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.

Bet on these MF schemes for now

We are passing through rather interesting times in the Indian economy and markets. The rise in the indices have had investors thinking as to whether it will be a good idea to keep buying as of now. By all conceivable logic, there is a correction round the corner. Is it likely to be momentary or very deep? We can only speculate in an intelligent manner.

In my opinion, it does not really matter much if there is a correction soon. Nifty will probably find support at 9000 plus levels and that is something none of us expected a couple of months back. In the scenario I see unfolding, we are very much in a structural bull run and corrections are going to be price based rather than time based. To that extent you need not really change your investment plans a great deal.

What about people who are starting off building a MF portfolio or ones who want to realign their portfolio to better funds, taking advantage of the current highs? Which funds should we bet on for the next 15 years or more? I gathered some inputs from experts managing HNI money and this is what they had to say:-

  • A good fund manager has generated 4-5 % alpha over the indices in the past 2 decades. For this reason avoid Index ETF in our markets right now.
  • There may well be a structural bull run in our markets over the next 10-15 years.
  • Multi cap funds will be the best suited for this time frame but look at other categories like large cap and mid/small caps too.

So which are the funds to bet on? Here are a few for you to consider:-

  • ICICI Focused Blue chip
  • Kotak Select Focus
  • Reliance Vision
  • SBI Pharma
  • Kotak 50
  • Franklin High growth
  • MOST 25
  • MOST 35
  • ICICI Value Discovery

You will not find many of your known funds here, but then these are futuristic in their likely performance. Go with them if you are willing to take some risks for potential higher returns.

However, if your existing funds are doing well, do not change for the sake of change.

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.

IndiGrid InvIT Fund IPO – should you invest ?

In the investment world we are all looking at newer ways to invest, always hoping that the next product coming across will hopefully give us better returns than our earlier ones. In this context the Infrastructure Investment trust bond issue from IRB Infra generated a lot of interest in the market and was oversubscribed 8.6 times, despite the high ticket size of 10 lacs. Close on it’s heels we have the IndiGrid InvIT fund IPO, open from 17th to 19th of this month.

To begin with, Infrastructure projects such as ports, roads, power projects and other kinds of construction are normally on a massive scale and need a lot of funding. These are also long gestation projects where the returns will only come after a certain number of years. If you look at NHAI for example, the several companies started by it for the different projects are all technically running at a loss, due to the high interest rates and depreciation that they have to deal with. Their loans are huge and though the marginal profits on EBITDA are very good, progress in some of these projects have been slow due to the adequate availability of cash at the right times.

The idea of an Infrastructure Investment Trust ( InvIT ) is to restructure these loans by paying it off with the investment they will get in the trust. The Trust will then have an arrangement with these companies to get returns from them through the profits generated. Investors in InvIT will get their returns through dividends, buyback etc. As all these companies are having pretty much assured revenue over a period of time, the returns are likely to be good.

The below information about the IndiGrid InvIT Fund IPo, is taken from the website http://www.chittorgarh.com and a few other sources of publicly available information:-

Incorporated in 2016, IndiGrid InvIT Fund is an infrastructure investment trust (“InvIT”) established to own inter-state power transmission assets in India. They are focused on providing stable and sustainable distributions to their Unitholders.

Sterlite Power Grid Ventures Ltd, sponsor of IndiGrid InvIT Fund is one of the leading independent power transmission companies operating in the private sector, with extensive experience in bidding, designing, financing, constructing and maintaining power transmission projects across India.

Company’s sponsor owns 11 inter-state power transmission projects with a total network of 30 power transmission lines of approximately 7,733 ckms and nine substations having 13,890 MVA of transformation capacity. Some of these projects have been fully commissioned, while others are at different stages of development. They recently won bids for two transmission projects in Brazil,

Of the 11 inter-state power transmission projects owned by the Sponsor, they will initially acquire two projects with a total network of eight power transmission lines of 1,936 ckms and two substations having 6,000 MVA of transformation capacity across four states (the “Initial Portfolio Assets”).

Objects of the Issue:

The object of the issue are to:

1. providing loan to BDTCL and JTCL for repayment or pre-payment of debt (including any accrued interest and any applicable penalties) of banks, financial institutions, SGL1, SGL2;
2. repayment of any other long term and short term liabilities and capital expenditure creditors.

Comparision of InvITs

Comparision of InvITs (IRB InvITs & IndiGrid InvIT)
Particulars IRB InvITs IndiGrid InvIT
Price band Rs. 100-102 Rs. 98-100
Issur Size Rs. 5921 cr. Rs. 2250 cr.
Sector Toll Road constructions Power Transmission
Likely yield 8 to 12% 10 to 15%
Entry Level At a Premium At par value
Tenure 16 years 35 years
Corporate Ratings AAA/Stable AAA/Stable
Proportionate Allotment 75% of the issue (i.e. except retail) 75% of the issue (i.e. except retail)
Risk Factors Inflation, Traffic Volume, Govt. policies Load Availability, Market trends
Market perception Bearing Risk as above Considered as Safe asset class Globally
Promoter IRB Group Sterlie Group

Should you be applying to this issue? Well, if you have not got an allotment in the IRB InvIT IPO then you should definitely look at it. The one thing which may be a spoiler here is that the yields are primarily going to be in terms of interest and this will be taxable in the hands of the investor.

In case you are not yet fully invested in equities through MF and stocks, you may want to delay investment in InvIT’s for now. Focus on building your equity investments and you can then look at future InvIT issues. There will surely be many more soon.

 

Infrastructure Investment Trust – what is it and is it investment worthy?

In the investment world we are all looking at newer ways to invest, always hoping that the next product coming across will hopefully give us better returns than our earlier ones. In this context the Infrastructure Investment trust bond issue from IRB Infra is now generating a lot of interest in the market. What is this and will it be a good idea to invest? Let me try and address it in this post.

To begin with, Infrastructure projects such as ports, roads and other kinds of construction are normally on a massive scale and need a lot of funding. These are also long gestation projects where the returns will only come after a certain number of years. If you look at NHAI for example, the several companies started by it for the different projects are all technically running at a loss, due to the high interest rates and depreciation that they have to deal with. Their loans are huge and though the marginal profits on EBITDA are very good, progress in some of these projects have been slow due to the adequate availability of cash at the right times.

The idea of an Infrastructure Investment Trust ( InvIT ) is to restructure these loans by paying it off with the investment they will get in the trust. The Trust will then have an arrangement with these companies to get returns from them through the profits generated. Investors in InvIT will get their returns through dividends, buyback etc. As all these companies are having pretty much assured revenue over a period of time, the returns are likely to be good.

Let us now look at the first issue of this kind by IRB Infra. The ticket size for investment will be between 10 lacs and 10.2 lacs, so if you are not having this kind of money you will not be able to invest now. This issue is opening for subscription today and will close on 5th May. Some information about the issue taken from ICICI Direct is as follows:-

IRB InvIT Fund is backed by IRB Infrastructure Developers Limited (sponsor of the trust) and the trustee of IRB InvIT Fund is IDBI Trusteeship.
What are “InvITs”?
An InvIT is a new capital market product promoted by the Government to enable Infrastructure Developers to free up tied-up capital. InvITs are designed to attract low cost long term capital from FIIs, Insurance and Pension Funds and the DIIs (mutual funds, Banks) which will also benefit to other investors including HNI clients.
IRB InvIT – An Overview
The IRB InvIT is composed of six Special Purpose Vehicles (SPVs) consisting of NHAI toll-road assets aggregating to 3,645 lane kilometers of highways located across the states of Maharashtra, Gujarat, Rajasthan, Karnataka and Tamil Nadu.
As per InvIT regulations, at least 90% of available cash flow of the SPV shall be distributed to the InvIT in proportion to its holding in the SPV. The InvIT in turn is required to distribute at least 90% of its available cash flow to the unit holders on a semi-annual basis.

Should you be investing in them? I think there are very high chances of the returns being significantly better than most MF schemes over long periods of time. The returns will be taxable, but even with that it seems to be an exciting investment. If you have surplus funds available, you should consider this seriously.

Personally, I am shifting some of my money that was there in Arbitrage funds to this issue. Returns in Arbitrage funds have been rather low and I do not see them faring any better in the near future.

There will of course be other such funds in the future, so keep on the look out for them, even if you cannot invest in this one.

My cash flows and investments in April

April has been a good month for our markets with all the major indices hitting a lifetime high. My Stock and MF portfolio have done rather well and while I am not one to keep looking at my net worth every day, it does feel good to see it grow well in this month. For all people with an asset allocation strategy in place, this will be a good time to shift some money to debt. However, the question is which debt instruments will really work out in the current situation, where the interest rates are probably bottoming out?

I think it will be a good idea to outline my own situation in terms of the cash flows in April and how I have invested them in the month. These situations and decisions are unique to me but it can be definitely useful learning to some of the readers. Let me start with the cash inflow first. The month of April had significant cash inflows for me from the sources given below:-

  • My active Management consultancy income from the software company where I work currently as Chief Strategy Officer.
  • Some consultancy income from a couple of holistic life plans I have made for 2 people who had reached out to me.
  • Rent from my Chennai apartment which largely goes into paying for our current apartment in Hyderabad.
  • Interest income from tax free bonds
  • Dividend income from stocks in my portfolio
  • Dividend income from some MF schemes in my portfolio
  • Redemption proceeds of some FMP schemes on their maturity

My regular expenses that require cash outflow are as follows:-

  • Household expenses including rent for our apartment.
  • Amount sent to my parents every month for supplementing their income.
  • Expenses incurred on my children, separate from their college fees.
  • Any discretionary expenses including travel, entertainment and gifts.
  • Contribution to 2 charities of our choice.

As of now my passive income is enough to meet the above expenses in an ongoing manner and therefore my active income is almost totally invested. Besides for the FMP redemption proceeds, I invest the principal and use the capital gains as part of passive income. In April, the FMP redemption principal was to the tune of 11 lacs and this needed me to decide where should I put it back.

The investments I have done in April are as follows:-

  • PPF contribution to the maximum for my wife and me.
  • FMP plans from Reliance, Sundaram and BSL.
  • MIP from BSL
  • ICICI Value Fund series 12
  • Sundaram Micro cap fund series 11

Why have I invested in the following and will I be doing the same in May? The answer to the second part is no, as I look into each month separately now, keeping the overall asset allocation in mind. 

The first part has a more complex answer and I will try to provide it in the next post.

 

 

Debt investments which have worked well for me lately

As many of my readers will know well by now, I am a great advocate of the 3 portfolio strategy with Debt, Stocks and MF each having an important place. Of these, stocks and MF are typically for the long term and something I will normally not redeem in the next decade at least and maybe even later. Debt is different – in my FI state I depend on it for passive income and use some of this for my regular expenditure. 

One of the obvious approaches in debt investments is to understand the interest rate cycle and try to lock investments for a possible longer term, in order to maximise your interest earning out of these. While there is a bit of luck and speculation involved in this, if you are following the economy properly, it is possible to get these signals correct more often than not. A few of the situations in the past years which has really stood me in good stead are as follows:-

  • I normally put some amount as FD for my parents so that they get a monthly amount to supplement their income. I consolidated a larger amount in 2015 and locked it in for 3 years at a rate of 9.5 %. Current rates are 7.5 % only.
  • Despite several people advising me against it, I went ahead and invested in a big manner in the Tax free bonds of 2013-2014. The rates were close to 9 % and today it gives me an interest to meet nearly 25 % of my annual expenditure needs.
  • Our earlier POMIS matured in December 2015 with a rate of 8 %. I reinvested 9 lacs in a joint account with my wife at a rate of 8.4 %. Today the rate is 7.5 % or so.
  • In the 2013-2015 period I rolled over most of my FMP schemes as the rates of interest were favourable and it made sense to lock these in further. 
  • I also invested fresh into many FMP schemes as it seemed a good idea to have investments which locked into government papers at the then prevailing rates.
  • I continued my investments in PPF even though the rates kept coming down based on the alignment of Small savings schemes to the market rates. The EEE nature of it plus the possibility of a rate increase when the cycle reverses make it worthwhile.

While all of these were great till 2015 or so, since the last year, with the rates going down steadily with each RBI policy, Debt instruments have become more of a challenge. For all the instruments that are maturing today, one needs to look into alternatives that will give decent returns compared to a pure debt product.

In the meantime however, I am quite happy with the above decisions I had made. The best of them were definitely the investment in Tax free bonds.