Investment Objectives & Advice

Path to Financial Independence: 10th year anniversary

“Remember to celebrate the milestones as you prepare for the road ahead.” – Nelson Mandela

In 2011, I first thought about the financial independence and wrote in Path to Financial Independence almost 10 years back. Even though my calculations of numbers were basic but I was thinking correctly about the issue & steps to resolve it. As the time passed, I get more and more organized as well as closer to my financial independence goal. Retire early or not, The Financial Independence continues to be main focus for me [#FIRE].

One major shortcoming of my basic calculations were the under appreciation for the impact of inflation, I am not talking about the normal reported inflation but the personal inflation. Common inflation would be 6-8% annually but personal inflation or what we call Lifestyle creep is much higher. In my bachelor life, My monthly expenses were 15-20k as most resources were funded by 4-5 people staying together. Post marriage they jumped by >100% as you need to bear the whole expenses at your end. There are other expenses, which increase due to upgrade of lifestyle like moving from bike to car, travelling by Flights vs. Trains etc. [Check my detailed article on Lifestyle inflation]

At the end of 2020 (Year in Review), I had accumulated the 27x portfolio [Currently ~33x] to my current expenses. By traditional benchmarks/ thumb rules, this milestone could be termed as Financial Independence milestone but as I explained in the analysis for a friend that it might not be sufficient for sure. In last 10years, my portfolio has grown by 41x at a compounded rate of growth of 47%. As I am slowing transitioning from the Phase 1 to Phase 2 of wealth cycle, The primary factor of the growth has been the increase in income & corresponding increase in savings. Now the growth in portfolio is increasingly driven by returns, 2020 growth by returns was > the overall absolute growth in any of the years from 2012-2017. Think & understand this point better as per your position in the wealth cycle.

41x Portfolio Growth in 10 Years

In the last 10 years, There have been many lessons for improving the returns, which I plan to leverage in the next decade. The most important lesson among all is the concept of less is more. Earlier in my investing journey, I invested into various stocks & mutual funds. Tried chasing returns and did it successfully too. As your portfolio size start increasing, it is much more efficient to be a buy & hold investor. When you have higher churn rate in portfolio, you need to worry about the cost of transaction, exit loads, Tax implications. for e.g. you identify the opportunistic equity investment of 25% return in a year with INR 100k investment you book a profit of INR 25k next year (No capital gain tax) but if portfolio size is INR 1mm then INR 250k would mean INR 15k as capital gain tax. Higher churn also means more number of decisions to be taken, which in turn increases the probability of wrong calls. Below are the steps to be taken to improve your long term returns with lower churn:

5 lenses to identify the right investment portfolio
  1. The portfolio design should satisfy each of the five requirements in terms of returns, risks, liquidity, tax and your time horizon. It is a crime to invest your 1year ahead required money in equity like risky product as well as keeping all your 15-20 year far goal in 100% debt
  2. Buy right products in your core portfolio with relevant diversification as no one asset class would continue to be the lead return generating
  3. Diversification do not mean that you end up buying lots of funds or stocks. Simplification is as important as diversification.
  4. Do not sell your investments unless it meets one of the criteria flagged in when to sell your investments

I am quite hopeful, that the simple portfolio of just 5-6 funds can serve the most needs of an investor. As I am getting closer to my financial independence goal, I am helping more and more people to start their journey in more structured manner. I learned the process by hit & trial, started with zero inheritance and if I can do it, I am sure most of you can do it as well with little help & determination.

May this independence day brings you the aspiration to achieve your financial independence as well.

Happy Independence Day & Happy Investing!

Investment Objectives & Advice

Madness in March!

“One of the best rules anybody can learn about investing is to do nothing” – Guy Spier

Most people underestimate the importance of doing nothing, when it comes to investing. Last Year, when the news of pandemic hit the markets and worldwide the market started to decline on a fast track, lot of people end up exiting their investments. In the last financial year, from Apr 1, 2020 to today Mar 31, 2021 Nifty 50 TRI has gained 80% and Nifty Midcap 100 TRI has gained 107%. Investors, who had jumped the ship, have missed the rising tide completely. Few of the brave hearts have jumped in March 2020 so they wanted to book the profits and get out of market, I had shared some ways to do so in my June 2020 article. This year March was quite easy compare to last year, we have seen the market top at 15,300+ as well as a quick 5 days sell off in the mid-month. If you want to get out of the market to book your profits, I would strongly recommend to read the June article. There are so many things to discuss from the march headlines, so let’s tackle them one by one.

SEBI’s new regulation on how to value the Perpetual bonds and limit on exposure to AT1 bonds: First of all, let me share my view about this regulation that “It is an important step towards strengthening the debt market & debt mutual funds transparency.” I do not have to remind of the recent write down of AT1 bonds of Yes Bank as well as Lakshmi Vilas bank. Second is that If in short run your invested funds show loses, do not cry foul on regulators or AMCs or your advisers/ distributors. Third, Let’s analyse the next steps of actions to be taken. You should look through the latest portfolio disclosure of the debt fund or Hybrid funds you hold.

  • If the portfolio holds <5% of assets in form of perpetual bonds, you should not worry and consider the fluctuations in it’s NAV as part of market risk you have signed for.
  • If the exposure is 5-15%, and your debt fund is of Low/ Short/ Ultra Short duration or 15%-20% in your Banking PSU/ Medium duration fund then there is problem as the fund has to value funds with assumed maturity of 10 years in short run. This will increase the interest rate risk as well as modified duration of the fund so the fund houses might have to reduce the exposure. This would have an impact on NAV and if you have a really large exposure, you should contemplate reducing your holdings. (Speak to your advisor/ distributor)
  • If your fund has >20% exposure & your have significant investment in such fund than consider to get out of such fund

SEBI’s regulation to rename the dividend schemes: Most people thought of dividend pay-out from their mutual fund schemes as their absolute gains. These schemes offered the tax advantage to high income tax bracket people but govt has plugged in this loop hole by taxing the dividend at the investors hand. This has made the dividend option in efficient as you have to pay tax not only on the gains but also on the money you have invested in. The new name makes it clear “Pay out of Income Distribution cum capital withdrawal option”. I flagged the incorrectness of the dividend option in Apr 2020, read it to understand the logic.

The aftermath of the Franklin verdict: The Supreme court has also accepted the liquidation approach submitted by SBI for Franklin funds. As we have already seen the partial pay-out to investors in Franklin schemes. The remaining amount of the unwound schemes should also be mostly realized by investors in the next 6-12 months in my personal view. This is quite a good outcome and shows the strength of regulations around Mutual fund structure in India. I still remember wait for 18 years and then realizing 70% of the principal amount invested in one of the deposits made by my parents. I covered the possible effect and suggested actions in aftermath of Franklin debacle in May 2020. Even though people expect a fund house risk after Franklin’s statement about exiting the country, the impact might be faced on the current liquidation process. Keep an eye on the progress and stay informed of such risks in future.

Supreme Court verdict on the interest-on-interest waiver as well as NPA Classification: Much awaited clarification came from the supreme court and it has allowed banks to declare NPAs as per existing rules with no extension on the moratorium period. This means that banks have to recognize the NPAs as well as realized the losses in accordance to the NPA recognition. Also, they have to reverse the income realized as interest on interest as prescribed by the honorable supreme court. I flagged this in Dec 2020 as risks to earnings and one of the reasons that the impact might be higher due to heightened valuation levels.

As you would have notice, There are so many moving parts that it is quite difficult to gauge the actual direction of the market. Though as I have said in past, just use the valuations as your yardstick along with your asset allocation based on goal to calibrate the exposure. In the long term, Earnings drive the markets along with future earnings expectations. The next couple of quarters would be quite important to give the actual direction of earnings and markets. Therefore, Stay vigilant and stay invested. Happy Investing!