Month: June 2019

12 Personal Finance Mistakes I Made!

I have shared (in past) several lists of things to do for a successful personal finance setup — most of the items in those lists were my learnings over past 15-16yrs.

Today I was talking to someone to get their personal finance in order and remembered all the mistakes I have done and so thought putting them here for others to use:

1. The lure of passive income

A lot of people aim for financial freedom and passive income. Well, it is almost impossible to achieve it unless you are fortunate or have an inheritance or have underestimated your expenses. When I started “investing” back in the early 2000s, one crore corpus was a good standard of retirement. Today it is not even a safe corpus.

Lesson: So, instead of focusing on passive income, the focus should be on active income. Work hard till you are 50 and ensure you hit the point where 80C is taken care by EPF only. The moment you hit this mark, a lot of things will fall into your place.

2. Multiple credit cards and bank accounts

I love credit cards and believe it is the best product in the world if used correctly. However, IF YOU CANNOT MEASURE IT, YOU CANNOT MANAGE IT!

Lesson: Keep the number of bank account, Demat accounts, credit cards, MF schemes, stocks in the portfolio to an ideal number. There is hardly any sense in having more than two bank accounts and 2-3 credit cards.

3. Multiple Demat accounts/ Learning macro and microeconomics

Contrary to point 2, have multiple Demat accounts, however, operate only one Demat account. The rationale for various accounts is to get equity research reports on multiple names.

Lesson: You May be a SIP only person; however, it is critical to understand the economy and sectors. The best place to do it is reading reports. There will be people who will say Indian Equity space sucks and the report quality poor – Don’t listen to them. It takes time to learn and understand economics, and most of the cynical people are the ones who don’t understand these reports

4. Always talk to the shopkeeper/Maids/Cook

There is a multibagger right in front of your eyes. The next Asian Paints, Eicher Motors, HDFC, Havells, Finolex, Page Industries, are in the aisles when you shop.

Lesson: Talk to the small shopkeepers and gauge the mood of the buyers. Also, look into the carts of the people standing in front of you. You will be able to get the next TTK and Asian Paints. It is not tough to spot them. Not for a moment, think all the multi-baggers are gone.

5. Follow a broad set of stocks

While it is essential to own a fewer number of shares and MFs scheme, it is necessary to track a broader set of stocks and MFs. In the long run, it helps to know a sector or a stock well while churning the portfolio

6. You will never miss the bus

I can’t fathom why people crib on missing buying a stock when it was X (today price is 5x). This is the stock market; the end is not near.

Lesson: There is one big “correction” once every decade. This decade had one when Southern European countries were on the verge of collapse and Greece bonds’ yield was 60%. You will always get a chance to enter – whether you are brave to enter during such a time is another matter.
I thought the world was ending in Sep 2008 and then in 2012. But now I have more grey hairs, a fatter waistline, and slightly more relaxed mind although I get scared even now 🤦🏻‍♂️

7. Spend money on yourself and your loved ones

Back in the mid-2000s, I chased the shit out of RPL and RNRL (few people will remember these stocks), and I made a fortune out of them. I paid up the majority of my education loan using these two stocks, and I reached a point where I started cutting serious corners to save money for extra leverage on day trading. I was stupid. I should have enjoyed more and should have spent that money on a few luxuries (like the trip to Sikkim that I skipped and bought Suzlon at 390 a share 😂)

Lesson: My engineering days are long gone, and that carefree day will not come back. While some of my friends have great memories of those time, I have memories of watching a black screen with quotes of two stocks that don’t exist anymore. Spend money on things that make you happy.

8. Buy a term plan

OMG! Every time I meet someone who doesn’t have a term plan, I pinch myself to stop me from punching him. Yes, it is outrageous not to buy a term plan. Buy one today if you don’t have one. Top it up to meet your current lifestyle if you already have one.

Lesson: Indian insurance sector is one of the most stable and well regulated in the world. Also one of the cheapest. Freeze the rate as early as possible to the maximum amount you can. AND PLEASE DONT EXCEPT for ANY RETURN FROM A TERM PLAN – term plan is for your loved ones and not for you to benefit!

9. Subdued returns? The brochure said Sensex gives 15% return

So your portfolio has a CAGR of only 9% while someone else has a CAGR of 12%. This is the end of the world – let me churn my portfolio. Don’t be this person. 9% over the long term is an excellent return; the days of 15% returns are behind us. Live with this fact.

Lesson: Don’t churn your portfolio at the drop of a hat. There is a whole line of finance that deals with portfolio management, and most of the well-performing portfolios/funds have a low churn rate. Buy quality and stick with them.

10. Dividends

The dividend yield is only 1.8%, why to bother about it. Dividends are more than just the money you get annually. A dividend paying company confirms several things which are critical for long term growth:

a) The company knows how to reward long term shareholders
b) The company is making enough cash to sustain its growth and hence can share profit
c) The company is making real cash and hence is able to share it. The profit is not just accounting magic.
d) The mgmt knows how to navigate short term financing

Lesson: Always give a premium to dividend paying stocks.

11. Buy gold

I know it is not in fashion to buy gold but keep 5% portfolio in gold. This is my personal opinion. Gold has a habit of sleeping for decades and then jumping suddenly in 2-3yrs to sleep again for decades. This is mostly because politicians world over has a habit of screwing the currency once in a while and gold is a hedge against the weaker currency.

Lesson: Buy gold on Diwali every year. Not only does it keep the spouse/parents happy, it will stabilize your net worth. How you wish to buy is up to you. I buy physical gold because I love the feel of it 🙂

12. Damn! He bought HDFC when it was 200 bucks. He is a genius

No, he is not. He is lucky. In personal finance, you can follow all the tips and rules, but in the end, it all boils down to luck. If your years of earning match the year of economy expansion, you will make money. It is as simple as that. Rest all is just garbage.
Yes being knowledgeable and having a plan will be useful and will give you an edge but luck plays a big role. As they say – The more you practice, the luckier you get.

Lesson: Don’t envy people who say he got X stock at 5% of today’s price. I have 3 Suzlon, Welspun, Jai Corp for every TTK and Page. I rarely mention Suzlon and Jai Corp and almost always mention TTK and Page. It is the case with everyone (including Rakesh Jhunjhunwala and other biggies). Just listen, smile and walk away. Some people have luck, you should have a plan. Eventually (after 40yrs), both of you will meet at the same point.

Phew! That’s all for today.

10 Lessons for Investors in the Indian Stock Markets

1. One should trade cyclical stocks only when one understands the start and end of cycles. Cyclical stocks peak in their prices not when their earnings peak out when expectations of earnings peak out.

2. MNC consumption commands a premium and should be looked at as a safe zone when markets are in an uncertain phase.

3. The financial mess can be more profound and trickier than manufacturing or product based company’s mess. In a finance company, troubles are unknown, leveraged and also have a ripple effect on other good assets.

4. Quality, the reputation of management, and quality of earnings provide a better margin of safety than cheaper valuations.

5. The market is smarter than all of us put together. If a stock trades at 30-40 PE, 50-60 PE, there are reasons for it. Predictability, longevity and quality with high growth command premium and price anchoring.

6. If the approach is not well defined, and strategy is not rolled out clearly, then random bets are bound to suffer.

7. Stock becoming cheaper and cheaper is not the right criteria to buy it, single-digit price is not at all a compelling reason to buy. If you ask me if it has assets, not so bad earnings and it’s in 10s or 20s of price, how much it can fall then answer is Zero. Sentiments and happenings to conduct in the future, perception towards them plays a significant role in price movements.

8. Turnarounds do not often turn. Stocks that have fallen from a ratio of 5 to 1 will not change their longer-term direction bouncing to 1.3 or 1.4 from 1. many stocks make such rallies in between but not able to sustain them when have fallen from very high.

9. no situation lasts. At one point people were picking mid-cap and small caps, now finding large cap as the holy grail. This won’t last all the time too. Time changes so do the momentums. Ability to hold good stocks for long, buying them on correction, digesting their falls only will produce substantial, durable returns. No shares or portfolio in the world has been invincible. Most revered veteran investors had witnessed 40-50% drawdowns in their holding value in their stock market investment career. Conviction and stomach will only make sizable investment and returns.

10. By merely avoiding what you don’t understand, stocks having pledges, low margins or cyclical margins, low promoter holdings, and investing in better roce, better visibility companies, one can do very well passively.

Lessons have a long way to go. The market is the best teacher.

Never Invest in a Mutual Fund Product You Don’t Understand!

A couple of days ago, I was having a discussion with my father about the recent DHFL default in debt Mutual fund space. He reads the newspapers regularly and  had read about ILFS, Essel group crisis and now DHFL. So he got concerned about the liquid mutual funds.

The first thing my father said was that he sees an ad daily on the television, “Mutual fund Sahi hai“. If Mutual fund sahi hai, then what do all these instances of default mean. I had explained many times earlier about the risks involved, but he was disappointed to learn that the sales team hide information about risks and just focus on one point to prove that mutual funds are always right.

My parents don’t know much about financial products, so I manage their portfolio and risk. My father retired four years ago and gets an indexed pension which is sufficient to meet their day to day and medical expenses. After checking the retirement calculator, I always knew that they wouldn’t have a sufficient corpus as most of their savings were spent on my and my sister’s education.

Thanks to an indexed pension, they get active income throughout their life so we didn’t have to think about buying an annuity. Also, funds get stuck in annuity and what if you need large corpus to fulfill any emergency. I also remember the day when we went to bank to deposit his retirement cheque. The manager tried to sell a ULIP. Since I was there I clearly told them no.

Later when we visited another bank to get KYC done for Mutual fund investments, they tried to sell regular plans. It’s like wherever you go for an investment product, the salespeople will be ready with a pitch to complete their target and sell a junk product to you.

After reading about the bucket strategy, we decided to keep 60% portfolio in FD, MOD, etc. and some part in Senior Citizens Savings Scheme (SCSS). The plan was to protect the corpus and let it grow matching with inflation as senior citizens get higher rates. Also, in case of emergency they can withdraw it anytime without much hassle.

15-20% was invested in liquid mutual fund due to its taxation benefits over FD and remaining in equity (as it should not be required for at least 10 to 15 years and I am always there to fund any emergency through my corpus). I don’t trust anyone to manage the risk for my parents as most people out there like distributors, bankers, etc will try to take customers for a ride.

The reason for this post is I have managed risk properly for the last four years for their equity portfolio, but I never thought that one by one there can be crisis in debt part. It’s like you focus on improving your middle order problems as the top order is sorted out then suddenly one or 2 of your top order gets injured and can’t recover for months.

Now you are staring at a fragile top order which was not there in your contingency plan.

Fortunately neither me and my father suffered a lost a single penny in debt portfolio due to recent events but this has been a very good lesson for everyone who invests in debt MF. They are more complex than any equity MF. Choosing an equity MF is more easy compared to debt MF. Losses in equity can recover with market (only with long term investment) but its almost impossible to recover it in debt MF.

Finally, for my father’s portfolio we decided to max out SCSS as it has some scope left and rest debt will be kept in good old FD only. I can’t imagine a situation for them where they would have lost their hard earned money due to such events. I would not have been able to sleep properly if something like that had happened.

Also, those who manage their parents portfolio due to their limited knowledge on financial products, please never invest in any product which you don’t understand clearly and younger generation and senior citizens have different risk appetite so quantify that before taking any decision. Sorry for a long post but I thought to share my experience as it might be helpful to others

A Quick Analysis of Overnight Funds

Why am I talking about Overnight Funds now?

I Got hit finally after years of escaping debt fund mayhem! UTI PSU And banking fund is bleeding… Banking and PSU funds are created just for this purpose as they eliminate interest risk compared to Gilt. They are supposed to invest only in Govt backed holdings as per their SID. This case also the SPV has a deal with NHPC, NHPC pays the money to SPV. But since SPV was created by IL&FS, they have stopped payments to adhere to supreme court order of stay. There should not be any credit risk in these family of funds unless the state or central or municipal govt refuses to honor the contract. This SPV was supposed to be the Govt backed deal but this time it failed. This is the only time it failed BTW. Got to know lot about the structure of SPV as I researched. This is an interesting case. Many lawsuits will be filed now saying this SPV is sovereign as payments are from NHPC and this is not linked to parent group IL&FS

Even though it’s a tiny amount as I have invested in many debt funds but this made me lose confidence in debt funds. I am done with them… Already from the past many years, I am building my own NCD, GOI bonds, Treasury list, etc. and accumulating it slowly.

Anyone who has a substantial corpus in debt funds beware.  Liquid funds are also risky. Even the most popular Reliance liquid which gives instant money holds many risky instruments! Its AAA just for namesake. Majority of the fund managers are god damn stupid/fraud and change the portfolio like they change their dress. They should be fired and sent to jail literally!

My only rescue funds are overnight and arbitrage fund. But guess what the arbitrage funds are becoming greedy and making the same goddamn mistake of storing junk in debt folio. Overnight fund I am not sure when CBLO guarantee turns out to be fraud.

What is an overnight fund?

An overnight fund has the mandate to invest in overnight securities that have a maturity of as low as one day. They are typically money market instruments viz — Treasury bill (T-Bills).

In contrast, Liquid funds invest in papers up to 91 days of maturity. More than 60% of the Liquid funds AUM is invested in Corporate paper (mostly unsecured) which makes liquid fund riskier than an Overnight fund. Hence Liquid funds could show a drop in NAV just like the other short duration, and credit risk and corporate bond funds did.

The Pros and cons of Overnight Funds

Overnight funds are the lowest in the spectrum of risk returns, i.e., Low risk and Low return. The returns match or slightly exceed the RBI Repo Rate. The RBI repo rate was incidentally was reduced to 5.75 by the recent RBI MPC.

A look at the offering of Overnight funds shows that many funds are less than one year and returns are around 6% … this is likely to fall as the repo rate has been reduced and hence more likely to be below 6% going forward.

These are good for a very short duration instead of Savings Bank.

Only two funds seem to have decent corpus (HDFC and SBI fund offering), and the total corpus across all funds is less than 17000 crores which is a very small compared to what gets invested in Liquid funds.

8 Lessons from The curious case of DHFL!

DHFL – one of the darlings of the market over the last 5yrs has been demolished and how!

So without going into the reasons behind it (we get to know the real details may be 6 months from now), let us see how we could have seen this coming and lessons we must learn.

1. Forever long on equities is not the way forward

I know a lot of people who are forever long on Indian stocks or NSE index or in mutual funds. This is the biggest mistake you can ever make – being forever long on an asset class or sector.

Yes if you would have held onto Wipro or Infy since 1991 today, you would have been a $ terms millionaire. But how many people you know achieve this? I see a lot of people who destroyed their wealth holding onto to shit (I still hold Suzlon that I bought in 2007 😂)

Always. Always. Always look for indicators

2. SIP

The fact that you do SIP in the 5-star fund doesn’t mean the tension is over and retirement is done and dusted.

Always check the top holdings of your mutual fund and check for concentration risk.

Concentration risk becomes even more critical in debt funds because the Indian debt market is not deep. Funds have nowhere to park the money, and they end up buying the same or similar paper again and again and again!
The result is fund starts to hold over 10-15% of papers from the same company of different maturity.

3. Debt funds are safer

Nothing can be farther from the truth. Fixed income securities are a beast and a beast that is very tough to manage. Avoid this beast unless you know what you are getting into.

With the shallowness of the Indian debt market, debt funds are very very risky.

If you love fixed income, put money in PPF or EPF. Please, avoid debt funds. They are not as safe as you think.

If you don’t believe me – google this “Risk associated with fixed income securities.”

4. Keep your eyes opened for DHFL like issues

For a change, I saw DHFL thing coming. Yes, it is easier to say this now but think about this news I read last month. It is a different matter that I missed making money off this and trust me. I am more pissed with myself than the person who lost money in the debt fund today. (Read more on this)

The company had stopped fixed deposit withdrawal. That is as big a red signal as it comes.

If you have a stock, keep notification on for that stock on your phone. You tend to get these indicators, and they provide you enough hints!

5. NBFCs

A sector leads every market rally and, once that rally ends, that sector gets demolished to never rise again for years.

Infra in the mid-2000s
Pharma in the early 2010s
IT in the early 2010s
Auto in mid2010s
NBFCs in 2014-17

The NBFC story is more or less over. Regulators will come heavy on them. Avoid this sector for the next few years. If you have made money on these, book the profit. DO NOT LOWER YOUR AVG COST!

6. Banks

I don’t know where Indian markets are heading. The growth can’t come without credit, and with ILFS and DHFL, banks will have to take a massive haircut. More provisions, more regulations, more costs, and less money to lend.

I was looking forward to buying banks after Modi’s win however now this a sector to avoid.

7. Insurance firms

Not a lot of commentary around these listed firms. Only god know knows what kind of losses they are writing off on bonds and how this will affect the pricing in the future.
The Indian insurance sector is one of the best regulated and stable sectors in the world. God bless them to cross this hurdle.

8. Asset allocation

This tragedy again confirms the importance of asset allocation. PPF, Real Estate, Gold, Equities, Bonds. Mix them well. Don’t go overboard on a few of them.

Some of these asset class act as a natural hedge while some collapse together.

Finally, a bond default is terrible news. A bond default by a financial institution is catastrophic. FIs trust on each other and one defaults hits everyone. And I mean everyone. I hope this is the last name that faces the problem in NBFC space (although I have a feeling this won’t be the last).