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.

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.

FMP redemption – a case study in April

As all my regular readers will know, a lot of my debt investment have been historically into FMP instruments. The basic premise of this is simple – it is a safe investment with relatively stable interest rates you can lock into for 3 years or more, the indexation benefits are good and consequently the taxes are reasonably low. If you want to read more about why I invest in it you can go through the FMP related blog posts.

The way I approach FMP redemption proceeds can be summarised as below:-

  • The capital gains are used for my regular expenditure if required. These form a good part of my passive income stream and, more often than not, I use it for some discretionary expenses.
  • I normally reinvest the principal amount in some other debt instrument, it could be FMP again or something else depending on the context of time.

So far in April, 3 of my FMP investments have been redeemed and the overall details are as follows:-

  • The principal amount in these three were 7 lacs.
  • Total capital gains arising out of these redemption is 2.25 lacs. In terms of XIRR it translates to around 9.75 % which is pretty good.
  • At this point in time, I do not really need the capital gains for my expenditure. This is mainly due to my active income through Consultancy which is more than adequate to take care of my regular and discretionary expenses.

Based on the above considerations I have decided to invest 9 lacs out of the redemption amount. In the present interest rate cycle, investing in pure debt products will really not make sense. As such, I am looking at the following distribution:-

  • Dual advantage FMP which invest in equity to a small extent.
  • Close ended equity funds such as Sundaram long term micro cap fund.
  • Equity savings funds.
  • MIPs
  • Funds such as ICICI Balanced Advantage fund or Edelweiss Absolute Return fund.

As some of these funds are dependent on market levels, I will be waiting for the annual results to be out. My feeling is Nifty will get down to below 9000 levels shortly and that will be a good time for me to buy these instruments.

 

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 goes to 9300 etc. Once the quarterly results  are through and the global geopolitical situation worsens, our markets are very likely to down to 8500 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 8500 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 9300, as I do not believe that is a value at which the Nifty can sustain itself.

Indices at life time highs – should you sell your MF ?

Over the last few days all indices are either hitting their lifetime highs or coming very close to them. In fact, with the issues in Syria and the impact on crude oil prices, there is a chance of some correction in the immediate future. This is probably the reason why I have got a lot of messages asking me as to whether it will be a good idea to sell the entire MF portfolio, be in cash and again buy the MFs once the markets seem to have finished the correction.

Is it possible that you will make money in the short run through this approach? The answer to that is “yes”. Is it therefore a good idea? The answer to this is clearly a “no”. in order to understand why this is so, you need to understand how MF works in the first place. The fund manager has a certain amount of money available and he is buying stocks with it. These set of stocks for a particular scheme will keep changing. The fund manager is doing these changes and you pay him for that very reason. Now if the markets are going down the fund manager may selectively sell some stocks and buy others. As such the scheme you sell and the one you buy are fundamentally different. If you are in the scheme as part of your long term goals then it makes absolutely no sense to sell off the schemes when the markets are at highs. For all you know your fund manager is taking the appropriate decisions by selling some stocks at their highs and buying others which still have a lot of value in them. Do not try to second guess a person who is professionally trained and does this for a living. Just because you can play around with spreadsheets and calculators does not make you competent to take such decisions.

Now what if these funds are not part of your long term portfolio? Well, if you are to sell them anyway then you might as well sell when they are at their highest or near it. In that case my recommendation would be to sell NOW. Yes Nifty can still go to 9500 plus this year and maybe even 10000, but those are fraught with uncertainties. You might as well sell off now and wait for a 5 % drop or more to buy funds that you want to be in for the long term. As I said before with the same fund it does not make sense to change but if you are changing your fund you might as well look at a better entry point.

What if your investments are in Regular schemes and you want to shift to Direct schemes? The same logic will hold – sell NOW and buy after a while.

Over the years I have invested in several schemes and have now reduced it to 5 only. The current market gives me a great chance to clean up my portfolio. How do I intend to do it? Read the next post to find out.

My investment plans for next FY

The last day of the financial year is normally a good time to take stock on the investments of the year gone by and also to plan for the next FY. For me the current FY investments had gone pretty much as expected. I did not really sell much and, even though there were some redemption, I invested in similar avenues through the year.

There were 3 main issues that characterised my investments of the current FY:-

  1. I invested in several IPOs but got allotted only 3 of these.
  2. A lot of my FMP got redeemed and, unlike other years, this time I invested the principal proceeds in mostly hybrid products – Equity Savings Funds, MIP, Dual Advantage funds etc. I also put some money in Balanced funds. PPF was continued as an investment.
  3. I invested in MF selectively and not as much as I would really have liked to. This was due to the generally rising indices levels. I could have put a lot more money in December than I did – truth be told, I did not anticipate the strong rally from January onward.

So, given this backdrop, what are the investment plans for the next FY? As some of the readers will know my passive income from interest, dividends, house rental are enough to take care of my regular expenses. The expenses for my college going children are quite high but these are catered for separately. My active income from being a Consultant is reasonable – it is probably only about 40 % of what I could potentially earn as a full time CXO, but as I do it with only 20 % of my time, I am quite happy about it. Much of this money is used in equity investing – some for MF and the rest in stocks, IPO or otherwise. The rest is to be used for discretionary expenses, last year we replaced most of our household furniture. This year the plan is to change the laptop and also buy a new desktop. We are also planning a trip to Italy in May.

Finally, without further ado, this is my investment plan for the next FY:-

  • PPF investment of 3 lacs for both me and my wife.
  • Investment in select IPO to the tune of 2 lacs through the year.
  • Investment in stocks to the tune of another 2 – 3 lacs.
  • MF investment of average 40,000 per month, to be bought at the right times.
  • My FMP redemption will be to the tune of 20 lacs or so in this year. I plan to use the capital gains for my expenditure and use the principal for investing in:-
    • Equity Savings fund
    • Balanced funds
    • Monthly Income Plans
    • Arbitrage funds
    • Dual advantage plans
    • Capital protection plans
    • Short term debt funds
    • Gilt funds

A lot of my investments are market linked, so I will look at the Nifty and other indices closely through the year. While stock purchases do not always depend on index levels, I am keen to buy MF only at the right time. If the time does not come I just do not buy, as was the case for much of the first 3 months of 2017.

I am happy with the above plan and just hope that some of the better IPO allotments happen !!