Whose game are you playing?

Imagine what would have happened if Anil Kumble had quit cricket because he can’t hit a hundred like Sachin Tendulkar OR Rahul Dravid stopped playing because he can’t bowl like Kapil Dev? They would have not only ruined their career but would have also missed such a great fan following.

Now imagine another scenario where all the players in the team, instead of focusing on their own strengths start copying others. Ishant Sharma fighting with Virat Kohli to come as on opener so that he can also hit a century and Rohit Sharma fighting to open the bowling so that he can have a good bowling record.

Funny scenario, right? You know what is funnier, that most of the people try to do this with their investments. They try to copy others and their investment strategy. They invest in stocks because their friends or colleagues are investing in them, or they invest in mutual funds because their relative is also investing.

Investments are a personal thing. You need to understand why are you investing, what product are you investing in, what is your investment time frame, what is your risk appetite etc. Just because your colleague or neighbour or friend is taking extra risk and investing his money in small cap stocks/mutual funds / ULIPs, you should not do the same. You should understand what game you are playing. Every individual has his own set of goals and investments should be done keeping them in mind. You should not invest in a product just because your neighbour / colleague is investing. For the sole reason that your goal and risk-taking ability is different from theirs.

Understand your risk appetite, your time horizon, your asset allocation and then invest. It is completely ok if your return on investment is 2% less than your neighbour or if you don’t invest on days when markets are down 5% or you invest in equity mutual funds rather than investing in stocks or invest in a debt instrument instead of equity, if it gives you a goodnight sleep.

People invest in stock market / equity mutual funds with a time horizon of say 5 years but get jittery when stock price / NAV comes down by 5%. If you are an existing investor you must be aware that equity markets are bound to be volatile and there is nothing to be worried about. If you are new to investments then start with Debt mutual funds, gradually move to hybrid products and then to equity funds and lastly if you feel like then sector funds. Stock market have given enough opportunities in past and it will continue to give in future also. There is no hurry to invest. First understand and then invest.

Always remember losses are not made because of volatility in stock market, they are made because of volatility in your mind and that happens when you invest in products which doesn’t suit your risk appetite.

“The best way to measure your investing success is not by whether you’re beating the market but by whether you’ve put in place a financial plan and a behavioral discipline that are likely to get you where you want to go.” – The Intelligent Investor

Main Aazaad Hoon

Like most of my blog, the title of this article is also inspired by Bollywood. Bollywood and Finance has always attracted me as there seems to be a lot of commonality in them. Both of them have lots of action, drama, hasi mazaak(Highs) and rona dhona (Lows) etc. Well as it is said that most of the stories of Bollywood movies are inspired from our day to day life, I thought of writing an article inspired by a famous movie title. Coming back to the point, through this article I would like to share how an individual can be free from financial trouble and that’s when they can say “Main Azaad Hoon”. Here we go:

The First thing one should do is to take a Life Insurance policy. This is the simplest and most economical way to ensure that your family future is secured and that they are free from any kind of financial trouble, even when you are not around. The number of policies don’t matter; what matters is the amount of insurance one has opted for. Well, there is no definite amount but as per thumb rule one should have at least 10-12 times of his/her annual income so that one’s family can continue to maintain the same life style. Having a life insurance becomes even more important when you have liabilities like a home loan or a business loan because here the money involved is very huge and can take away your lifetime savings. I won’t talk much about having a life insurance as I have already shared in my previous article the need and importance of it.

Second is to have a health insurance. Do you know that hospitalisation for ONLY 1 disease can take away our years of savings? Sharing few numbers as food for thought:

• One of the fastest growing illness in India is Cancer and the treatment cost can be anywhere between INR 8-10 lakhs
• In India, 1 out of 10 people suffer from some chronic kidney disorder. A kidney transplant costs around Rs. 7 lakhs whereas dialysis can cost you anywhere between INR 18,000-20,000 per session
• 25% of deaths in the age group of 25-69 are because of heart disease. The treatment cost here can be anywhere between INR 5-7 lakhs
• Hospitalisation cost in case of Covid is anywhere between INR 2-3 lakhs per person. The biggest problem here is that in case of Covid, multiple family members can get infected and may need hospitalisation. This will increase the cost highly.

Don’t think of the annual premium as expense but it is a small amount for peace of mind and safety of ourself and our family members.

In case you don’t have a health insurance, you should apply for one immediately and in case you have a health insurance, ensure that its good enough to cover the hospitalisation cost. If you already have insurance and the cover is not enough, you can opt for a “Top Up” plan instead of applying for new insurance policy. Top Up plans can provide a very high cover at a very low cost. A floater “Top Up” plan of INR 10 lakhs should not cost you more than INR 5000-6000 on an annual basis.

Third is to keep aside a sum of money which can take care of your day to day expense for next 3-4 months. This can be kept in bank Fixed deposit or in a Liquid fund / Arbitrage mutual fund.

It’s when one does all the above 3 actions i.e. Life Insurance, Health Insurance and creation of an Emergency Fund, that one is truly free and can proudly say “ Main Azaad hoon”. One can then start investing in which ever asset class suitable as per one’s risk profile. It can be Equity, Debt, Gold, Hybrid etc.

“A big part of financial freedom is having your heart and mind free from worry about the what-ifs of life.” – Suze Orman

Main Hoon Na!!

Yes! This is one of the famous movies in Bollywood but that is not what I am not referring to. I am referring to what we say, whenever our kids / friends /parents / siblings are in trouble. This is one of the things, I like about our culture and values. We go all out to help our friends and families even if its outside our reach. We provide them not only what they want but also what we feel they deserve. However, one thing that we often forget in the hustle and bustle all the hassles of life is, what will happen to our family when we are not around? We can and we do whatever possible to ensure that our family gets what ever they need and that no trouble comes to them. Many a times we so much love to live in the present that we forget about the future. Our family deserves not only our love, affection and trust but also financial freedom, especially when we are not around.

Apart from what ever we do for our family, our first and utmost responsibility should be to safeguard their future. Obviously, we can’t change the destiny but we can at least ensure that they don’t have to fight with destiny along with struggling for money and the simplest way to do this is to simplify your finances. A first step towards this financial freedom can be taking up a term plan. I am sure most of you have heard about term plans and I hope all of you have also bought it. For those who are not aware of term plans, this is an insurance product which is available at a very low cost and is the easiest way to ensure that your family has a contented future when you are not around. For example, term insurance is available at less than Rs 600 per month for a cover of Rs 1 Cr.

It provides not only financial stability to your family, but can also come in handy to repay any debt, home loans, etc. During your lifetime they can be helpful to cover disability or critical illnesses, too. Though I am not a big fan of recommending insurance for saving tax but ’yes’, it does give you tax benefit under section 80C.

It doesn’t matter even if you are covered under group insurance policy of your company; you should still ensure that you have taken an individual policy. Again, it doesn’t matter how many policies you have taken; what matters is the sum you are insured for. Once more, it doesn’t matter which company you choose; whether you buy an insurance policy or not matters.

We all know and understand that we need insurance cover but many of us postpone it for unknown reasons. Events like Corona only reiterate the fact that we all should be covered for any contingencies as life is uncertain.

When buying an insurance, there are few things that you should remember:

• Disclose everything about your lifestyle while applying for insurance (hiding facts to save few hundred rupees can be expensive for your family if your claim is rejected).
• Ensure that your life cover is minimum 10-12 times (ideally it should be 20 times) of your current annual income. This will ensure enough money for your family.
• Buy insurance from a company you trust.
• Your family should be aware about your insurance. This is “Very Important”. All the above actions and decisions will be of no use if they are not aware about it. (Do you know that the LIC of India alone has more than Rs. 11,000 Cr of unclaimed money ?)

Always remember It’s not about what you need. It’s about what your family needs if you aren’t there. You don’t buy life insurance because you are going to die, but because those you love are going to live

Be Rich

RICH.. One word in the world which drives most of the people but in the race to be rich they often forget that whether they want to be really rich or just show that they are rich. Lot of people never become wealthy because they waste too much money on buying symbols of success that depreciate. They are more focused on looking rich instead of becoming rich. The first thing that we were taught about financial independence is that we should save first and then spend what ever is left. However, in the race to look rich, people spend first and then save if anything is left. In most of the cases, nothing is left to save. Expensive foreign trips, new mobile phone every year, a smart watch to match the mobile, air pods, new car, latest jewellery, etc. are a few things which can make one look rich but realistically one does not become rich.

Mr. Mukesh Ambani drives a Maybach because he is the Mukesh Ambani and not vice versa (he is not Mukesh Ambani because he drives a Maybach).

On one hand, we have people like Mr.Azim Premji, India’s second richest man, who drove a second hand Mercedes Benz which he apparently bought from one of his employees and South Indian megastar Rajnikant who drives a Toyota Innova. Whereas on the other hand we have people with an annual income of INR 20-25 lakhs driving high end cars like Audi, BMW etc. These are the people who want to look rich and not to become rich.

Whenever you want to buy something, stop for a moment and think if it will actually make you rich or merely make you look rich. It is important to invest or buy things which appreciate and not which depreciate. You should not spend on a new car or a new mobile or buy a house which you can’t afford just because 3-4 people in your friend circle have it. They can buy it either because they have enough money or they are people who just want to look rich. In either of the cases, you should not follow them.

Today, most of the auto manufacturers are offering a huge discount on purchase of new vehicles. People will go and buy a Maruti S-cross because it is available at a discount of INR 1 lakh but won’t buy Maruti stock which is available at a 50% discount. If there is a sale on iPhone, say, of 10% , people will line-up to buy it but won’t buy stocks like Page Industries or Eicher Motors which are down 50% or won’t invest in mid-small cap mutual funds which are down 25%-30%. In a rush to look successful we spend money on material goods or luxury items which will be outdated in a maximum of 1-2- years. We sell our 2-year-old mobile phones at 50% price but we can’t digest a 10% temporary fall in our portfolio. All these are perfect recipes of not becoming richer.

Think about buying car company’s stock instead of buying the new car. It’s better to own shares in the jewellery company instead of having a massive jewellery collection. Think like an owner, not a consumer. Your goal should be to become rich and not just look rich. Buy whatever you want but only after you have invested for your child’s future and more importantly your future.

“Too many people spend money they earned, to buy things they don’t want, to impress people that they don’t like.” ― Will Rogers

 

Asset Allocation

आए तो यूँ कि जैसे हमेशा थे मेहरबान, भूले तो यूँ कि गोया¹ कभी आश्ना² न थे
                                                                                                            -Faiz Ahmed Faiz

1- Jaise , 2-Acquaitance

Faiz may have not thought it this way but this para from his poetry describes the behaviour of our equity market in a very beautiful way. When the bull run starts, markets behave as if there is not looking back and it will continue forever; something that we saw in the last equity rally between 2014-2017. The second line explains the bearish phase which started from 1^st Feb 2018; wherein the markets took a U turn post Feb 2018 and since then we have not seen any signs of recovery.

When the markets are in bullish phase, we stop looking at valuations, corporate governance issues, etc. and during bearish phases we start doubting the best of companies. This happens in every market cycle and will happen in future also. The only way to get saved from this euphoria of getting carried away in either direction is following asset allocation strategy.

Once you have identified your goals and you are aware of your risk-taking ability, decide on an asset allocation strategy and follow that religiously. Asset allocation strategy simply means that dividing your investments in debt and equity depending on your risk profile and how far or near your goal is. For e.g. In a bull run, mid and small caps tend to outperform large cap funds but that does not mean that we move our entire portfolio to mid and small caps. Same way we should not move our entire portfolio in large caps when markets are not in our favour. In equity allocation, your portfolio should be divided between large caps, multi caps and mid-caps. Though one can change the allocation by 15-20% up or down depending on the market scenario; one should never change the entire portfolio.

Same way one should never have his entire portfolio in equity or in debt. It should be a mix of both the asset classes. There is no defined rule for how much equity or debt one should hold as that will depend on each individual but as a thumb rule your debt allocation should not be more than your age. So, if you are 40 years old, your debt portfolio should be around 40%. Again, this is just a thumb rule and will completely depend on each and every individual as per his risk profile and how far or near his goal is.

Its highly risky to keep your entire portfolio in equity as during these bearish phases which we are witnessing now where large caps have corrected by 10-15%, mid cap by 30-40% and small caps by 50-70%; the probability of losing your capital increases. Same way if your entire portfolio is in debt then you restrict your money to grow. For e.g. if your goal is 10 years away, it is criminal to invest in debt funds. For such goals you should invest in equity funds and for goals which are say 2-3 years away one should invest in debt fund. This way you will reduce the impact of market volatility and put your money to best use.

While doing asset allocation considering your risk-taking ability is of utmost importance; followed by your return’s expectations. The amount of risk that you can take depends on your inherent nature and it’s difficult to increase it or decrease it, whatever said and done. It’s easier to invest the way your friend or colleague is investing but seldom we know their risk appetite. When one invests without considering their risk-taking ability, the chances of taking wrong investment decision increases. You will either sell too early or wait too long.

The most important key to successful investing can be summed up in just two words-asset allocation. – Michael LeBoeuf

THE LAZY INVESTOR

Bill Gates once said, “I always choose a lazy person to do a difficult job because he will find an easy way to do it”

You know what’s the most difficult part in investing? It’s ‘Doing nothing’. With so much of noise around you, about your colleague making “x” return and another friend making “y” return, it’s really difficult to not do anything. As we don’t want to be left behind, we tend to take some action. We don’t take action to make money but only because of the feeling that if someone is making money or making more money than me, then why I can’t make the same amount of money.

Do you remember, the famous dialogue from the movie 3 Idiots “Jab dost fail ho jaye to bura lagta hai, but jab dost 1^st aa jaye to jyada bura lagta hai? “ Same way when our friend loses money, we feel bad, but we feel worst when they make money and we don’t.

Secondly, we are taught that unless we work continuously towards our goal we will not achieve it, and so we apply that to investing also. There are people who are always on top of their portfolio and ready to do some action. If markets are falling, they want to redeem money; if it’s going up, they want to add more; if Fund A  is under performing F, they want to change the Fund A and when Fund C  starts performing better than Fund B they want to dump Fund B. They feel that unless they take continuous action, they will not be able to generate returns in their portfolio.

This is where being lazy helps. It may not work in other aspect of life but in investing it works most of the time. Do you know the easiest way of doing this difficult job of investing? It’s SIP. It’s dull and boring, but apparently the most disciplined and prudent way of investing. Let’s look at some numbers to make it more relevant. Last 3 years return of Birla Equity Fund is around 4% CAGR but last 20 years is around 18% CAGR. Last 3 years return of L&T Midcap fund is around 0.5% CAGR but last 10 years return is around 16% CAGR. If one takes action at every downfall, he will seldom make money. The idea should always be to invest in a good fund house and a good fund, ride through the cycles and get good returns.

One should not change his mutual fund portfolio actively as the fund managers are doing this job on behalf of investors. Most of the good fund managers change the sector and stock allocation in their portfolio actively based on the market scenario. This not only reduces the cost for investor but also the hassles of entering and exiting the portfolios every now and then. You should change the funds only when they start giving below average return and there is no sign of improvement.

Being lazy does not mean stop tracking your portfolio but it simply means that taking the decision of inaction after looking at all the aspects. Being lazy should be by choice and not otherwise.

‘MDBSC’ – This term was coined by one of my Facebook friend. It means My Dull and Boring SIP Continues. So, whenever your friend or colleague comes and asks what are you doing in this market, simply say MDBSC. (My Dull and Boring SIP Continues).

 

Rule of 15

Whenever anyone starts investing, the three most common questions that come to his mind are

• how much to invest?
• for how long?
• where to invest?

The rule of 15 will help in getting the answer for the first 2 questions.

This rule is good for someone who is investing without any goal in mind. The rule simply says that if you invest Rs 15,000 p.m. for 15 years giving a return of 15% p.a. you will build a final corpus of Rs. 1 Crore.

SIP Amount = Rs 15k per month
CAGR =15%
Time horizon =15 Years
Final corpus = Rs 1 Cr

Your total invested amount is equal to just Rs 27 lakhs. However, over the time period of 15 years, you will build a total wealth of Rs 1 Crore.

Now let’s see what happens if we increase the tenure by just 5 more years. So, we invest Rs 15,000 at 15% for 20 years. Here just by increasing your investment tenure by just 5 more years you will build a total corpus of Rs 3 Crores. This is the power of compounding and that’s why it is considered the most substantial factor for wealth creation. The time period is a significant factor when you are investing.

In this post, you can notice how by increasing the time horizon from 15 to 20 years; you can get three times bigger final corpus. And that’s why it is recommended to start investing as soon as possible.

 “Compound interest is the eighth wonder of the world. He who understands it earns it … he who doesn’t … pays it.” -Albert Einstein

Note: In the scenarios discussed above, 15% is considered as the average compounded annual growth rate (CAGR) over the years. However, you must understand that it is just an average as no market can give consistent 15% returns. Returns can be higher in bull market and lower in bear market. The longer you stay invested higher is the chance of averaging out the volatility.

Greed is good

If this caption sound familiar it’s because in the 1987 movie Wall Street, Michael Douglas as Gordon Gekko gave an insightful speech where he said, “Greed, for lack of a better word, is good.” He went on to make the point that greed is a clean drive that “captures the essence of the evolutionary spirit. Greed, in all of its forms; greed for life, for money, for love, knowledge has marked the upward surge of mankind.”

This is true in the field of investments also. Unless and until there is greed to earn return on investments one will keep his money in bank account or fixed deposits. There is nothing wrong when you keep your money in a bank which offers you 6%-7% on savings bank account than the one giving mere 4% or when you invest your money in a liquid fund to earn extra return than your bank account or when you invest money in equity market to earn more than liquid fund.

Money is a major facilitator of dreams and would provide the opportunity to do things that you desire to do in your life. Remember, nobody has become rich by earning only salary. You have to create an asset that provides you income even when you are not working and you can’t create an asset unless you have greed for one. The simplest way is to create financial assets by investing in Mutual Funds, deposits, shares etc. Create a financial asset that can fund your holidays, car EMIs, new phone etc, don’t use your salary / business income for them. Business / Salary income should be used only to cover your basic expenses, rest everything should be invested.

Try and build a strong portfolio which can fund for your additional expenses and EMI’s. For example, instead of paying upfront for your home loan, build a portfolio that can generate interest income which is equal to your EMI. This way you will have your investments plus you can buy an asset from the income generated by another asset.

If you are new to investments, start with small and keep your expectations reasonable. Like excess of anything is bad, same is the case with greed also. Although greed can work, it alone can be disastrous. Start small, may be a SIP of 5K, follow asset allocation strategy and expect reasonable return from equity ( 12%-15%). This should be good to start and then you can increase your investment once you are comfortable with the financial products. The mutual fund basket provides with products where you can invest for as low as 7 days to as high as 15-20 years with complete liquidity unlike insurance products. Always remember, its never too late to start.

“Money is always eager and ready to work for anyone who is ready to employ it.”                                                                                                                                   Idowu Koyenikan

Greed and Fear

These two words are enough to describe the situation of the investment world today. Greed forces oneself to make wrong choices and fear also apparently does the same thing. Whether one makes money or loses money is dependent on how much one allows these forces to have a control over them. Warren Buffet has very aptly tapped these words, when he says that “Be fearful when others are greedy and be greedy when others are fearful”.

The last 6 months have been pretty bad for investors.  A majority of the investors haven’t made money in spite of the index touching an all-time high. This is probably one of the most hated all-time highs of Sensex.

Index always indicates how the stock markets have performed, however it is not the case this time. In the last one year, out of 50 Nifty stocks, only 10 of them have been able to make money for the investors and they are the ones that are responsible for the markets touching an all-time high. Valuation correction has been pretty sharp in mid and small caps. Similar is the case with BSE. If we exclude the market cap of the top 10 stocks, the remaining 4000 stocks listed on BSE have lost whopping INR 16.70 lakh crores since January 2018 and more than 300 stocks have fallen anywhere between 50%-90% from their 52-week highs.

Rising inflation, high oil prices, unclear election results are not allowing the markets to go high whereas factors such as domestic liquidity is not allowing the markets to go down.

In such a situation, it will be incorrect for an investor to think that their portfolios are down (in spite of all-time high markets) because of wrong investment decisions. It is important to understand that these kinds of situations are rare and should be dealt with patience.  Thus, making it even more essential for one to trust the fund managers / advisors and continue with his/her investments. Markets are bound to remain irrational but an investor should not.

Undoubtedly, returns can be generated only through proper asset allocation and following a disciplined way of investing.  Noise will always be there. But, what is vital is that one learns to avoid/ ignore this noise and focus on long term investments. Remember Rome was not built in one day but Hiroshima and Nagasaki were destroyed in one day.

“If you want to have a better performance than the crowd, you must do things differently from the crowd.”

MORE MONEY IS LOST OUTSIDE THE MARKET RATHER INSIDE THE MARKET

MORE MONEY IS LOST OUTSIDE THE MARKET RATHER INSIDE THE MARKET. I believe making money is quite simple in equity markets, difficult part is to lose money. Surprisingly most of the “investors” lose money successfully.

To make money in equities, the theory is quite simple, select a set of good funds, invest systematically, review periodically and stay invested. For e.g. A large cap fund like Aditya Birla Frontline Equity has given a return of 16% CAGR over last 10 years or a mid cap fund like HDFC Mid Cap which has given a return of 23% CAGR during the same period. This covers all the ups and downs of last 10 years including events like the Lehman Crisis. The idea was simple. “Keep investing”.

The tough part here is to lose money. For that you have to track your SIP returns on a daily basis, read the market outlook, listen to experts on CNBC and redeem your money or stop your SIP because some experts believe that markets may correct more. If one tries to time the market, then one will never be able to enter the markets again. One generally wants to be invested in the best fund , which apparently keeps on changing every year. The list goes on and works as a perfect recipe to lose money.  Always remember “MORE MONEY IS LOST OUTSIDE THE MARKET RATHER INSIDE THE MARKET”.

Volatility is investors best friend. It’s like that friend who gives us right advice but somehow, we never like them. Scams, elections, rate cuts, rate hikes, high inflation, low inflation, etc. will come and go as short-term positives and negatives. They can disturb the momentum for a short period of time but over a long period these events don’t even matter. If someone expects markets to deliver only positive returns then, equity is definitely not the right choice.

What matters is “PATIENCE”. I had mentioned in one of my earlier posts also that investments are like kids. Just like one doesn’t measure their kid’s height and weight daily, similarly one should not look at the performance of the funds daily.

The stock market is a device for transferring money from impatience to the patient                                                                                                                                   Warren Buffett