Chill Maadi

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

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

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).

Two thousand one hundred twenty-six companies declared their numbers till now of which as high as 768 companies reported in last week. Of 768 companies, 480 companies CFT scores have fallen while 309 companies have improved.

So, what are big takeaways from the March 2019 India Inc numbers? First liquidity dried up pushing the cost of funding for many of NBFCS. Also, many companies who had ILFS papers in their books were forced to write down their investments. ILFS crisis continues to impact India Inc. Many consumer-facing companies reported weak volume growth suggesting poor consumer sentiments. Mid-season sale at many retail stores shows that retailers want to reduce inventory. Uncertainty on global trade war is not giving enough confidence to entrepreneurs to build new capacities. With inferior liquidity in the system, banks are not very keen to lend money for projects in fear of the same turning into NPAs at a later stage. There is no animal spirit either at banks level or entrepreneur level. Two legs of economy-consumption and capital investment-both are struggling.

The new government that has sworn in yesterday has task cut out for them. The big challenge is that they need to put more money in the hands of consumers so that they can spend more. This can be possible by cutting Taxes. Second private capex is just not happening. Time has come that government gives some significant benefits for companies to do capex that can help to generate employment as well as increase economic activities. One of the best ways is to reduce corporate tax. This can leave more money with corporate to fund capex.

It would be interesting to see what measures new finance minister- Nirmala Sitharaman takes. In the next 30 days, she would be presenting her first budget. Her focus should be on long-term goals rather than a quick fix solution.

What should one expect in the June quarter? We sense that June would be another quarter that may not live up to the investors’ expectations. We are expecting sales as well as net profit growth subdued in June quarter. In the next three months, we can expect one more interest rate cut from RBI. Crude prices would have gone soft, and if that continues, we can see margin expansion. The new government would have spelled out their vision for the next five years. That means there would be a lot of action by the time June quarter season ends.

Right now, the market should remain firm till Budget. Post that market sentiments would be a function of local as well as international news flow. Fear of weak monsoon is now fading away. That’s good news for the market. If all goes well, one should expect earnings growth revival from the September quarter.

Time and again I have come across investors who shy away from equity investing or so to speak they do not understand how this market functions and are neither keen to invest into products such as the mutual fund, debt funds or in the equity market.

All that they look for is the safety of their capital amount and are pretty happy; earning a small rate of 6 to 7.5% p.a., even though such returns cannot even beat the market inflation rate but so what they are still contented with it.

Almost every other post has people believing in the above two fables in the title of this post.

Yes, they both have been right in last 5-6 yrs, however, bear with me. These are my experience over the last decade and a half.

1. PPF

Don’t underestimate the power of the tax-free (EEE) compounding. Always use the max limit every year. Let this be the rock on which you will build your portfolio.
A lot of people haven’t seen their portfolio in deep red, and the pain is massive. PPF brings stability

2. Asset reallocation

One of the essential things in long term planning. No asset is evergreen.
If everyone knows Mutual Funds Sahi hain and long term mein Equity will outperform, then the game is straightforward. The fact is the game is not easy.

Always look for assets that are beaten down and keep an eye on indicators that point towards them turning around.

Trust your instincts and reallocate your portfolio

3. Follow politics

Keep a very close eye on the politics of the state and the country.  Politics decides the policies and policies decides which industries will do better.
If you know the politics well, you will know when to buy a thematic fund and when to exit it. I am not even talking about stocks here.

4. Don’t berate people who are buying against the tide

Whether it is stocks, real estate, gold, bonds all move in cycles. Eventually, Stocks beats the other assets classes by a few % points in the long run. The key is to buy the asset class when no one is looking is it.

5. Dividends

Most of us are chasing the elusive financial freedom. I don’t believe in economic freedom as every time drag the Excel formula, I see costs moving faster and faster.

IMHO, the key is to create dividends, coupons, and rents that are more than your monthly salary.

Anyways, if you are buying stocks, keep an eye on the dividend policy of the company. Eventually, the companies that pay back the investors regularly tend to outperform.

6. Financial advisors

Pick your financial advisor with the same care as you pick your life partner. Trust your financial advisor after that.

However (Big, however), learn things on your own. People change, and so do the motives of your financial advisors. Never trust them blindly after a point.

If the advisor is only advising stocks and mutual funds, be careful.

7. Learn Finance

You may be an engg or a doctor or any other profession. You may have hated basic finance lectures in your school. However, it is critical you understand how the money moves around.

You must also invest your time.

Attend investor presentations as a starting point. Bajaj Fin investor presentation is an excellent starting point for newbies. Learn market trends

8. Tools to learn

• Investor presentations – Always attend these of stocks in your portfolio
• AGMs – Go to these if they are in your city. If nothing at least you will get free ice cream and lunch (sometimes). Plus you get to see the CEO and CFO. It is a lot of fun.
• Track your portfolio – IF IT CANNOT BE MEASURED, IT CANNOT BE MANAGED
• Don’t ask someone directly if you don’t understand something. Google about it and try to learn it on your own and talk to someone who might know about it. Self-learning is critical

9. Use leverage intelligently- Debt can be your friend

People hate credit cards. I always wonder why. There are points to be collected and interest-free, collateral-free credit to be taken. THERE IS NO PRODUCT LIKE A CREDIT CARD IN THE WHOLE WORLD. I have worked in equity research, M&A, Commercial banking across different countries, and I am yet to find a product as good as a credit card.

People hate home loans. Why? Use leverage to maximize your returns on equity. Of course, don’t go overboard on debt.

10. Don’t be a Kanjoos

No one likes a kanjoos. Don’t be the person you want to hate. Money can be earned. It is not tough. Saving a penny here and there won’t make your rich.

Try to maximize your gains and not worry about expenses. There are just a few years you genuinely enjoy life. Spend it well – Go to the best of the restaurants, travel business class once in a while, ask for sea facing rooms in hotels, gift that gold necklace to your wife (ya gold is lousy investment), throw money on home renovation.

Everyone is stressed these days, so if something makes you happy, that is already Alpha return.

Most graduate students are strapped for cash. Even with the Federal Stafford Loan, Graduate PLUS Loan and alternative student loans students often do not have the money to live a comfortable lifestyle. Between tuition payments, rent, food, and only being able to work part time things can get really tight. Here are five creative ways for graduate students to cut back on expenses and save more money.

1: Shack up with roommates: Although you may prefer to live alone living with roommates will save you hundreds every month. If a one bedroom place by yourself goes for $800 a month and a two bedroom place with a roommate goes for $1,200 a month you would save $200 a month right there!

2: Find the nearest Starbucks: Ok I know we are trying to save money here, but Starbucks has free WiFi! Get used to writing your papers and doing research there or at the school library or anywhere else where the internet connection is free.   This way you will not have to pay for home internet access which could save you as much as $100 a month!

3: Nix your cable and phone bill: Face it; you never use your home landline so cancel it. All you really need is your cell phone. You also barely ever have time to watch TV because you are always studying so cut the cable. Most of the shows you watch are online anyway!

4: Eat at home more: This is my big weakness. I love going out to dinner, but I know that if I stayed home more, I would save a lot of money. Try only going out once a month or set a strict dine out budget for yourself and stick to it!

5: Try public transportation: If you live in the city try getting rid of your car and sticking to public transportation. It may be tough at first but getting your car payment back and not paying for gas will make a massive difference in your budget.

Cutting back on your household budget can be difficult, especially if you have debt or there are a lot of people living in your household. Also, with food and energy prices on the rise, it can be hard knowing where to cut corners and most importantly where you can make the best savings. However, if you follow these five tips, you can be on your way to finding a bit of extra cash in your pocket each month.

Keep on top of your energy bills
Use a price comparison site such as uSwitch which shows you a comprehensive list of all of the current energy tariffs on the market at the moment and suggests the right deal for you. This is one of the easiest ways to save money because you don’t have to do anything other than supply a meter reading. Of course, another way to save on energy costs is to reduce your energy consumption as much as possible. Unplug appliances you aren’t using, use ceiling fans for cooling, and use a programmable thermostat.

Use cashback sites
The two most popular cash back websites Quidco and Top Cashback offer users a percentage of what they spend back, which they can then withdraw and use however they wish. If you’re considering changing energy suppliers, entering a phone contract or anything else that requires a significant spend and a big commitment some companies offer a nice sum in cash back to buy with them. Be aware, though, it takes a while for the sites to pay out and it may be months before you even get a reasonable amount of cash back that you can withdraw to your account. Every little bit helps though!

Assess your debt
Having a huge credit card bill can be challenging to manage, but there are alternatives if you can’t pay it off all in one go. Doing a balance transfer to another credit card with a 0% interest rate won’t make your debt go away, but it will stop it from getting more significant.

Always Shop Around For Insurance
It pays to shop around and get quotes when renewing your home or auto insurance. A few minutes of your time can result in saving a substantial amount. Don’t cut corners by doing away with insurance altogether either. Even if you rent your property, you should invest in home contents insurance to make sure your belongings are protected.

Do Your Grocery Shopping online
If you really can’t control yourself and have to go for all those buy one get one free deal that the supermarkets advertise at the end of every aisle, ordering your groceries online lets you monitor exactly how much money you’re spending, and you’re less likely to impulse buy. Not only this, you’ll save money by not using the gas in your car to drive to the supermarket.

A budget vacation may not always go as per your plan; the chances are that you may go over budget and end up in debt.  Scanning the world-wide-web, you may come across numerous articles and blog posts to help you trim your vacation expenses during the planning and execution phase. In this article, we look at how expenses can be cut down ‘before-the-trip-begins’! Remember to follow them next time you’re out for some fun time:

1. Book your tickets with a travel-friendly credit card

Some credit cards are designed to facilitate travelers by giving away thousands of flyer miles in return for booking tickets using those cards. You may not get immediate discounts, but you do save hundreds of dollars in future travel tickets. As always, make sure you pay off your credit card bill before the month ends to avoid interest charges.

2. Book early and carefully

You’ve probably heard this one, millions of times – airline tickets bought early (and off-peak) are less expensive compared to those purchased at the last moment (and during peak seasons). The same rule applies to traveling at night and during weekdays because they are considered off-peak times.

Similarly, trips to famous tourist destinations cost more but are not necessarily better (more scenic or fun) than trips to less popular spots. Sometimes a weekend camping trip to a nearby woodland can be as entertaining as anything else.

Let’s not forget boarding and lodging. A five-star experience may sound fancy, but it damages your wallet pretty nicely. Look around for Bed & Breakfast arrangements, inns, reasonably-priced motels or two or three-star hotels that offer you better value for money.

3. Plan your itinerary before boarding the plane

Once you know where you’ll be heading, surf the web for a few days and decide which activities will keep you busy during your vacation.

• Which museums, parks, galleries, beaches interest you?
• What are the directions and distances?
• What features is the city/town known for?
• Where is the best street food served?
• Where are the cleanest toilets? (This one is pretty high up on my list).

Planning enables you to draw the maximum mileage from your short visit, so you don’t waste precious time thinking of what to explore/visit.

4. Invite others to join your vacation

Traveling alone may sound adventurous, but if you take along a friend or relative, you can split a few costs and enjoy their company too. For instance, if you lease a car to travel to another city, the fuel bill can be divvied up along with the bill for any hotel room you rent for the night.

5. Pack a light suitcase

Airlines often charge a hefty amount for excess baggage (any weight that goes beyond the standard 20 kg limit). You don’t need to carry much when traveling – a few clothes that meet the weather requirements, personal hygiene products (most hotels provide these), any gifts you’re taking for your family and friends, and that’s 80% of the list. Besides saving money, traveling light is just more comfortable, and it leaves enough room in your suitcase to accommodate any holiday shopping you do.

Be sure to measure your luggage before you leave your home to avoid extra charges.

This 2019 it will be a tricky year for property buyers. Do you want to know why? It is because they will continue to vie for a lesser supply of properties.

Plus, mortgages rates and home prices are, believe it or not, likely to increase or move upward, peeving affordability. As we move forward to a new year, many home buyers are looking forward to the mortgage trends.

As a home buyer, it is imperative to know and learn the mortgage trends that will likely to happen in 2019. By that, you can prepare yourself for what’s to come. For a little help, here are five mortgage and housing trends to look out for in 2019.

2019 Will Be A Seller’s Market

For the past years, real estate has been, for the most part, a seller’s market. Meaning, there are more home buyers compared to the properties for sale. Thus, putting the negotiating power in the property seller’s direction.

And this 2019, it will still be a seller’s market. However, it will be a bad situation for property buyers if it will still be a seller’s market this year.

But, fortunately, there is a little hope for home buyers. In 2019, the supply of properties will rise. However, the problem is that the demand is also, for the most part, expected to exceed supply, even though there will be more properties for sale.

According to Realtor.com, although the housing situation isn’t getting worse for property buyers, it is also not doing good in most markets. Furthermore, according to Freddie Mac, unless housing construction improves, property costs will ramp up as well, limiting home formation and restricting a lot of people for homeownership.

Housing Costs Will Increase

Housing costs are, like it or not, expected to bring bad news, good news in 2019. So, to start off, the bad news is that the housing costs will keep ramping up. But the good news is that the housing prices will not increase as fast as they did in the past year.

According to the liege economist for the NAR or National Association of Realtors Lawrence Yun, housing cost appreciation will decline, but they will continue to increase. According to him, it is expected that the housing costs will increase in 2019, particularly 2.5 percent, with a median of $265,200.

If you compare it in the past year, it was about a 4.7 percent rise in housing prices, to a median of $258,700. Moreover, Realtor.com and CoreLogic also forecast a slowdown in housing costs in 2019.

Homes Tend To Get Smaller

From a house purchaser’s point of view, most markets require more houses available to be purchased, and they should be on the reasonable end of the value scale. All things considered, a lot of first-time property buyers purchase short-term homes rather than forever homes, with costs under the area’s median. There are indications that property builders are reacting by building more affordable, smaller homes.

According to Robert Dietz, expert for the National Association of Home Builders, proceeding with a multiyear trend, single-family home sizes diminished amid the second from last quarter of 2018. New home size has been slumping over the past three years because of a steady move to additional entry-level housing development.

As indicated by the U.S. Registration Bureau, the middle size of single-family homes began in the second from last quarter of 2018 was 2,320 square feet. That is 4.9% lesser than the middle size of new homes three years sooner, at 2,440 square feet.

Also, he said that home developers were centered around that $500,000-and-up market because the edges were more advantageous, but they’re beginning to discover now that there’s such a significant amount of repressed interest in the lower-end-valued market that they can economically offer networks and new development, and we’ve seen a ton of progress in that space.

Year-over-year average costs for new homes started decelerating in spring 2018. At $309,700, the average price of another home in October was 3.1% lower than the middle new-home value a year sooner. In any case, Fannie Mae and NAR foresee that new-home costs will ascend in 2019.

First-time Home Buyers Will Increase

The real estate and mortgage industries are centered around serving first-time home purchasers, and in light of current circumstances: first-time home buyers have overwhelmed the mortgage industry for as far back as ten years. And they are still increasing today as per an Urban Institute report distributed this mid-year, which includes, we won’t see this changing at any point in the near future.

Prior to the housing disaster, first-time home purchasers took out about 40 percent of procurement contracts, as per the establishment. Recently the novice share has been about 60 percent.

Tian Liu, financial analyst for Genworth Mortgage Insurance, says 80 percent of the development in home deals in the previous three years has originated from first-time purchasers. Do you want to know why? First-time home buyers represent years of repressed demand.

Home Sellers Could Struggle

As referenced previously, 2019 will remain a merchant’s market, where home buyers exceed supply. However, that doesn’t mean home dealers can anticipate offering wars from urgent purchasers.

That is particularly the situation with individuals who are moving homes that cost over the area’s median, Realtor.com financial expert Hale says. First-time purchasers command most markets, and they will, in general, shop for homes estimated underneath their area’s median. As a merchant, Hale says, in case you’re in that above-middle value point, you will need to value aggressively and offer motivating forces for purchasers.

Takeaway

So, 2018 was such a tease in the real estate industry. Will 2019 deliver more of the same outcomes? What are the trends that you should look out for this year? Whether you are staying put, buying, or selling, the above trends are the mortgage trends that you need to know. Keep your eyes and ears open for the upcoming trends by staying up to date with various mortgage groups such as Annapolis Mortgage Group.