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

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.

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.

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.

Nifty at lifetime high but what about your large cap MF schemes?

Over the past few months the benchmark indices have really gone for a roller coaster ride. The Nifty reached 11000 plus levels in January, suffered greatly after the budget and, after a spell of range bound movements, have recovered to great levels of late. If you have select Nifty stocks in your portfolio, they would have done quite well too. For most of us though, Mutual fund is the vehicle of investment we use, so it makes more sense to see how such investments are doing.

If you have invested in large cap MF schemes, they would have reached their peak NAV’s and therefore highest portfolio value in January 2018. Thereafter, the NAV’s would have gone all over the place and right now most will be lower than the Jan 2018 levels. In this post we will look at why this is so and what does it mean for the future. But before we do that, let us examine some popular large cap MF schemes to see how they have played out. I will take 3 schemes from my own portfolio to illustrate the point.

  • The first scheme is Aditya Birla Sun Life Frontline Equity Fund. The NAV reached a peak value of 229.46 Rs on Jan 23rd, 2018 and is currently at 226.54 Rs. You can see from here that it is nearly back to peak level now.
  • HDFC Top 100 Fund. The NAV reached a peak value of 490.50 Rs on Jan 24th, 2018 and is currently at 469.49 Rs. It is clear that it is yet to recover fully though it has made up a fair bit from the fall it had.
  • ICICI Prudential Blue Chip Fund. The peak NAV was 44.52 Rs on August 9th, 2018 and at present it is at 44.14 Rs. This clearly shows that the fund has recovered well along with the Nifty and has shed off all effects of the deep cuts after budget.

As someone who has significant investments in all of these three, I am obviously pleased with the ICICI fund, happy that the ABSL fund is recovering but unhappy that the losses in the HDFC fund are not recouped, even when Nifty is really at a lifetime high.

Let us now come back to the question of why this is happening in the first place. The following factors are responsible for these variances.

  • Though all of these are large cap funds their portfolios vary quite a bit and the overlap with the NIFTY are in varying degrees.
  • Even within the Nifty, some stocks have done greatly while others have not. So depending on which stocks the fund have in their portfolio, results will vary.
  • Due to the SEBI classification of funds, some of the MF schemes have needed to rejig their portfolios. HDFC Top 200 Fund has now been renamed as HDFC Top 100 Fund and have been affected the most among these 3. 

What would have happened if the fund tracked Nifty very closely. The best way to understand this will be to look at any Nifty ETF. For example ICICI Prudential Nifty ETF has an NAV of  118.66 Rs today, which is quite close to the highest NAV of 118.93 Rs. An important point to understand here is that with the SEBI guidelines in place now, the differential returns of actively managed funds will be somewhat muted as compared to what was happening earlier. Over the next 5 years or so Index funds may start doing quite well and may become the main investment choice, as they are in the developed markets such as US and Europe.

Based on all of this, here is what you need to do for the large cap funds in your portfolio:-

  • Check the difference in NAV from the 52 week high as of today. In case it is more than 10 % down, there may be a fundamental issue of fund management and you should definitely look at an alternative.
  • If the difference is in the range of 5-9 % then review the fund every 2 months and be prepared to change if the gap is increasing.
  • For a difference of less than 5 %, you can assume you are in the right fund and do a review every 6 months.

As all of us are aware, the greater pain by far is in the mid cap and small cap funds. I will do 2 more posts shortly covering the same.



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.