Portfolio Management Services – are they good for you?

Over the past few years my equity portfolio has been at a reasonable level. Thanks to my friends, acquaintances, bank people and readers of the blog this is a fairly well known fact too. I have consequently been approached by several individuals as well as Fund Houses with the offer of managing my portfolio for me. Even though I have not gone for any PMS so far, these interactions and my own reading has helped me to get a fairly good idea of this.

So to start with, a PMS is not all that different from a MF at a basic level. In an MF scheme the Fund manager gets money from multiple individuals and creates a portfolio out of those funds. He then runs that portfolio for certain fees and people can continue to invest in the scheme. Returns from the scheme are in terms of dividends and also capital gains from the portfolio. In a PMS most of these are also true, except that the amounts are larger and it is being done for a single individual. Let us review this in a little more depth. I will take a specific example of one PMS I was offered recently, without naming it.

The salient features of the PMS proposed to me is as follows:-

  • Minimum ticket size is 25 lacs. This could be in cash or also in terms of a 25 lac stock portfolio at current market prices.
  • In either case a new Demat account will be opened and all transactions will be in that account after the initial transfer of the shares.
  • You are giving a mandate to the PMS manger to execute trades on your behalf in this portfolio. While you can be involved if you want, that really defeats the whole purpose of having a PMS in the first place.
  • Typical charges are 2-3 % and they are normally upfront. However, there is a lot of scope for discounts and some PMS work primarily on a profit sharing model.
  • Returns on the PMS are obviously not guaranteed but over long term most have managed to give 20 % and above after deducting the PMS expenses.
  • The chances that the PMS will be successful are reasonably high as the manager is dealing with a concentrated portfolio and can take the right kind of calls based on the research available at his disposal.
  • More importantly, the PMS manager is not emotionally invested in the portfolio and therefore is in a better position to take sell and buy calls compared to the investor.

The last point is the most important one. As investors we suffer from an endowment bias working on both the buy and sell sides. For example, I bought Maruti years back and it has grown manifold after that. While that gives me great pleasure, I am not very likely to sell it, even if I realise that in the next year that money can be utilised better elsewhere. A PMS manager will probably sell it at 8000, use the money on a beaten down stock like Yes Bank for a year and then buy it back if needed. This helps him to make more returns than I would. Similarly, I have stocks such as NDTV and RCOM which have gone nowhere and I still have issues about selling them. This is because I want to avoid the pain of loss and admission of a mistake. The PMS manager will have no such considerations.

So is PMS a good idea for you? Well, if your stock portfolio is more than 50 lacs or so then you can look at it. Separate out the stocks which are not doing well and give it to the PMS. Review the performance after a year and check if it makes sense to continue. Remember to really negotiate hard on all costs as the standard costs are quite high, but they are negotiable too. Try to get into the profit sharing model to the extent possible.

Why is the PMS always likely to give better returns than an MF scheme? Well, for one it is a concentrated portfolio with a finite value. This enables the PMS manager to take quick calls, unlike the MF manager who has to deal with much larger amounts. Secondly, in a PMS there are no redemption pressures within the year. Thirdly, constant inflows through SIP forces the MF manager to keep investing, even if the time is not right. This is not the case in a PMS. Fourthly, an MF manager will mostly buy standard company stocks unless there is a very specific mandate to do otherwise. A PMS manager has far more flexibility in this regard and can really create value for the investor. Fifthly, if the markets crash the PMS manager can sell off quickly to limit the damages. This is not really feasible for a MF fund manager having a large AUM.

Remember that your equity journey should start with Mutual funds, then get into stocks and finally graduate to a PMS only after you have a substantial stock portfolio. If you start with putting your first 25 lacs into a PMS, your experience may be a bad one and scar you so badly that you distrust any equity investment thereafter.

Finally, then is the PMS a good idea? On the whole, I will be inclined to agree though I am still trying to make up my mind as to if I should go for it. In case I finalise the PMS, I will do a future post on it.

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Should you be selling equity now?

The liquidity driven rally in the indices and several stocks has been the flavor of this festive season. In the beginning of this financial year the opinion of most analysts were that there can be a possible range bound movement and the Nifty would probably settle in the range of 9500 to 9800 over the next few months. Thereafter things would be taken care by the last quarter results. Indeed when the markets started to rally and crossed the 10000 levels with relative ease, the consensus was that the corporate earning would justify the rise.

Now that several companies have declared their results for the second quarter, it can be safely said that the results have been a mixed bag and there is nothing really in them to indicate strongly that the lacklustre showing of corporate results are a thing of the past. In fact while the Auto companies and several banks have shown encouraging results many other sectors have been clearly disappointing – IT, Engineering and Pharma to name a few. So what does this portend for our markets, the Nifty in particular? 

For starters, there are really no immediate triggers left for the markets. Both the GST and the good monsoons have largely been factored in the rally which we have witnessed in the past few months. In any event, the actual impact of these are not being felt in the Q2 results. Given this situation it is kind of tough to see Nifty getting a serious lift from the present levels. Yes, the liquidity factor along with some other good news can push it to near 10500 levels but it will be very difficult for it to sustain it there. In simple terms, I think that there is a far greater case for a Nifty downside to 9500 and below in the next 2 months as opposed to an up move to 11000 levels. In this context, does it make sense for an investor to sell off his equity holdings partially and enter later at lower levels? 

People who are holding a direct stocks portfolio will be familiar with this simple mechanism. You can move out of a stock at a level where you feel there is unlikely to be any more upside in the short run. Over a period of time you can decide at what level would you like to re-enter the stock. At the very least you would try to add to the stock at certain lower levels, even if you do not book profits. Of course, this requires a deeper understanding than just looking at Nifty levels but the rewards can really be stupendous. There are people who sold Maruti at 4600 last year and then bought it back around 3500, to now see it climb back to 4700 again. If you owned even 100 shares of Maruti, this strategy would have given you a cool tax free profit of 1.2 lacs.

What about MF in that case? Most investors who are into SIP are led to believe that they should adopt the Hero Honda strategy of, “fill it, shut it, forget it”. But in reality is this a good idea? Like in the case of Maruti stock, will you be leaving a lot of money in the table if the Nifty really goes down rapidly from here and your MF scheme NAV declines alarmingly. At some level, your fund manager is taking care of this but it will do no harm to take an active stance in this as well. Many investors have investments of 3-5 lacs in an MF scheme. Even a 10 % drop in the Nifty levels will mean significant amounts of money. Remember, this is clearly like a tax free bonanza that you can use for many of your discretionary expenses and even for additional expenses if you so desire.

More importantly, many of us have collected stocks and MF schemes over a long period of time. These do not fit into our current plans very well but we may have been too lazy to sell them or have not found it worthwhile. With the market levels being where they are for all types of indices, it may be a pretty good idea to sell some of these. You can channelise the money into your current portfolio depending on the right market levels. Also, if you are stuck with a long standing SIP in a fund which you do not like any more, this will be the perfect opportunity to get out of it lock, stock and barrel.

Is there a risk that Nifty can just go up unidirectional and well past 11000? I do not think so and even if it does, it will come down at some point. Remember you will be holding cash and that is also an asset.

In the next post, I will outline how I want to adopt this strategy for my own investments.

Do Equity returns compound? No !!

In my last post I had written about the frequent wrong usage of Maths to create misconceptions in investing which are not factually true. One such glaring misconception is for investors to feel that there will be compounding returns on equity investments, at least over the long term. This is simply not true and I would have thought that most investors would be able to understand this. However, as I have got quite a few queries and requests for clarification, let me do so here.

To start with let us fundamentally understand what Compounding is. I have used the following definition from Investopedia:-

DEFINITION of ‘Compounding’

The ability of an asset to generate earnings, which are then reinvested in order to generate their own earnings. In other words, compounding refers to generating earnings from previous earnings.

Essentially compounding involves some positive return on your asset, irrespective of what the return might be. Due to this the absolute value of your investment will always be increasing. Note here that we are not talking of inflation and Real returns here. For example, if I have a FD of 1 lac Rs and it pays me an interest of 8 % today then at the end of 1 year I will have an amount of 1.08 Lacs. Now if inflation is also at 8 %, my real return ( interest rate – inflation rate) is 0 and I have not really gained anything in terms of my purchasing power through this investment. At the same time, the absolute value of my investment has definitely grown by 8000 Rs in the one year period. This 1.08 lacs becomes my principal amount in the next year and I earn interest on this new amount. So in effect, compounding entails my earning interest not only on the principal amount but also on the interest amount.

The usage of compounding logic works great with debt products where the interest rates are relatively stable. Take an FD as an example again. At 8 % interest rate your money will double in approximately 9 years, at 12 % rate it will double in approximately 6 years and so on. Your money always grows in absolute terms, ignore the real growth for this discussion.

Now let us look at equities and see if this logic can be sustained in the light of our knowledge of it. If you look at stock prices over a period of time, you will see that it is clearly not so. Let me give you some examples from well known companies and their share prices from fairly recent memory:-

  • ITC reached 400 Rs and is now down to 300 odd levels.
  • HUL went to 1000 and then declined to levels of 800.
  • Reliance has had negative growth over years, so has Tata Steel.
  • Some company shares like Kingfisher Airlines have become penny stocks today.

There are also many examples of company shares having done extremely well and generate spectacular returns. My point here is simple – equities can give great growth but the way to understand that is not through the compounding principle. The growth in equity is non-linear and carries serious risk with it. Now at this point, people may tell you that over the long term of 15-20 years the compounding logic will hold true for equities. Sorry, it does not – if you bought the shares of Deccan Aviation at 146 Rs in the IPO , you have lost this money pretty much forever, never mind how long you are going to wait.

When I think about why there is such a great misconception about something really straightforward, I could come up with the following reasoning in my mind:-

  1. Most people invest in equity through Mutual Funds. As a MF scheme maintains a portfolio of stocks, the overall NAV of the scheme would normally increase in a reasonably good market, which we have had in recent years.
  2. Of course, the above can change in a prolonged poor market, but not many of today’s investors have had this experience. 2008 through 2010 was such a phase but has been mostly forgotten now.
  3. The usage of CAGR term, somehow makes one think that equity investments compound. This, of course, is complete nonsense but I have seen many sensible people believe this. CAGR is an artificial construct to understand annual returns, it in no way says that such returns are stable and not even that they are positive. In fact you can have negative CAGR and negative IRR / XIRR quite easily.

So, if it is clear by now that compounding logic is irrelevant to equities then how do we go about financial planning with equities as an investment asset class? I will answer that in a future post. For now, do understand that you cannot just hope that you will invest in stocks and it will give you an XIRR of 15-20 % because that has been the historical returns in the index. I really wish life were that simple for me and you, but it does not work like that.

Take heart though – we can make great returns from equity, by understanding the correct ways of investing in it.

Interested readers may pls follow my blog on email by clicking on the relevant button on the right hand panel. I will shortly be stopping the practice of posting the links in different Facebook groups. Following the blog will ensure you get intimated whenever there is a new post.

How will the Nifty perform now and in 2017?

As expected the Nifty levels hit a fresh high as a result of the positive sentiments emanating from the election results. The market players like stability and after the results there was renewed FII buying. However, it was not a runaway rally as many had predicted for 2 reasons. Firstly, a lot of the possible BJP victory in UP had already been factored in. Secondly, there are some serious factors which will come into play in the medium term.

So to address the first issue, where does one see the Nifty in the next week or so? Given that the March expiry is next week both transactions and medium term fundamentals will be pertinent. From all technical analysis the Nifty has serious resistance levels at both 9180 and 9220. If it is able to cross both these points then it is likely to rally for a couple of hundred points more. However, in terms of probability that is rather unlikely and like this week, the markets will probably be range bound. On the down side Nifty has strong support at 9050 and again at 8975 levels. In case both of these break there is every possibility of a deeper correction in April. Again, in probabilistic terms this scenario is also not very likely and therefore, we will probably be in a range of 9050 through 9200 for most part in the week.

What about 2017 then? Well, many analysts believe that an overall growth of Nifty by 15-25 % in the year is possible. So, given that we started 2017 at levels of 8000, we should be able to get close to the 10000 mark. As usual, there are many factors that can make this happen or prevent it from happening. Here are some of the key ones.

  • GST implementation from July 1st
  • Monsoon performance and whether the EL Nino effect is a serious one
  • US Fed rate hikes and impact of it on FII buying in our markets
  • Earning growth showing positive signs finally in this FY
  • Infrastructure spending by government to increase in the next 2 years or so

What is my call on the Nifty? Well, I think we may well get close to 10000 by the end of this FY but the path will obviously not be a linear one. There is a possibility of a sharp correction of about 10 % and that may well happen in the months of May and June, especially if the monsoon predictions turn negative and the GDP and IIP numbers show an unexpected decline. The route Nifty will take from 9100 now can well be as follows, though predictions are hazardous : 9100-9250-8700-8500-9000-9400-9200-9500-9700-10000. Each of the ranges may last for several weeks or months. While the route is tough to predict with any real degree of accuracy, I do think Nifty will end with 9700 plus by the end of this FY and may very likely get to 10000.

What does this mean for your investments this year and how should you plan them. Let me get back to this in another post.

My stock portfolio -5 top holdings

While most investors may be going through the MF route to buy equity as an asset class, there is a lot of interest in the stock portfolios of seemingly successful investors. This is amply demonstrated by the numerous requests I get for stock tips and readers wanting to know about my portfolio. I had written on this earlier but with the passage of time a few things have changed. So here is a list of my top 5 holdings.

The first in the list is Tata Motors and some observations are below.

  • My motivation for buying the stock was it’s prominent place in the Auto sector along with Maruti as Indian auto companies.
  • My first purchase was in 2007 February and the last in January 2009.
  • The stock has seen a lot of corporate action in terms of bonus earlier but I only witnessed a split in 2011.
  • It has normally been a good dividend paying company at 100 % but in the past 2 years this has come down considerably.
  • In terms of potential, this is clearly one of the best examples of an Indian company which has gone global successfully. I think it is quite possible for the stock to double over the next 2-3 years.
  • My investment in the stock is now at an average price of 109 Rs and it is about 8 % of my portfolio value at CMP.
  • I do not have any real plans to sell the stock, now or in the near future.

The second in the list is Palred Technologies and some observations are below.

  • My motivation for buying the stock was really the options I got as the CEO of Four Soft between 2007 and 2012.
  • These were mostly through allotments over these years.
  • The stock has seen a lot of corporate action in terms of capital reduction and split. Four Soft was also sold off to Kewill and the current business of Palred Technologies is completely different.
  • It has normally never paid dividends but on the selling of the company the shareholders got a special dividend, which for me amounted to more than 10 lacs.
  • In terms of potential, the company is one of the few listed Indian companies in the E-commerce portal area. However, it deals in relatively cheap electronic accessories and is in a low margin business.
  • My investment in the stock is now at an average price of 30 Rs and it is about 7 % of my portfolio value at CMP.
  • I do not see this as a long term success and may sell it whenever I need money.

The third in the list is Maruti Suzuki and some observations are below.

  • My motivation for buying the stock was it’s prominent place in the Auto sector along with Tata Motors as Indian auto companies.
  • My first purchase was in 2007 June and the last in October 2009.
  • The stock has not seen corporate action in terms of bonus or splits.
  • It has normally been a good dividend paying company and in the last 2 years the dividends have been 500 % and 700 %
  • In terms of potential, this is clearly one of the best examples of an Indian company which has dominated locally and started it’s global journey now. I think it is quite possible for the stock to double over the next 4-5 years.
  • My investment in the stock is now at an average price of 678 Rs and it is about 7 % of my portfolio value at CMP.
  • I do not have any real plans to sell the stock, now or in the near future.

The fourth in the list is Infosys and some observations are below.

  • My motivation for buying the stock was it’s prominent place in the IT sector as a major global player.
  • All my purchases of this stock was between June and November 2007.
  • The stock has seen a lot of corporate action in terms of two 1:1 bonuses in the years 2014 and 2015.
  • It has normally been a good dividend paying company and mostly pays dividends at 500 % and beyond.
  • In terms of potential, this is clearly one of the best examples of an Indian company which has gone global successfully. I think it is quite possible for the stock to double over the next 3-4 years, despite the obvious challenges.
  • My investment in the stock is now at an average price of 454 Rs and it is about 7 % of my portfolio value at CMP.
  • I do not have any real plans to sell the stock, now or in the near future.

The final one in the top 5 list is M & M and some observations are below.

  • My motivation for buying the stock was it’s prominent place in the commercial vehicles sector, which is an important one for our economy.
  • My first purchase was in 2007 March and the last in January 2009.
  • The stock has seen a split in 2010 when the face value was reduced to 5 from 10.
  • It has normally been a good dividend paying company at around 200 % and more.
  • In terms of potential, this is clearly one of the best examples of an Indian company catering to a growing local demand. I think it is quite possible for the stock to double over the next 4-5 years.
  • My investment in the stock is now at an average price of 285 Rs and it is about 7 % of my portfolio value at CMP.
  • I do not have any real plans to sell the stock, now or in the near future.

As you will see from here, investing in good companies and holding them for a long period of time has really worked for me here. There are some other holdings I have that may be of interest to my readers. I will share it in a future post.

Equity MF buying in 2017 – which ones to buy?

As I discussed in an earlier post, equity is an asset class which will probably perform the best in 2017. While I think it is a good idea to have both an MF and stocks portfolio, for most investors an MF portfolio will be a good place to start. In any case, I think most of my readers are having an MF portfolio and will definitely like to continue the same in 2017.

In this post, let me share the names of a few top funds in different categories which will make a great deal of investment sense in 2017. There are two important things to note here. Firstly, do not get swayed into buying MF through all kinds of statistical analysis and tools. These methods are amateurish even though I daresay they are sincere. Like every industry, the MF industry has professionals who are knowledgeable and neutral. It is very logical to go with their recommendations, reinventing the wheel has always been a rather poor idea. The funds suggested in this post are taken from the TV program “Investors Guide”. Secondly do not change your portfolio just because these funds are not there in it. There are several good MF schemes from different fund houses and changes should only be done when your annual review has shown some funds in your portfolio to be performing poorly. For new MF investors, I think it will make a lot of sense to pick some funds out of the ones mentioned in this post.

Coming to the fund categories, let us start with the multi-cap category. You must have this in your portfolio even if you are having only one category. Based on performance and potential, the following funds are recommended ones :-

  • ICICI Value Discovery fund
  • Franklin India High Growth companies fund
  • Birla Sun Life Equity fund
  • SBI Magnum Multi-cap fund

It will be important to have the mid-cap category fund in your portfolio too as these are the potential large caps of the future. Recommended funds in this category are :-

  • Mirae Asset Emerging Blue chip fund
  • Principal Emerging Blue Chip fund
  • UTI Mid-cap fund
  • Franklin India Prima fund

You also need to have the small cap category fund in your portfolio as, despite the risks, these are likely to reward you substantially in the future. Recommended funds are :-

  • DSP BR Micro cap fund
  • Franklin India Smaller Companies fund
  • Reliance Small cap fund
  • SBI Mid and Small cap fund

Finally the large cap category is important as it is likely to do well in 2017 and it provides some stability to your portfolio. Recommended funds in this category are :-

  • Mirae Asset India Opportunities fund
  • SBI Blue Chip fund
  • Birla Sun Life top 100 fund
  • Quantum Long Term Equity fund

For a good long term MF portfolio you just need to pick a fund from each category and invest in them regularly. You can decide on your allocation based on your risk taking ability, but even if you allocate 25 % of your money to each category, you will be fine.

Should you do SIP – not in general and in 2017 it will be a particularly bad idea. I will explain how you can invest in your portfolio in the next post.

How will I buy MF in 2017?

Even though I have explained my perspective on buying MF in several of my blog posts, I keep getting requests from readers to share how I plan to buy MF. As we are starting a new year soon let me state my plans to buy MF in 2017.

First things first – is it a good idea to invest in MF this year? I would say yes to that. Most investors are not equipped properly to invest only in stocks and even the ones who have that knowledge, should invest in MF for greater coverage of the market. My 3 portfolio strategy of Debt, MF and stocks remain the same in 2017. Avoid stocks if you are not comfortable with it right now, though you must have a stock portfolio eventually. As far as MF goes you must invest in it consistently and increase your investments with time. 

Now will it be a good idea to invest in MF even though the indices may not see any great upswing this year? Again the answer will be a yes, if you are investing for the long term then current levels do not matter much. Of course, your buying levels matter and as such doing SIP blindly will really be a bad idea. There will be serious fluctuations in the indices this year and you need to take advantage of this. I think we will see levels of sub 8000 on the NIFTY with a possibility of going down all the way to 7000. At the same time there will be a possibility of crossing 9000 levels and potentially reaching 9500.

Based on this, my plans to buy MF in 2017 is as follows:-

  • I will have an overall investment allocation to MF of 4.8 lacs, in the 4 funds that I invest in. You can read about this in my other posts.
  • My assumption is there will be at least 4-5 opportunities this year where Nifty will go below 8000. I do not plan to try and catch the bottom which is an impossibility.
  • I estimate the first opportunity to come around budget time and the next one to come after results of the assembly elections.
  • At these 2 times, I want to invest about 3 lacs. This money will be available from my active income and also from my FMP redemption as needed.
  • Of course, these are estimates based on two assumptions. First, the budget will come at a time when the Q3 results are out and have suffered due to the demonetization issue. Second, BJP will lose in the UP elections as their traditional support base has been rather badly affected by the same token.
  • Regardless of whether this happens or not, there will be 4-5 opportunities that you need to wait for.
  • Last year such a strategy allowed me to buy DSP BR Micro cap fund at an average NAV of 38 Rs, which was great.

What happens in the unlikely case that the market just starts going up and Nifty scales 10000 and more in 2017? Well, firstly in a rising market it makes no sense to invest through SIP. Secondly, the markets will definitely have a serious correction at times. I will just wait for it and invest most of my money when that happens.

When the market is falling how do you know at what point to buy? Look at the DMA figures for the appropriate index. For example, if the 200 DMA is falling and so is the 50 DMA then you can wait for some time. The moment there is a turnaround in this and the trend reversal sustains for 2-3 days go ahead and buy your MF units. Yes, there is no guarantee that the indices will not fall further but always remember that you are not trying to catch the bottom of the market, only attempting to buy at a sensible price.

What are the chances of this strategy not working out ? Fortunately, none !!!