My cash flows and investment plans in 2019

The start of a new year is always full of excitement and hope. There are new opportunities to explore and you hope for a lot of significant events to take place in the year, irrespective of what may ha e happened in the earlier one. In my previous posts I had outlined how 2018 was a fairly poor one both for my own active income generation as well as for the markets. In this post let me talk about my plans for 2019.

One must always start with the cash flow outlook for the year. Fortunately, with both my children becoming financially independent of me now, courtesy their careers, my major head of cash outflow is gone now. Currently their college education fees are all done and even though Ronju may get into a B school sometime in the future, we can always look at it through Education loans. On the flip side our expenses on travel are ever increasing due to the number of trips as well as the way we travel. Last year we had 2 vacations outside India, 2 full vacations in India as well as several shorter trips for leisure or family issues. 2019 looks similar as we already have a planned visit to Phuket in March. Our children are fortunately staying with us now though that may change through the middle of the year. Based on all these I am looking at cash outflow in these terms :-

  • Regular household expenditure likely to be in the range of 6 lacs
  • Travel expenses can be estimated at 3.5 lacs to be on the safe side.
  • Family support will be in the region of 2 lacs.
  • Rent for our Hyderabad apartment is around 3.5 lacs.
  • So overall cash flows required will be in the range of 15 lacs

Against these the cash inflows I am expecting in 2019 are as follows :-

  • Interest from Tax free bonds, InvIT funds and POMIS will be about 4 lacs
  • Dividends from Stocks and Equity MF schemes will be about 4 lacs
  • Capital gains from FMP redemption will be about 3 lacs
  • Rental income from our Chennai apartment  will be about 3.6 lacs
  • Income from Debt funds and stock trading will be about 1 lac

The above looks good but what if the markets continue to do badly and the dividends dry up? Well, as a backup plan I have the PPF accounts of both me and my wife. At present it earns about 5 lacs in interest per year and I can dip into it if needed. Another way could be to redeem some of my Debt MF schemes, to the extent I need the money. A final option will be to sell some stock that is doing really well but I do not feel this will be needed.

What about investments then? Well, in my present stage of life I am not looking at too much investment obviously. Even then, I had started a secondary stock portfolio in 2018 and have invested about 7 lacs in it so far. My idea is to let this portfolio grow and also do selective trading in it, something I have wanted to do for a long time. I do not want to do this on my primary stock portfolio where the plan is to have it for the really long term. Based on all of these the new investments I plan to do in 2019 are as follows :-

  • 3 lacs in the two PPF accounts that we have.
  • Put all FMP redemption money in Hybrid funds – this will be about 10 lacs in the year 2019. Part of this may also be used in my secondary stock portfolio.
  • Build the Secondary stock portfolio to at least 10 lacs by putting in a minimum of 3 lacs in this year.
  • Look at any interesting NFO themes as they become available.
  • Keep adding to my Primary stock portfolio based on available money.

Where will the money for this come from? Well, what ever income I have from my Consultancy services will all be invested in above avenues as my passive income is adequate to take care of my cash flow needs.

So things look rather good right now, hoping that the markets will recover this year !!

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My year end investment audit for 2018

Every year I try to take stock of my life and my finances on the last day of the year. It serves two major purposes – firstly, it shows me where I am and what do I need to do in order to get to my desired state and secondly, it gives me an idea as to whether I am doing the right things by my money. 

Any way we look at it, 2018 was a bad year from a financial or investment viewpoint. In the beginning it had not appeared so, especially after the stellar 2017 we had for our markets. January was a good month, corporate earning was looking like turning the corner and politics was largely stable, BJP having won Gujarat despite some hiccups. It was unfortunately to go wrong very soon, the first blow being the equity taxation in the budget. This has been talked about in every budget over the past few years but the markets clearly did not think it would actually happen. Once it did a domino effect of bad news and sentiment followed which has damaged equity portfolios through the year. I will not go into a detailed commentary here but crude oil prices, withdrawal of FII money, BJP losing Karnataka and then the Hindi heartland states, corporate earning being rather flat all played a role to ensure that our markets did very poorly. Even when there was some recovery, it was seen only in the large cap stocks, the mid caps and the small caps have been battered out of shape.

The news was not much better on the Debt front either. The ILFS fiasco affected several debt funds poorly and the returns for this year will be well below par. Short term accrual funds, normally considered the safest bets, also had fairly bad cuts. Redemption from debt funds was sustained over the year and the fund houses were saved by the continuing SIP inflow into equity MF schemes. So, while it was good to see that the Indian retail investor had gained some financial maturity, from a portfolio return perspective there were hardly any financial instruments that you could rely on.

With this backdrop, let us see how my investments have done in 2018 :-

  • My direct stock portfolio suffered in a big way early on, recovered somewhat in July/August period and then went down after that. The large cap stocks are not doing badly now but the mid cap and small caps have tanked quite a bit. On the whole the portfolio would have hardly made any returns after adjusting for inflation, I suspect there may be some losses too.
  • Similarly my Equity MF portfolio has suffered too, more in the mid cap and small cap space while holding on in the large cap space.
  • Thankfully, since both of these portfolios are long term, they are still doing well in the overall sense. Also, given the fact that I do not really have any need to redeem any of my investments, I can wait and hope for things to turn around.
  • The markets and stocks tanking also presented a buying opportunity. I have started a secondary portfolio of stocks which I want to run for 10 years. My plan is to invest about 10 lacs in it and so far I have done about 7 lacs. There are some posts in my blog on this and you can go through those for more details.
  • I do have a few open ended debt funds and they have not done well. During the year some of my FMP schemes had matured and I invested the principal amounts into hybrid schemes such as Balanced funds and Equity Savings funds.
  • My fixed income instruments were the savior for 2018. The Tax free bonds, InvIT funds, PPF, POMIS performed as expected and generated the expected cash flows.
  • With the rise of the US Dollar, I sold off some Dollars that I had over the years. I used this money to kick start my secondary stock portfolio.
  • I also received the maturity proceeds of an old LIC policy and this was also used in my secondary stock portfolio.

So what is the overall verdict? This was a year of bad returns and high expenditure due to our travels which included trips to Bali and Mauritius. As I said in yesterday’s post my active income was also not as expected. Despite all of these issues, my cash flows were comfortable and I was even able to invest in a secondary stock portfolio. This gives me the confidence that my asset base is capable of supporting my financial independent state with some leeway. Hopefully next year will get better and the asset base will increase to an even more comfortable state.

What are my cash flow plans for 2019 and how will I plan to invest next year? These will be the subjects of my next 2 posts.

Wishing all my readers a very happy and successful 2019.

 

How has my first Mutual fund investment performed?

Over the last week, I have been taking a closer look at some investments I have done in my early days as an investor and trying to see how they have worked out. While readers will know by now that I started investing in stocks since 1990, my foray into the Mutual fund world was only in the year 2001. This was after we had shifted to Chennai in 1998 and, despite having 2 young kids with high expenses, happily found that we had quite a bit of invest-able surplus every month, thanks to a strategic job change that had resulted in a pretty decent take home compensation.

When we were approached by a Financial adviser who wanted us to invest in equity through the vehicle of MF, it seemed a natural progression from my investments in stocks. To start with we wanted to look at a large cap fund and see how things worked out for a while. The choice of Franklin Blue Chip fund was a logical one among the schemes that were in vogue then. We started off with a 10000 Rs investment in February 2001 and over the next 12 months this investment went to 50000 Rs. The NAV of the scheme was around 10 Rs only during those days, courtesy the markets having tanked due to the Harshad Mehta scam and we got 4722 units for our investment. With one thing and another I did not keep up with my investments in this after January 2002 – our focus shifted to buying an apartment in Chennai, we started a stock portfolio in a meaningful way and my professional life got busy. When we did start our MF investments again in 2008, the MF universe had changed quite a bit and there were many schemes on offer. 

So the long and the short of the story is that I have had the investment in FT Blue chip fund for nearly 17 years now. This makes it an ideal investment candidate to check if equity investments in the long run have really worked. We had invested in the dividend option  and the fund has declared a dividend unfailingly every year since 2002. Some basic data on the fund performance is as follows :-

  • Dividends over the year have added up to 2.85 lacs
  • Current value of my units in this scheme is 1.83 lacs
  • As I said earlier, our investment between Feb 2001 and Jan 2002 was 50000 Rs
  • From the FT site, I can see that this translates to an XIRR of 30 % plus.

Without getting into any discussions of relative performance etc, one can see quite easily from the above that the investment has done rather well. Though future projections are fraught with risks, this should encourage all investors to invest in MF schemes for the long term. The expectations should not center around the XIRR here, but even with an 18 % XIRR your investment will grow 16 fold in 16 years, which is remarkable.

Was a dividend option a good idea? Yes, for us it was as it enabled us to spend on some things during the years when money supply was tight, despite my high income, due to our buying the Chennai apartment and trying to pay it off quickly. I also have a feeling that taking some money off the scheme has worked well in the bad years of the market. This has to be corroborated by data and I will do a separate post on that soon.

The bottom line though is this – investment in MF is a very viable option in the Indian markets for the long term. If you have time on your side, start this now. In fact, any investor with more than 10 years till he needs the money must do so.

Build a long term portfolio through focus on sectors

In some of my blog posts I have covered the topic of building a portfolio for a new investor. While there are many ways to do this, building a long term robust portfolio is best done through sectoral focus. This has several advantages and one should keep these in mind while building the portfolio. Firstly, investing in a few important sectors will ensure that your portfolio is a representative one and reflects the indices in some manner. Secondly, a combination of such stocks will act as a natural hedge against any serious downfall in the markets. Thirdly, it will be easy to review and change such a portfolio as you are having both the industry and company dimension to look at.

Which will be the sectors to put in money now? Given the economy and demography of India, anything which is related to the domestic infrastructure building or domestic consumption will be great areas to bet on. Remember, you are building a portfolio for the long run, it does not matter if it tanks by 20 % in the present year. The important thing is to identify good companies in the sector – these must have good market presence and asset base to ensure longevity in a positive manner. Avoid flashy companies where results go all over the place and which are in high debt.

For people starting off here is a set of sectors and some suggested companies in them :-

  • Financial sector (Banks)
    • Large private bank – choose between HDFC Bank / ICICI / Kotak / IndusInd
    • Large PSU bank – SBI / PNB
    • Smaller private banks – Yes Bank / Federal Bank / RBL
  • Housing Finance companies
    • LIC Housing Finance / HDFC
    • Indiabulls Housing Finance
  • Cement / Paint companies
    • ACC / Ultratech 
    • Heidelberg / Ambuja
    • Kansai Nerolac / Asian Paints / Berger Paints
  • Auto companies
    • TVS Motors / HeroMotocorp
    • Maruti / M & M
  • Pharma companies
    • Cipla / Lupin / DRL
    • Shilpa Medicare
    • Ajanta / Granules / Aurobindo
  • FMCG
    • Marico / Dabur
    • HUL / ITC
  • Engineering
    • L & T
    • BHEL / BEML
  • IT Services
    • Infosys / TCS
    • Hexaware / KPIT / Mindtree

Avoid Telecom companies and also any other businesses which are cyclical in nature like Sugar and other agro based ones.

Once you have the above framework, all you need to do is to get a low cost Demat account where you can buy stocks without paying high brokerage or annual charges. Based on how much money you have, decide on a quarterly allocation of funds and start buying based on the right time. Remember, you always buy in small lots and check the DMA figures to make sure there is some basic logic to the price. Also, do not go overboard on the number of stocks. You should buy from each of the above but not more than 2/3 from each of them.

Let me give a typical portfolio created out of this strategy :-

  • HDFC Bank
  • SBI
  • Federal Bank
  • Indiabulls Housing Finance
  • Kansai Nerolac
  • Ultratech Cement
  • TVS Motors
  • Maruti
  • Cipla
  • Shipa Medicare
  • Marico
  • ITC
  • L & T
  • BEML
  • Infosys
  • Mindtree

These 16 stocks should be a good one to go with, though you can definitely change some as per your personal preferences. For example, you can replace Maruti by M & M and Mindtree by Hexaware and ITC by HUL and the basic nature of the portfolio will not be altered. Try to have only about 16-20 stocks as with any more you will be spreading the portfolio too thin. In any case, you will review the portfolio once every year and can replace some stocks if you are not happy with their performance.

What should be the investment in this portfolio. It can be anything really but I think you need to invest about 25-50 K in every stock for it to be meaningful. Ideally you should build up this portfolio between now and 2019 end. So we are talking about 4-8 lacs over the next 15 months. If you do not have these resources, you can still build a portfolio with above logic but lesser number of stocks. Put in 1-2 lacs in about 4-8 stocks to start with and you can keep adding more as and when you get money available.

Now to the million Dollar question – how will this portfolio perform in the long run? Well, though it is difficult to predict equity performance over any duration, for 10 years it becomes a little easier. At a conservative estimate this portfolio, with a thorough annual review and change, should deliver at least 15 % annual growth. So a 8 lac portfolio will become about 32 lacs in 10 years. You can therefore assume a multiple of 4 to your invested amount. 

This is a great time to build a portfolio by investing in good stocks. If you have a goal in 10 years time of 40 lacs, just build a portfolio of 10 lacs with these stocks and let the markets do the rest. If you are just starting off and can invest only 2 lacs over the next year then do so – maybe in 10 years you can buy a car of your choice.

I hope to see you getting started today so that you reap the benefits in 2019 !!

Building a stock portfolio with expert recommendations

The past few months have been very interesting ones for the Indian markets. Most people will agree that the valuations of a large number of stocks were stretched and unsustainable, so the correction, though brutal, have had the benefits of bringing down the markets to levels where one can look at investing. The mid cap and the small cap space may well witness more pains, even though the large caps seem to have stabilised for now. The quarterly results were largely good, though not spectacular, and with the festive season falling in Q3 it can be expected that the current quarter results will be good. Is this the time to build a portfolio for the future then?

In my opinion, if you do not have a stock portfolio now, it is a good time to start building one. Several stocks are available at attractive prices and present a great opportunity of handsome gains between this Diwali and the next. The important thing is to pick the right stocks so that the portfolio is a high performance one. In this regard it is best to go with professional recommendations, even though you must do your due diligence to ensure you are comfortable with the stock in your portfolio and are broadly aware of the risks that are associated with the stock.

I have been following a lot of recommendations over the last 2 weeks and have come up with this selection from different experts, both from Fund houses and brokerage houses:-

  • Birla Cable
  • Engineers India
  • Escorts
  • Federal Bank
  • Heidelberg Cement
  • Hindustan Oil Exploration 
  • Himadri Speciality Chemicals
  • ICICI Bank
  • L & T Finance Holdings 
  • NALCO
  • NBCC
  • Petronet LNG
  • Sonata Soft
  • South Indian Bank

You can start investing in these with the basic rules in place – buy in small lots, stagger your purchases, be aware of important events such as state election results, be in cash to take advantage of sudden market changes etc. If you have 5 lacs plus to invest, you can look at the next 4-5 months to put your money in. With a lower amount, look at the next 2-3 months and invest in fewer stocks, not the whole lot.

A disclaimer here will be in order – I have a few of these stocks and am actively considering the option of adding the rest to my secondary portfolio between now and end of the year.

Long term performance of MF – personal example #2

I am currently writing a series on real life MF performances on my blog. The first post of the series was about my portfolio created through monthly SIP between April 2008 and March 2010. Around the same time another portfolio was started by my wife and this too ran for the same period. Of course, in her case there was one fund which continued for 3 years but that will not change the analysis much.

So here is the portfolio and the performance of individual MF schemes in it:-

  • ABSL Frontline Equity fund has XIRR of 12.65 % and has been down nearly 4.75 % this year.
  • HDFC Top 100 fund ( earlier HDFC Top 200 ) has XIRR of 12.07 % and has been down nearly 1.21 % this year.
  • ICICI Prudential Value Discovery fund has XIRR of 18.63 % and has been down only 0.37 % this year.
  • DSP Equity fund  has XIRR of 11.04 % and has been down nearly 10.76 % this year.
  • IDFC Multi Cap fund ( earlier IDFC Premier Equity ) has XIRR of 16.07 % and is down 8.78 % this year.
  • UTI Dividend Yield fund has XIRR of 11.91 % and is up 1.61 % this year !!
  • Sundaram Small Cap fund has XIRR of 11.08 % and is down 31.54 % this year.
  • The overall XIRR of the portfolio is 14.35 %

Now, at first glance, this appears quite good and most MF investors will be happy to get such a result. However, when we buy into equity we need to look a little deeper to get a clear picture. So here then are some critical points to consider.

  • Starting on a positive note, the portfolio XIRR was about 20 % just 2 months back !!
  • Note that these purchases through SIP were between April 2008 and March 2010 ( March 2011 for one fund ), a great time to invest in MF.
  • The data clearly shows our markets have performed well over 10 years – after all Sensex was below 10000 in 2009 and has been to 37000 this year.
  • So even with the best buying price and the best market performance ( discount the last 2 months ) we are looking at a return of less than 18 % over 10 years.
  • Consider also that these are some of the best funds of that time and fairly reputed now too. 
  • These are all regular funds so the expenses are higher as compared to Direct.

Summing up, it is good to invest in MF regularly and if you can do it at a time when the markets are in a downward trend then all the better. However, under most conditions you should temper down your expectations of XIRR to 12 %. If you get more than that it is a bonus but any plan with a return expectation which is greater does not make sense.

In my other posts on this series, I will provide more data and insights on this.

Long term performance of MF – personal example #1

Over the years I have been very impressed in seeing how investors have taken to investing in MF schemes. The success assumes more significance if you consider that Indian investors were rather averse to equity and retail participation in our stock markets have been a very poor percentage, in low single digits even today. Marketing of MF as an investment vehicle has a lot to do with the success and there are a few themes that are hammered incessantly, be it in advertisements or by financial planners or MF distributors.

The first of this is the long term performance of MF schemes and the second is the value of regular investments through SIP mode. So much so that most planners work with an XIRR of 12 to 18 %, depending on the type of MF being invested in. This is clearly not a good way to sell as the risks of the equity markets are greatly downplayed. The proof of the pudding is however always in the eating, so it is important to check this against some real data to see how it works. In this post and a few following ones I will aim to do that.

My own investment with MF dates back to 2001 when I did a few investments in Franklin Bluechip fund and ICICI Technology fund. While I will cover those in a future post, let me look at the investments that I did between 2008 and 2010 for an MF portfolio. I started the investments as the stock markets were really down and we wanted to look at some alternative to our normally heavy stock buying. From a market perspective it seemed a great idea and we obviously had time on our side – we did not want to take the money out for the next 10 years and maybe much more than that.

Cut to 2018 October, when I did a review of how the investments had fared in 10 years. I will just give the MF scheme names and XIRR here as the invested amounts are nor really relevant for the purpose of understanding long term performance.

So here is the portfolio and the performance of individual MF schemes in it:-

  • Reliance Value fund ( earlier Reliance Regular Savings Equity ) has XIRR of 12.6 % and has been down nearly 12.6 % this year.
  • L & T Equity fund has XIRR of 13.36 % and has been down nearly 5.5 % this year.
  • HDFC Mid Cap Opportunities fund has XIRR of 20.84 % and has been down nearly 14 % this year.
  • DSP Small Cap fund ( earlier DSP BR Micro Cap)  has XIRR of 21.06 % and has been down nearly 26 % this year.
  • The overall XIRR of the portfolio is 15.28 %

Now, at first glance, this appears quite good and most MF investors will be happy to get such a result. However, when we buy into equity we need to look a little deeper to get a clear picture. So here then are some critical points to consider.

  • Starting on a positive note, the portfolio XIRR was about 20 % just 2 months back !!
  • Note that these purchases through SIP were between April 2008 and March 2010, a great time to invest in MF.
  • The data clearly shows our markets have performed well over 10 years – after all Sensex was below 10000 in 2009 and has been to 37000 this year.
  • So even with the best buying price and the best market performance ( discount the last 2 months ) we are looking at a return of less than 18 % over 10 years.
  • Consider also that these are some of the best funds of that time and fairly reputed now too. 
  • These are all regular funds so the expenses are higher as compared to Direct.

Summing up, it is good to invest in MF regularly and if you can do it at a time when the markets are in a downward trend then all the better. However, under most conditions you should temper down your expectations of XIRR to 12 %. If you get more than that it is a bonus but any plan with a return expectation which is greater does not make sense.

In my other posts on this series, I will provide more data and insights on this.