Are we still in a Bull market?

In several discussions about our stock markets, the inevitable question that comes up is – Are we still in a Bull market? At times the people asking the question are really not aware of what a Bull or a Bear market is, they are merely articulating what they have read somewhere or heard on the TV channels. In this post let me try and define these a little, in the context of our markets over the last 15 years or so.

So let us start with the basics – the long term returns for Nifty has been in the range of 14% over the last 3 decades or so. You can define a Bull market as a period of time where the returns were significantly higher than this. In the 2003-2007 period the returns were in excess of 30% as Nifty went from about 2000 to 6000 odd levels. This period can therefore be definitely classified as a Bull market. The corporate profits grew 4 times in this period and the PE ratios approached the high 20’s by the time the run ended.

Contrast this to the period 2008 to 2015. The annualized return on the Nifty was well below the 14% mark. Though the markets went up and down the overall trend was negative. Volumes were generally muted and the overall sentiment was a negative one. This was very clearly a Bear phase of the market. This phase ended in 2015 December and since 2016 beginning we are in a Bull phase again.

It is important to note that in a Bull market there is often a possibility of fairly deep corrections, often more than 10% and at times even to the extent of 30%. In the last Bull run of 2003-2007 there were more than 10 such corrections. The recovery of the markets from such corrections ranged between 2 and 6 months. Even in the present Bull market which started in 2016 there have been 3 instances of such deep corrections. In each of these cases there was recovery in the markets and it went up more than it had fallen.

So, coming back to the main question of the post, are we still in a Bull market? There is a very interesting twist to this answer. For front line stocks ( say top 100 ) the profit multipliers have not been great yet and neither are the PE ratios at a very high level. So the indicators do not signify an end to the Bull market soon. From all available data it seems likely that the run will last till 2020 end or even more. Of course, unexpected events such as the incumbent government losing power can signal an abrupt end to it. In the meantime there will be deep cuts from time to time and investors should use it as an opportunity to buy more.

The broader markets with Mid cap and Small cap stocks are a different story though. Here the individual stocks have been battered down quite badly, in some cases being down by 40 to 60 % from their peak price. Though the recovery may yet happen, it is likely to be rather slow. In case it goes into a deep time correction without recovery then we will have to say that a Bear run has started for this part of the market. As Indian companies grow at different levels this may well become the norm where different part of the markets exhibit different buying levels and interest.

On the whole though, I am inclined to think that we are in a Bull run for the overall market – maybe more so for the large caps and less so for the others. Unless BJP loses 2019 polls, it is very likely that the run will continue till 2022 which will be the mid point of the next government.

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MF schemes with highest assets – should you invest in these?

I have been away from writing the blog for a while as my children are at home now and we had been to Bali for a vacation. It was nice to see that several readers have inquired as to when I am going to resume writing the blog. With all the interesting things happening in the markets I think this is a good time to start writing again.

Over the past few months the SEBI mandated categorization of MF schemes have now happened, thus bringing a lot of standardization for the investors. I was looking at the MF schemes that have been the most popular over the years. Now, just because the schemes have been invested in it does not mean that you must do so. At the same time there is a lot of value to these schemes being supported over the years by investors.

The following 6 schemes have the highest AUM, all of them above 20000 crores:-

  • HDFC Prudence fund
  • HDFC Equity fund
  • HDFC Mid Cap Opportunities fund
  • ABSL Frontline Equity fund
  • Kotak Select Focus fund
  • SBI Blue Chip fund

Should you be investing in these funds? For that it is important to look at the following issues:-

  • Fund manager credentials and longevity are normally good for all these funds.
  • With a larger AUM the flexibility of the fund manager to make quick changes according to the market situation is limited.
  • The mandate of the fund becomes critical in these situations. With the SEBI definitions in place a pure large cap fund will find it difficult to generate differential returns.
  • It will be imperative to look at the past records of these funds especially for the last year or so where the markets have gone through a volatile period.
  • While most of the existing investors can remain invested in these schemes for some more time the real issue is whether new investors should get into these or not.

Based on the above, it will be fair to say that both HDFC Prudence as well as HDFC Equity have really not performed well compared to both the Benchmarks and Peer group funds. If you are looking at a large cup fund you will be better advised to stick with the ABSL or SBI variant. However, for investors with a longer term time horizon, Kotak Select and HDFC Mid cap will be significantly better options.

Of course, there are several other great schemes where the AUM is not as high as these six funds but these are doing as well or better. I have some posts on these in my blog and you can go through them to build your own high performance MF portfolio.

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.

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.

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.

LTCG tax on equities – How to calculate?

Since I have started writing this blog there has been three budgets and I normally get a lot of queries after every budget. In this budget, understandably the maximum number of queries have been in the tax treatment of equities, where LTCG has been taxed at the rate of 10 %. I was thinking of doing a post on this but a CBDT circular clarifying the different scenarios has made my task easier.

As I do not believe in reinventing the wheel, let me just reproduce here what the circular says. I am doing this so that people reading my blog have easy access to it:-

The computation of long-term capital gains in different scenarios is illustrated as under‑

Scenario 1 — An equity share is acquired on 1st of January, 2017 at Rs. 100, its fair market value is Rs. 200 on 31st of January, 2018 and it is sold on 1st of April, 2018 at Rs. 250.

As the actual cost of acquisition is less than the fair market value as on 31st of January, 2018, the fair market value of Rs. 200 will be taken as the cost of acquisition and the long-term capital gain will be Rs. 50 (Rs. 250 — Rs. 200).

Scenario 2 —An equity share is acquired on 1st of January, 2017 at Rs. 100, its fair market value is Rs. 200 on 31st of January, 2018 and it is sold on 1st of April, 2018 at Rs. 150.

In this case, the actual cost of acquisition is less than the fair market value as on 31stof January, 2018. However, the sale value is also less than the fair market value as on 31st of January, 2018. Accordingly, the sale value of Rs. 150 will be taken as the cost of acquisition and the long-term capital gain will be NIL (Rs. 150 — Rs. 150).

Scenario 3 —An equity share is acquired on 1st of January, 2017 at Rs. 100, its fair market value is Rs. 50 on 31st of January, 2018 and it is sold on 1st of April, 2018 at Rs. 150.

In this case, the fair market value as on 31st of January, 2018 is less than the actual cost of acquisition, and therefore, the actual cost of Rs. 100 will be taken as actual cost of acquisition and the long-term capital gain will be Rs. 50 (Rs. 150— Rs. 100).

Scenario 4 — An equity share is acquired on 1st of January, 2017 at Rs. 100, its fair market value is Rs. 200 on 31st of January, 2018 and it is sold on 1st of April, 2018 at Rs. 50.

In this case, the actual cost of acquisition is less than the fair market value as on 31stJanuary, 2018. The sale value is less than the fair market value as on 31st of January, 2018 and also the actual cost of acquisition. Therefore, the actual cost of Rs. 100 will be taken as the cost of acquisition in this case. Hence, the long-term capital loss will be Rs. 50 (Rs. 50 — Rs. 100) in this case.

I hope with this all the readers would have got a very clear idea on how the tax is to be calculated. However, the more serious issue is the real impact of the tax on your investments you have been making for the long term.

The news on that front is unfortunately not a good one – I will explain in the next post.

The impact of budget on your investments

When you are in the middle of a storm it is difficult to stay calm. The immediate aftermath of the budget yesterday has been a sharp fall in the markets – the fall is significant for the Sensex and the Nifty and brutal for the mid cap and the small cap indices. I thought of writing this post about the overall impact of the budget on your investments but it will probably be a good idea to start with the markets first.

Now as any of us who have been in the markets for some time will know, the markets do not like surprises. In the budget of yesterday, there were 2 elements which were not really surprises, yet the markets were hoping against hope that they will not take place. The first is the fiscal deficit figure whose importance is really in how the world views us financially. Not only have we not met the projected 3.2 % but, what is far worse, we are pegging the next year target too at 3.5 %. The financial discipline which was the hallmark of the last few budgets seem to be slipping. The second is of course taxing of LTCG for equities. While this had to happen some time, the markets are clearly shocked at it being done now and in not doing away with STT. Out of the two factors, the first will spook the FII’s and the second will be more of a problem for domestic investors. It was therefore expected that the markets will fall today, but the extent of the fall has been shocking.

Let us take a look at the LTCG part in closer detail. There are several issues in it which have not been understood well. By and large, people investing in stock markets are the relatively better off people in our society as compared to those who do not. It will be unfair not to tax LTCG at all, given the increasing income disparities we are seeing in society today. So if the government had to run welfare schemes such as Ujala and the Health scheme the money had to come from somewhere. This was the obvious choice and the other was raising the cess from 3 % to 4 %. I am a little surprised that LTCG period has only been kept at 1 year. This along with the little difference from the STCG rate will mean that there is really no incentive for holding equity long term.

Let us now look at what it means for investors in tangible terms:-

  • All your gains made so far are well protected as the price on 31st Jan, 2018 will be taken as the cost price. Though you will be charged for future gains from this price, your current valuation of portfolio is protected.
  • If you sell your stocks and MF in the next FY, it will be possible to structure the sale so as to minimise the taxes. For example every one of us will have some stocks in our portfolio which lose heavily. This will be the time to square off these losses with the gainers so that you do not have to pay much taxes. 
  • As far as MF goes most of us are doing it for some long term goal and we can just continue to do so. Yes, you will pay some taxes on future gains but not on your past ones. Investors doing SIP should simply continue, you may now want to bump up the amount by 10 % to take care of the taxes when you redeem. Note that this is mainly true for the Growth option.
  • If you have chosen the dividend paying option in your MF investments then the DDT will come into place from April. You will now roughly get 10 % less dividend as compared to what you were getting earlier. If this forms part of your passive income then you will need to secure this gap from somewhere else.
  • Indexation not being there is a good thing as you can simply sell it now at any point in time, without worrying about the indexed cost price. In any case, indexation works best with debt products where the returns are linearly unidirectional.

In summary what should your actions be?

  • Clean up your portfolio by selling stocks you do not want to keep, especially if they are losing money. Make sure that your overall gains after squaring off the lasses are not more than 1 lac so that you need not pay any taxes next year.
  • Continue with SIP in your MF investments, look into increasing the monthly outlay to take care of the eventual taxes.
  • Dividend option in MF schemes is a bad idea now. You will be paying DDT twice and again pay taxes on LTCG. Go for the Growth option, if you need money you can simply sell off some units.
  • Rest of your investments in Debt etc can continue as before.

So you will see, there is no real reason to panic at all at an individual level. The markets are doing so as they had gone up a lot and would anyway have corrected. This bad news has given it a reason to do so now. If it was not this it would have been something else.