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.

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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.

Should you go for close ended equity NFO?

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 ICICI Value fund Series 18 is open for subscription now. 

Want to build your own stock portfolio? Here’s how

I understand that getting started in stocks is not an easy thing with so many experts giving a lot of conflicting advice to you. Some will tell you that you have no hopes of building a good portfolio unless you can understand all kinds of ratios and read Balance sheets like a CA does, others will tell you that going for direct stocks is akin to a horse race where anything you bet on is almost certainly going to lose. Yet others will chide you for thinking anything beyond Mutual funds. After all they are experts and invest only in MF with all kinds of complex strategies, who are you to even think otherwise?

While all of the above has very obvious counters, read my post on Why you must be in direct equity to satisfy yourself on the importance of being in stocks. Building a long term portfolio of direct stocks does take a lot of understanding of the economy, the industry and the business. You can get these only with experience and there is really no magic potion to make you an expert overnight. There is however, a way to get started on building a portfolio of stocks, while you gain this knowledge and experience over time. Is there a guarantee that you will not lose money if you follow my suggestion? Unfortunately not, but the chances of your losing money are indeed very slim.

Without further ado, let me give you the simple steps to what you need to do from scratch:-

  1. Choose the 5 sectors – Auto, Pharma, Banks, IT and Telecom. You can add other sectors at a later date.
  2. From each sector choose 2 market leaders. You can do it by their Market caps or the PE ratios. Honestly, it does not matter a great deal as to which method you are using as long as you are consistent in your approach.
  3. For people focused on names look at DRL, Cadilla, Lupin etc in Pharma. Tata Motors, Maruti, TVS Motors, M & M in Auto etc. SBI, ICICI, HDFC Bank in banks. TCS, HCL Tech, Infosys, Wipro in IT. Bharti, Idea in Telecom.
  4. Decide on a comfortable amount that you can spend every quarter on stocks related investment. Set price triggers based on 200 DMA of the stock. For example, if the 200 DMA of a stock is 3000 and the current market price is 3200 then set the first price trigger at 3000 or just below it.
  5. Stick to this discipline and never go beyond 20 % of your quarterly money in one go. You are in no hurry, wait for the stock price to drop. In the next 6 months there will be many ups and downs. Buy only on downs, let the ups go by without bothering too much.
  6. In a quarter there are bound to be many more bad days than 5, you just need to be patient.
  7. Remember you are building a long term portfolio, so even if you miscalculate and buy at a higher price it does not matter too much. In 10 years the markets will be far higher than 9000 on the Nifty.
  8. Keep adding to each stock regularly, do not start chasing other stocks that seem to be doing better.
  9. Increase your quarterly allocation based on your surplus availability and your comfort level.
  10. Stick to this for 2 years, by then you will have enough knowledge to get to the next level of risk.

Stock investment is like swimming, you will not do it by reading how not to do it. Get started with it and you will see how things work out at a portfolio level – remember, it will never work out for all stocks that you invest in. Also, next time someone advises you on how to pick stocks, ask him about his portfolio and how successful he has been in his own stock portfolio performance. Trust only advisers who put their money where their mouth is.

I will do other more involved posts on stock picking but this one is good enough for all new investors to get started.

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.