such a long time period.

Without much more ado then here are my suggestions:-

  • Large cap funds can have 20 % of your portfolio. Choose from below 
    • ICICI Blue chip fund
    • SBI Blue chip fund
    • Nifty ETF funds
  • Multi cap funds can have 20 % of your portfolio. Choose from below
    • DSP opportunity fund
    • HDFC Capital Builder fund
    • Mirae India Equity fund
  • Mid/Small cap funds can have 30 % of your portfolio. Choose from below
    • HDFC Small cap fund
    • L & T Emerging business fund
    • DSP Small cap fund
  • Tax Savings funds are only if you need to use them to exhaust your 80 C section. In case you have enough to invest otherwise do not go for these. Choose from below
    • IDFC Tax Advantage fund
    • ABSL Tax Relief-96 fund
  • Thematic funds are for the more risk oriented investors. Choose from below
    • IDFC Infra fund
    • Mirae Consumer fund
    • ABSL GenNext fund

Note that while I have suggested some allocation here, how much you should invest in each depends on your stage of life and also investment horizon. For example if your risk appetite is low then go light on the Mid/Small cap category and definitely avoid thematic funds. On the other hand a person with good understanding of the markets and high risk appetite can invest significantly in these two categories.

The good thing is all fund houses are giving you an opportunity to exit the current holdings. How do you go about this and recast your MF portfolio along with investing well for the future? I will cover this in my next post.


Looking at fixed income? Consider this investment

In my blog one of the most common queries I get from retired investors and ones planning to be in the FI state , is where one should invest for fixed income. This is expected in the current scenario as most of the Debt investments suffer from some lacuna or the other. Fixed deposit returns are low with inefficient tax treatment, PPF is a great long term product but not for regular income before 15 years, Debt funds are not giving great returns and you need to hold on for 3 years to get indexation benefits.

So, if you have a reasonable sum of money and are looking to put it somewhere for regular income, what are your options? A year back one could have looked at Arbitrage funds or Balanced funds but with the LTCG taxation on equity this does not seem a good idea. Tax free Bonds are not being issued right now and when they are the interest rates will probably be only in the range of 7.5 % to 8 %. In the present scenario one product which can be quite useful to investors is InvIT that is Infrastructure Investment Trusts.

What are InvIT’s? They are instruments for infrastructure developers to raise capital. For investors, InvITs provide (1) an opportunity to invest in a de-risked portfolio of operating infrastructure assets for a superior risk-adjusted return, (2) potential of growth via acquisitions. In simple words these funds take over the significant loans for large Power, Road and other infra projects. The return to the investors are in the form of interest payments, dividends declared, buy back of units and capital appreciation.

Are these Equity or Debt investments? Well, a bit of both really. The revenues are linked to the performance of companies that these trusts invest in so there is an equity nature. At the same time InvIT’s receive annuity from the companies they invest in, which is more like fixed income. As of now there are only two InvIT’s that were floated in the markets in 2017. IRB was for the Road companies and IndiGrid was for the Power companies. The ticket size for investment was 10 lacs for both of these and they were over subscribed. IRB was priced at 102 Rs and IndiGrid at 100 Rs per unit.

If we look at the performance of these companies in terms of their share prices then they are a disappointment. IRB is languishing at 86 Rs and IndiGrid is at 96 Rs. However, the more important parameter is the DPU or Distribution per unit which is something similar to a quarterly interest payment by these trusts. Both the trusts have paid this in a regular manner and in the last quarter the amounts were 3 Rs per unit for them.

I am having 10206 units of IndiGrid and have had overall DPU of 9.56 Rs in the 10 month period of operation over the last FY. The guidance for current FY is 12 Rs. Of course since most of this is interest payment, it will be taxable. In addition these can also offer some dividends which will be tax free in the hands of the investors.

Should you invest in these? Well, if you are a retired person in lower tax brackets then these do seem rather attractive at 12 % returns. Even in the 10 % tax bracket this makes a lot of sense. I think it will be ideal to buy a combination of IRB and IndiGrid. Remember the first is riskier as it depends on toll revenues. If you want to play safe just go for IndiGrid. The ticket size is 5 lac Rs and if you invest around 20 lacs you will be getting an average interest of 20000 per month. It can take care of a fair part of your household expenses. Do remember though that these are unlikely to appreciate much in share value and will not be very liquid so selling them can prove to be a challenge.

On the balance though these are doing rather nicely from the viewpoint of fixed income. I wish I had invested 2-3 times of what I actually did in the IPO and I have definite plans to put in my next 5-10 lacs there when some of my Debt investments mature.

Financial independence is central to living life in your terms

Over the course of the past 3 years or so when I have been writing my blog, several people have asked me as to why I focus so much on financial independence ( FI ) as a goal when most people automatically keep working till they cannot do so. In some posts I have explained as to why FI is an imperative, even if you want to continue in your present job or profession and retire normally. However, the most important idea of being in an FI state is that it gives you the ability and confidence to live life in your terms.

What do I mean by living life in your terms? It simply means that you are able to do the things you want to do without having to worry about the financial impact of them on your future well being. There are only two conditions where this is possible. Firstly, you can inherit a lot of money and secondly, you work towards and attain an FI state on your own steam. Remember, in your life the terms are set by you, so it is not necessary that they will align with other people. For one person it may be the ability to stay in a huge mansion with all amenities, for another it can be the flexibility to travel as and when he wants and for a third it may be playing the stock market with some capital without the fear of losing it. Let me give you some more examples of what you may be able to do in the FI state – these are real life happenings with people who I know.

  • A couple in their 40’s take 2 vacations outside India every year because there is just too much to see and they have the cushion of FI.
  • A man who is a car enthusiast has bought a luxury car recently surprising many of his friends and family. He said that he wanted to buy it for about 2 decades but was able to do it when he understood that he was in an FI state.
  • A batch mate of mine who is a Banker, left his job and started to do workshops on personal finance as it has been his passion for a very long time.
  • A lady who has been a lawyer for 3 decades was able to switch to taking cases free for the poor when she realised she was well over the FI line.

I can go on with more examples but I think the point is made. Whatever your terms are, you need to be in an FI state to live life with those. Most of us work because we need to earn certain amount of money, for now and for the future. While we are doing that, we are unable to live life in terms of what we want – it can be a money issue or a time issue or both. Once you are in the FI state you will be able to reorganise your life in a way so as to do these things in a manner that fulfils your aspirations. To me, that is the essence of living – yes, there are times when you live for responsibilities and need to compromise on your personal aspirations but that is surely not a desirable state.

Coming to my personal example, what does being in the FI state mean for me? Also, to respond to the curiosity of many people, what do I do now and what do I plan to do in the future? Let me try and address it here :-

  • I do some Consultancy work if it is of interest to me. As I do not depend on the money from it to fund my lifestyle, the flexibility of choice is great.
  • As many of you know, I write this blog and am advising several people who seek me out. I have also made Holistic life and Financial plans for a few people who have reached out to me. Note that this is not my profession in any manner.
  • I have been involved very closely with the education of my children and that is coming to an end now. Interaction with many IIM and B school aspirants through public sites is something I am passionate about. I am also part of the admission panel for IIM Calcutta.
  • Conducting high end Consulting workshops for corporate organisations is something I love to do and will expand it significantly this year.
  • Travel has been a passion for me since long and I am able to do it much more now. In the last year and quarter we have been to Kumarokom, Araku valley, Italy, Goa ( twice ), Konkan beaches, Durgapur, Ayodhya hills, Khajuraho and are now planning a short trip to Bali.
  • Sports is another passion I have and I am really happy to be able to watch almost anything I want to nowadays. Looking forward to the FIFA world cup.
  • I am toying with the idea of writing a book. Something may or may not come out of it but I will make a fairly serious attempt this year.
  • I am also keen to explore the idea of forming a venture. The ideas for it are crystallised now and I will be looking for some founder partners soon.

When I measure all of the above against what I could have done as a CEO in a regular corporate job, I must say that I find this infinitely more preferable. The bottom line however is that I am able to do this only because of my FI state.

What is your ideal existence in life? If you are already having it in your current job or profession, great !! If it is very different from what you are currently doing then you need to think seriously about being in the FI state so that you can live in your terms.

After all you have only one life to live !!

Investing in Mutual funds after the changes

The recent changes in regulations brought in by SEBI for the MF space is a welcome step. For too long Fund houses have gone about misleading people with naming funds in an attractive manner and investing in a manner different from the stated mandate. This had meant that several investors were investing in funds in a manner which was different from their real objective. In the changed circumstances, how should you go about investing in MF? Let me try to address it in this post.

Firstly, if you are an existing investor you will have to do a one time stock taking of your portfolio. You can do it in the following manner :-

  1. Check your portfolio value against the overall goal that you have and see where you have reached. For example, your FI goal in current money may be 5 crores and you may be at 1 crore. If you have different portfolios for each goal then you will need to do it for each portfolio. Remember that multiple portfolios is really a sub optimal way of investing and ideally avoided.
  2. Use a SIP returns calculator to check what is the XIRR you will need to have for your portfolio from this point in order to reach your goals. In the above example, you need 3 crores more as your current 1 crore will also grow in the next 15 years. If you are investing 50000 Rs a month and have 15 years to your goal of FI then you need an XIRR of 14 %.
  3. Based on the required XIRR you will need to reorganise your future investments in the following manner:-
    1. If the required XIRR is between 8-10 % then put 30 % in Balanced funds, 40 % in large cap funds and 15 % each in Mid and Small cap funds.
    2. If the required XIRR is between 10-12 % then put 20 % in Balanced funds, 40 % in large cap funds, 20 % each in Mid cap and Small cap funds.
    3. If the required XIRR is between 12-14 % then put 10 % in Balanced funds, 30 % in Large cap funds, 30 % in Mid cap funds and 30 % in Small cap funds.
  4. If the XIRR needed is more than 14 % then you need to increase your investment levels. It will be injudicious to make any plans with a return expectation higher than 14 %.

Secondly, if you are just starting off on your investment journey or are in the initial stages of it then look at the following portfolio:-

  1. 20 % in large cap funds
  2. 20 % in multi cap funds
  3. 20 % in mid cap funds
  4. 20 % in small cap funds
  5. 20 % in International funds

Over a long period of time, say 20 years or more, this all weather portfolio will serve all your investment needs well and hopefully take you to a FI state. Of course, you will need to review it annually and churn the funds or tweak the percentages every 3-4 years if it is needed.

Bottom line – have realistic XIRR expectations, look at a long time horizon, review every year and change things in 3-4 years as needed. That is really all you need to do.

Road to financial freedom for a fresh MBA

April is a month when the B school fever is at a peak, both for new admissions as well as for people who have just passed out and are about to embark on their first job. This year I got to meet quite a few of both varieties, courtesy my daughter’s convocation at XLRI and my being a panel member for the IIMC admissions. In one such interaction, I was asked a question – “how long will it take me to be financially independent, if my starting salary is 22 lacs a year and a good life today costs about 1 lac per month for a family?”.

I could not give a straight answer on the spot so I promised to get back to this person. If you look at it logically, we will need to make some assumptions in order to reach a conclusion on this. Let us go by the following :-

  • Rajat is 24 now and has an Educational loan of 20 lacs. He wants to pay it off in 10 years.
  • He is in a growth sector company and can at least expect a salary hike of 10 % each year. 
  • His initial costs per month will be 50000 Rs including 10000 Rs he sends to his parents.

Let us also assume that Rajat will live till 85 and will be financially free at age X. Based on what we had covered in the earlier posts, Rajat will need an income for (85-X) years. If he is assuming a cost per month of 1 lac in today’s prices, then it is reasonable to assume that at 6 % inflation, these costs will double in 12 years and triple in 20 years. Based on this Rajat will need 36(85-X) Rs as his corpus for zero real rate of return.

Putting some numbers in place now, let us see if Rajat can retire at 45 years:-

  • He will need to have 14.4 crores to fund himself till 85 years.
  • If he is investing in equity with SIP for 20 years, he will need to invest 1.45 lacs per month at a 12 % IRR. This is clearly not possible.
  • Viewing from another angle, how much can he invest today? Well, if he pays EMI of 25000 and has expenses of 50000 then he may be able to do SIP of 50000 at most.
  • In 20 years this will grow to nearly 5 crores @ 12 % returns.
  • With his increase in salary, Rajat will be able to do more SIP at a later date. Let us assume he will be able to do at least another SIP of 50000 Rs per month every 5 years. The new SIP’s will therefore be of 15,10 and 5 years respectively.
  • The new SIP’s will contribute the following to the corpus :-
    • 50000 for 15 years will grow to 2.5 crores @ 12 % returns
    • 100000 for 10 years will grow to 2.3 crores @ 12 % returns
    • 150000 for 5 years will grow to 1.22 crores @ 12 % returns
  • So from the MF route, Rajat will have about 11 crores.

Now apart from these he will also have substantial PF and some other Debt investments. Bottom line is he will easily be financially independent in 21 years time, if he is able to invest in a disciplined manner. As you have seen in the earlier posts, even with a corpus of about 12 crores or so, it will be quite easy to get this done.

I think the above will become the norm for the future very soon. We will have people working in regular corporate career for time periods of 20 to 25 years and then doing things which they are fond of. Of course, some may get off the train earlier so that they can follow something they are passionate about. 

Think of it – 45 and no worries financially any more that you have to earn money !! That is the stuff I always dreamed of but it took me another 5 years to get there.

ICICI Bharat Consumption fund – should you invest?

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

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

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

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

  • I purchased ICICI Prudential Value Fund series 2 on 6/12/2013. Invested amount was 2 lacs in the Dividend option.
  • The idea was to get some regular income as I planned to go for my consultancy practice sometime in 2014.
  • Though it was a 3 year fund, it has now been rolled over and will mature on 31/12/2018.
  • So far total dividends have amounted to 2 lacs
  • Current value of the fund is nearly 2.6 lacs

I think it can be said quite safely that this worked out quite well. In fact, I have invested in several follow up NFO from ICICI. Apart from ICICI I have also tried out Axis, Birla Sunlife, Sundaram and UTI for close ended funds. From a personal perspective it works well for me as I get tax free income and also growth from it.

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

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

If you are interested in these funds after reading this post, do consider the ICICI Prudential Bharat Consumption  Fund – Series 2 which closes for subscription on April 26th. It is in areas where there will be definite growth and the industries they are investing in will be likely to do well for the next 10-15 years and maybe even longer. The theme of investment is consumption oriented – all of these have great potential and are likely to do well in both medium and long term. The 3.5 year close ended NFO may just be the right vehicle for any medium term goal you have. For example, I feel of you want 5 lacs after 3 years, you can just invest 3 lacs in this and wait for 3 years. It is very likely that you will be able to realise an amount close to your goals.

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

Debt investments – why, where and how

I have been away to my home town for for 2 weeks on and managed to club my daughter’s convocation as well as a trip to Ajodhya hills in Purulia during this time. Was not able to write my blog in this period and saw that quite a few readers had put their queries on Debt investments. So in this first post after the break, let me try to address this issue in a comprehensive manner.

To begin with, do you need debt at all? If the annualised returns from equity investments are in the range of 12 % and more and you are struggling to get even 7-8 % in Debt investments, then why do you really need to invest in it? Well, the most important reason is that your investment growth with equity normally follows a rather tortuous path. Think of a situation where all your money is in equity and there is a market crash, which reduces your portfolio value by 30-40 % and it takes a long time to recover. In this period you may well have goals coming up such as children’s education etc which cannot be postponed. In such a scenario you will be forced to sell your equity investments at the wrong time. Not only will this have a significant negative impact on the growth but there is also a serious opportunity cost involved. Let me try to explain this with an example :-

  • Let us assume I was preparing for my son’s admission into a B school in 2019 and was planning for a portfolio of 22 lacs for the same. I had been doing SIP into 2-3 MF schemes for a long time to achieve this.
  • Due to the upsurge in our markets in Jan 2018, the portfolio value had already reached 21 lacs and I was sure that the portfolio will be well above this figure in 2019 March, when I need the money.
  • Unfortunately, the market corrected a fair amount already and let me assume that it will correct to -30 % till March 2009. 
  • My portfolio value will suddenly be 15 lacs only and I need 7 lacs from elsewhere.
  • I have 100 lacs in my retirement portfolio and was hoping it will increase to 200 lacs in 6 years @ 12 % annual returns. Wanted to retire in 2024.
  • Due to the market downturn, my portfolio for retirement became only 70 lacs by March 2019. On top of it, I also had to take 7 lacs out of it. My retirement portfolio then reduces to only 63 lacs in March 2019.
  • Even with a 12 % return now I will never get back to 200 lacs or anywhere close in my retirement – in fact I will have only about 120 lacs.

In case you are thinking that such things cannot happen, let me tell you from personal experience that such occurrences may well happen for 3-4 times in a 30 year period for which many of us normally invest. I myself have gone through 3 such experiences in 2001, 2008 and 2011 which created quite some difficulty for my plans. Fortunately, my asset allocation had the cushion of debt investments and I also did not need the money for any of my goals.

Well, I hope it is now clear as to why you need Debt investments as part of your portfolio. The issue now is where do you invest it and how. As I have covered it in other posts of my blog, I am only presenting the solution here, rather than giving a full explanation.

  • For all salaried people, PF is a must and you need to make sure that you do not withdraw from it. Keep it only for your retirement.
  • For all others a PPF account is a must. In fact, I will say the salaried people should have one too and others can have one for their spouse as well.
  • If you have a daughter then you can go for SSY as well.
  • Retired people or ones looking at regular income can look at Tax Free Bonds and Senior Citizen’s Savings Scheme along with Vaya Vandana Yojana.
  • Others can look at short term debt funds and also Hybrid type funds such as MIP and Equity Savings Funds.
  • Finally, you can look at long term Gilt funds if your time horizon is really long.

What about the asset allocation? Well, if you are working with an active income you can keep Debt to Equity at 35:65. For people in the FI state it can be 45:55, for retired people 55:45 and for senior citizens above 70 it should be 70:30. Remember that you will definitely need both equity and debt at all stages of your life, unless you have way more assets than you will ever need.

Whichever way you look at it, Debt investments are critical to your financial well being.