Close ended Equity NFO – should you invest in HDFC Housing fund?

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 1.6 lacs
  • Current value of the fund is nearly 2.5 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 HDFC Housing fund which closes for subscription today. It is in an area 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 3 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.

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My investment advice this Diwali – stick to these basics

I was quite happy to receive several requests as to what investments should be made this Diwali. This has encouraged me to write the current post. Note that, investment is an ongoing process and not for a particular day. It is, therefore, important to have the basic concepts of investment in place first.

Without further ado, here are my 10 commandants of investment life:-

  1. Insurance is not an investment and it is best to steer clear of products that combine the two in some manner such as ULIP. You definitely need insurance, treat it as an expense incurred annually.
  2. Use goal based investing only to have an idea of the overall amounts needed in different times. Once you know this, invest in the 3 portfolios of Debt, MF and stocks. There is absolutely no need to map separate portfolios for each goal, it is a waste and also harmful.
  3. Your endeavor should be to invest as much as possible, after you have taken care of the lifestyle that you desire and can afford. Do not be constrained by your goal amounts, more money is never a problem as you can use it for a variety of good purposes.
  4. You can afford to invest in asset classes such as Real Estate, Commodities, Forex only if you have the requisite knowledge and can handle the required transaction logistics smoothly.
  5. In normal circumstances, PF and PPF should be adequate for Debt, MF portfolio should cater to all goals except retirement ( which it does partly ) and all other surplus amount should go into direct stocks. In case you are uncomfortable about stocks then you can put the money into MF.
  6. Buy your own home to stay in, if you are in a stable job and are likely to be in the same location. If not then renting may be a better option. When you near retirement, it is important to have your own home.
  7. Redemption for a goal – use stocks if you are having windfall gains in them, use MF if your XIRR from them are reasonably good and use Debt if both of these are not true and the market is going through a bad patch when you want to redeem.
  8. Withdrawal in retirement – make sure you use debt first unless equity markets are really on steroids for the year in question. In general, let the equity investments grow as long as possible.
  9. Ideally in retirement, you should have an arrangement for tax free passive income in the first 10 years. This can be achieved through PPF withdrawals, Tax free bonds, Dividend income etc. For next 10 years look at MF redemption or selling stocks depending on the market situation. For the third decade stocks are the best option.
  10. Longevity of life that you plan for depends on several factors and only you can decide for yourself. However, whatever your figure is, your plan should not see your corpus come to zero value at that time. For example, if you plan for 85 years, make sure you still have a reasonable corpus for another 5 years or so, just to be on the safe side.

I have not explained my rationale for some of these investment commandants, if you are interested in understanding that go through my blog for posts relating to all of these points.

Are you following these in your own investments? If not, you need to align yourself to these basic principles so that you are able to build a robust portfolio over time.

Wishing all readers a very happy and successful Diwali and Samvat 2074 where you will make considerable progress in your goal of achieving financial independence.

My current stock portfolio – Top 5 by value

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 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 6% 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 one in the top 5 list is TVS Motors and some observations are below.

  • My motivation for buying the stock was it’s prominent place in the Two wheeler sector, which is an important one for our economy.
  • My entire purchases for this stock was in the calendar year 2006.
  • The stock declared a bonus in 2010 which doubled my shares held.
  • It has normally been a good dividend paying company at around 60-80 % but last year it increased the dividends to a whopping 250 %.
  • 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 50 Rs and it is about 6% of my portfolio value at CMP.
  • I do not have any real plans to sell the stock, now or in the near future.

The third 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 5% 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 one in the top 5 list is Kansai Nerolac and some observations are below.

  • My motivation for buying the stock was it’s prominent place in the paints sector, which is an important one for our economy.
  • My first purchase was in 2008 January and the last in January 2009.
  • The stock has declared a bonus in 2010 which doubled my shares holding.
  • It has normally been a good dividend paying company at around 100 % and in 2017 this was increased to 250 %.
  • 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 29 Rs and it is about 5% 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 4% 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.

In current markets you must follow asset allocation

One of the main reasons stock market and other bubbles get created is that we all love good times and good stories. It gives us an emotional kick to see that a stock that we hold has gone up by 10 % in a couple of trading sessions and the MF portfolio we hold has been clocking impressive gains over the last few months. In our heart of hearts and also in our rational minds we do know that the party will end, sooner rather than later, but it is far more exciting to believe that it somehow will not.

We all understand asset allocation at a fundamental level so I am not going into details. However, in simple terms for most portfolios of investors, the following need to be kept in mind when we are looking at asset allocation:-

  • Assuming you have 2 main asset classes Debt and Equity, decide on an asset allocation for yourself. 
  • In my view you must have at least 35% in Debt. This is fairly easy once you take your PF account money into consideration.
  • Periodically review to see if the allocation has got skewed by more than 5 %. In such cases sell from the higher asset and buy into the lower one.
  • For example, right now due to the run up in the markets your equity allocation may be 72% and debt 28 %. Sell off some equity and put it into a debt product such as Liquid fund etc. This provides your partial hedge against a market downturn.
  • What to sell? Again, look at stocks or MF which have run up the most and use your judgement as to which looks like the best bet.

What is my take on the current situation? I feel that there is a little more steam left in the markets yet, the Nifty may well reach 10300 levels by next month. However, beyond that there is every likelihood of a correction to 9500 levels and below.I do not believe that we will really see a crash in the Indian markets in the near future.

Based on the above premise take a serious look at your asset allocation this week and next. It is tough to sell something which is doing so well but you are really protecting some gains and limiting your future losses by doing so. Many people may tell you that you should simply hold and that the gains will again come back in the future. However, that is speculative and asset allocation is a way better strategy which is also a proven one.

I am sure you have never done it in the case of your MF portfolio built up through SIP – one more reason why the way SIP is done and administered, leaves a real lot to be desired.

MF portfolio realignment – my plan

If you are a regular reader of my blog you will know my 3 portfolio strategy for investment by now. I have portfolios in Debt, Stocks and MF. In the initial part of my working life I invested in mostly debt, the mid part was largely used to build up the stock portfolio and 2008 onward till now it has been largely MF. Of course, once I decided about giving up my regular corporate career in 2012, I boosted my debt portfolio significantly.

Over the years I have bought several MF schemes, initially with one time investments, thereafter with SIP and now back to investing at the right times. I have therefore collected a large number of MF schemes and in several of these the amounts invested are not very significant. The ones where I have done SIP obviously have some decent amounts, but even here there are several funds as my portfolio had changed over my 7 years of SIP.

In the past whenever the markets have gone up significantly, I have thought about cleaning up my MF portfolio. Somehow or the other it has never happened and I am stuck with a multitude of MF schemes, most of which I do not really want to keep. This weekend, I took a look at my MF portfolio after a long time and these were my observations.

  • I am currently investing in 4 MF schemes which are as follows. My plan is to continue investing in these for the future, at least till I have active income to do so:-
    • ICICI Focused Blue chip fund
    • ICICI Value Discovery Fund
    • HDFC Mid cap opportunities Fund
    • DSP BR Mid and small cap Fund
  • There are some other funds where I have significant investments but have dropped now. I will be keeping these for now but may want to sell them off during any annual review that I undertake. Future investments in these are unlikely:-
    • HDFC Top 200 Fund
    • IDFC Premier Equity Fund
    • Birla SunLife Frontline Equity Fund
    • DSP BR Equity Fund
    • Sundaram Select Mid cap Fund
    • Franklin India Blue Chip Fund
    • UTI Dividend yield Fund
  • There are some Close ended funds such as the ICICI Value Series Funds. I had invested in these as they give regular dividends which is useful to me. I will either continue with them or shift to other similar funds. To give readers an idea, ICICI Value Series 2 has given an XIRR of 30 % plus in the 3 year investment period.
  • Everything else, I want to get red of ASAP.

How do I plan to go about it? I have a feeling that next few weeks may be the best chance if Nifty once again goes to 10000 etc. Once the quarterly results  are through and the global geopolitical situation worsens, our markets are very likely to down to 9500 or even below that on the Nifty. Once I sell all my disposable MF, I will just be in cash and wait for the right opportunity.

What will I be buying with the cash I get? Well, one option is to invest in some of the stocks I had outlined in the earlier post. I am sure that if I buy these at Nifty levels of 9500 I will definitely see significant returns over the next 3 years etc. Another option will be to space out the stocks and invest in my 4 MF’s .

Unless the NIfty shows a rising trend due to a strong quarterly results, I am finally ready to pull the trigger on this. Even if it keeps rising, I will still sell when it reaches 10200, as I do not believe that is a value at which the Nifty can sustain itself.

So what is the alternative to FD’s ?

In the last post I wrote about why FD as an investment is not at all a suitable one. It offers low returns and is clearly not tax efficient. The natural question therefore is, which are the investments to replace traditional bank FD? In this post I will try to answer the same.

Let us first look at why do people invest in FD. There can be many reasons but 3 of them are the most common ones:-

  1. Many people simply do not know of any options for savings and think this is a safe way which will also earn some returns.
  2. Some investors look at FDs as a good place for an Emergency fund and also for any goal that may be coming up in the next 1-5 years.
  3. Retired people and others who want a regular source of income keep their money invested in FD for the longer term.

In this post I will deal with the first two as the last one is more complex in nature and deserves to be dealt with separately.

For the first category of people, if they are able to keep the money for long term, my recommendation will be PPF. The returns here are more than FD today and they are tax free. Moreover you get 80 C benefits with PPF, so if you have not exhausted your 1.5 lac limit through other means, this is a great benefit. Also, though PPF is for a 15 year term, you can make withdrawals after 6 years. Finally, if you start early, this will be a great backup to your MF redemption, in the years which are not good for equity.

What if you do not want a long term product such as PPF? Well, one option can be Arbitrage funds which will probably give you returns of around 7 %. While this is pretty much the same as FD, the tax treatment is much better as you will not be paying any taxes on the capital gains after one year. You can therefore park your money here and redeem it in a tax free manner for any needs in an ongoing basis. Arbitrage funds are also quite risk free as far as your capital is concerned, unlike equity funds.

Regular Debt funds or FMP, MIP etc will work if your time frame is at least 3 years. This is the time you need to keep your money to get indexation benefits for LTCG. Note here that with the Cost Inflation Index ( CII ) being dampened due to lower inflation numbers, you will still need to pay some taxes but this would be on a much lower scale. Also, as the interest rates will go up, Debt funds and MIP are likely to have a lower return. We are pretty much at the bottom of the cycle and rates will go up in the next 1-2 years. Finally MIP will do very well if equities are doing well but therein lies the risk too.

In conclusion for the first category of people, use the following strategies:-

  • If you are OK with a little risk go for MIP and Debt funds.
  • If you are having lower risk taking ability but can wait 3 years or more go for FMP. Here too you can look at Dual Advantage FMP if some risk is all right.
  • In case you do not have 3 years and are looking at moderate but steady returns, look at Arbitrage funds.
  • If you just want to save and are not going to need the money for long, look at PPF.

What about category 2 people? Many financial planners will advise you to withdraw from equity and part the money in debt some 3 years before your goal etc. I have never found any sense in this as you might really be losing out on growth by such actions. At the same time being purely in equity is not a good idea either. You need to take some middle path which balances the needs of both growth and safety.

  • Higher risk takers can try Equity Savings Funds or Balanced Funds.
  • Moderate risk takers can try MIP, Dual Advantage FMP, Debt funds
  • Risk averse investors can try FMP, Liquid funds, Arbitrage funds

Note here that the higher risk options are more suited to 3 years plus time frame.

So, there you have it. Now that you know what to do with your money which is in bank FD’s, go ahead and stop those. You will soon thank me for having written this post !!

Saving for your own marriage or education? Here’s how

Our social norms and practices have undergone huge changes in the past decade or so and this is a continuous process. One area where this is seen quite starkly is how marriages are arranged and carried out today. In the older days the parents were most likely to find a match for their child, arrange the marriage logistics and of course pay for the same. Given the fact that people married relatively young, especially the women, it made sense to do this then.

Times have changed greatly now, especially in urban India. The incomes have increased manifold but so have the responsibilities of parents. Increased cost of school education, high graduation costs and not really being able to depend on children for the retired years like before has created a need for funding retirement to a much greater extent than ever before. Also, as children nowadays prefer to choose their own partners and have their own ideas about how the marriage should take place. In this kind of situation it makes a lot of sense for the children to plan for their own marriage expenses. Of course the parents will give gifts etc as per their financial bandwidth but in case there is a seriously expensive wedding, that needs to be planned by the child.

So, let us say you are just out of college and are in a job which pays you about 50000 Rs a month. How do you go about planning your life at 22, when many things are not really firmed up for the near term or far term? For example, you may want to do an MBA, may have ideas to start something on your own in a few years time or may have an idea of getting married in 6-8 years time. While you do not have to decide exactly on what course of action you want to follow, it will be important for you to invest from the beginning in a fairly disciplined manner. This will enable you to have the financial ability to do the spend when required.

How do you start? We will assume that your initial salary is 50000 a month and this will increase at 10 % every year. You should be doing the following:-

  • You really do not need insurance so do not spend on it. For debt investments your PF is adequate but as a matter of good habit open a PPF account and put 5000 every month in it.
  • With the above and your monthly expenditure you should still be able to invest 10000 per month in MF fairly easily. In case you can do more, all the better.
  • With every passing year increase this amount by 5000 Rs per month. This should not be difficult with your annual increments or job changes, if any.
  • Assuming you plan to work for 5 years before you need the money and it grows at 12 % every year how does it look?
    • Initial 10000 for 5 years will grow to 8.24 lacs
    • Next 5000 for 4 years will grow to 3.09 lacs
    • Next 5000 for 3 years will grow to 2.17 lacs
    • Next 5000 for 2 years will grow to 1.36 lacs
    • Final 5000 for 1 year will grow to 0.64 lacs
  • So in 5 years you will have a corpus of 15.5 lacs.
  • You will also have about 5 lacs in your PPF account

With this in place you can easily plan for your marriage or higher education. For example if you want to do an MBA from ISB the cost is about 30 lacs today. You can use part of your corpus and also take an Education loan. In case you are looking at funding your marriage, the amount in your corpus should be adequate for most weddings.

Now many financial planners will tell you that you must not put money in equity for 5 years etc. Do not listen to them at all. Firstly you are creating an MF portfolio which you may or may not want to redeem in 5 years time. So, strictly speaking there is no real need to think of it as 5 years. If you do not need the money, you just continue with the portfolio as normal. Just to motivate you a little more, if you keep investing 10000 for 25 years, at a return of 12 %, you will end up with 1.9 crores from just here.

I hope this has given all the new earners a lot of food for thought. You need to be in charge of your finances now. So far your life events have been largely managed and almost wholly funded by your parents. Now is the time to really chart out your own course and depend on your own resources for the same.

Once you make up your mind to do this, success is almost guaranteed.