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PenguWIN turns 6

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Greetings from PenguWIN, PenguWIN 6th Anniversary

                                           Today, we are 6 years old. Our sincere thanks to each one of you, for your patronage. Trust we are well set for a long innings. Initially, when I decided to move from corporate employment to entrepreneurship (whatever small business that we do), while there was a lot of support from friends and well-wishers, there was some scepticism from family members. It was a call between doing what you might not like the best vs what you love to do but may not be successful in monetary terms. Since I had a flair for Personal Finance from my management school days, I ensured that we (wife & daughter including) were covered for atleast 10 years based on my Networth at that point in time.  Hence, I decided to take the plunge to start PenguWIN.

While it may sound easy to do something that you really like, entrepreneurship has its own set of challenges, especially when you are a first-generation entrepreneur. Anyway, I am happy with my decision and honestly, never in these 6 years did I think of going back to corporate employment.

The Covid 19 pandemic has affected the economies of the entire world during the first half of this calendar year. The medical fraternity is still grappling with unknowns, how to find a cure and a vaccine. I hope they will counter this challenge and come out successfully in the shortest possible time.

Every company in India is struggling to sustain its business and contraction in our economy is unavoidable, given the complexity of problems that they face. The top 10 business groups of India including Reliance, Tata, Adani, Birla reported profit before tax loss of Rs.19,340/- crores in Jan-Mar 2020 quarter (Q4 FY19-20) compared to profit before tax gain of Rs. 48,500/- crores in Jan-Mar 2019 quarter (Q4 FY18-19).

The Indian equity markets have been on a roller-coaster ride in CY 2020. 

Sensex went all the way up to 42,000+ and then nose-dived to around 26,000 (38% fall in about 6 weeks) on Covid-19 fears. Now we are back to around 36,000 level as of yesterday, the 3rd July 2020. Again, no investor or analyst could predict the market. While common sense tells us that when the economy is struggling, market is expected to go down, though the extent might not be predictable. But how did the market go back to 36,000 level from 26,000 when the Covid 19 is doing more damage than initially envisaged.?

One thing that has made a difference during this period is the heightened awareness about Life and Health insurance – Individual spending on life and health insurance has gone up 25% year on year. Interest and enquiries on long term life and health insurance are hitting the roof. Please ensure that you and your family have adequate coverage of Life, Health and Critical illness insurance.

Whenever there is uncertainty and stress in the economy, gold is expected to do well. While too high an allocation of gold and in jewellery form is not a good idea, a small exposure (upto 10% of networth) to gold as a hedge is a good diversification strategy. Sovereign Gold Bonds, issued by Government of India is the best option as it can be held in Demat (no issue of safety as in physical gold) and also provides 2.5% interest rate. There are 6 issues during this year and issue 4 starts on 6th Jul, Monday. The details are provided in the table below. The price mentioned is for 1 gm of 24K pure gold and offline price. You get a discount of Rs.50 i.e. if you apply online through demat, the July 6th issue price would be Rs. 4,802/gm.

On a different note, the Covid spread and consequences is alarming (I know atleast a dozen doctors and healthcare specialists who are directly facing the Covid patients). So, please be extra cautious.

Feel free to reach out to us for any of your personal finance requirements and please do refer your friends and family.

There is only one boss: the customer. And he can fire anybody in the company, from the chairman on down. Simply by spending his money somewhere else. - Sam Walton.

<Blog # PenguWIN 1077 – PenguWIN turns 6>

Debt Mutual Funds Simplified

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Greetings from PenguWIN,

I wanted to pen a short and simple write-up on Debt funds. The objective is that the investors should have a basic understanding of what a debt fund is and how it works. 

Debt funds are categorized based on the maturity profile of the instruments/securities/papers (used interchangeably) that they hold. In simple terms you can think of 60 days FD (Fixed Deposit), 91 days FD, 1-year FD and so on. If money is required in about 3 months, it is invested in a 91 days FD and if it is required in 13 months, it is invested in 1 Year FD. Similarly, depending on the tenure, investments in debt funds start from Overnight funds (few days), Liquid funds (weeks to a few months), Ultra-Short Duration funds (more than 3 months), going up to Long term, and Gilt funds. 


Debt funds comprise of instruments of multiple attributes – interest rate, company, rating, and tenure. Instruments over 1 year are long-term and rated as “AAA”, “AA+”, “AA” and so on. Instruments less than a year are rated as “A1+”, “A1” and so on (Crisil’s Rating Scale). Government issues long-term securities, referred to as GSECS and short-term securities, less than a year maturity, referred to as Treasury bills. GSECS and T-bills are also instruments (sovereign and backed by Government of India) that debt mutual funds invest in. 


The difference between a Bank FD and a Debt fund is that FDs are linear products (no volatility). But, if an investment is made in a 1-year FD for 6% and broken in 6 months, the interest rate will probably be around 4%, which is the rate for 6 months and there could be an additional penalty too. However, if an investment is made in a short-term debt fund, say Ultra-Short-term fund for 1 year which is expected to provide a return of 6%, typically, it will stabilize in a month (even less in many cases) and even if an investor exits in say, 2 months, the return will be about 6% (on an annualized basis). The returns will not be linear but close to linear (say, 5.5% in week 1, 6.2% in week 2, 5.8% in week 3, and so on) which provides a huge advantage of investing short-term money that might be required anytime. If an investor remains invested for 3 years, tax benefits through indexation kick in, which is very significant, and FDs do not get this benefit. Debt Funds do not have tax deduction at source (TDS) which means there will not be annual taxes to be paid. It needs to be paid only when the fund is redeemed. FDs have TDS which means compounding effect will be reduced.


Unlike FDs, fund managers trade securities in their schemes, purchase when money comes into the fund (investments), and sell (redeem) when money is required by investors. The volatility of returns from Debt funds is considerably low but not “Zero‘ and that’s why debt fund returns are close to linear but not perfectly linear. So, debt funds NAV (Total value of fund/ Number of outstanding units) increases slowly. Only during extreme situations, there would be wide swings in the NAV as a result of changes in the ^yields of underlying instruments. 


Typically, if a scheme/fund has invested in a proportionately high number of “AAA” papers, “A1+”, GSECs, the risk level is lower and so will be the returns (AAA yield will be lesser than AA, AA less than A+ and so on). To increase the fund returns, fund managers invest in less than AAA, say “AA-“ type of instruments. If a fund has 50 instruments, 10 maybe AAA, 15 in A1+ and rest in AA and AA-. Also, securities that are AA need not be of low quality. Ex. Airtel’s 8.25% Non-Convertible Debentures (NCD) is rated “AA” and knowing the pedigree of the company why would anyone hesitate to invest? If the question is, then why is it not rated “AAA”, it is beyond the scope of this write-up and requires an explanation of the credit rating process.

Daily, depending on the transactions done, the instrument gets a value like AAA, 3 years is 6.75, 5 years is 7.2, and so on. The price of the security goes up and down as it gets traded, based on demand and supply. Since the interest rate is constant like 8.25% in the case of Airtel NCD, it’s the yield that varies periodically.


^Yield is the return that you would get for the current price of the security. If Airtel 8.25% NCD has a lot of demand, then the price of 1 unit of the bond, say 1000 Rs. will increase to 1100 but the interest rate remains the same 8.25%. In this case, the yield would be 8.25% of 1100 or 7.5% i.e. Yield decreases as price increases and increases as price decreases (inversely proportional). Yield is the reference and key parameter for a security/instrument like the current market price of a share (Reliance Industries stock price is Rs. 1400/- (current trading price) and the face value of Rs. 10/- loses its significance.


When there is liquidity squeeze in the market i.e. demand for instruments by buyers goes down than supply or sellers trying to sell too many instruments, the price of the instrument/bond goes down and the yield shoots up. In such a scenario when a fund manager tries to sell lesser quality papers (AA, A+) the takers will be lesser resulting in a distress sale. If the value of a bond (Rs. 1000 face value) goes down to say 800, then the Net Asset Value (NAV) goes down sharply and this is what happened to the 6 Franklin Debt Funds which were in the news, recently. There could be a situation where there are no takers at all and price discovery itself becomes a challenge. If a distress sale happens then there will be a huge erosion of NAV, severely affecting the interests of investors. The underlying instruments (say even “AA”) can still be good and companies might pay back the loan in time. The current crisis is more of a demand-supply mismatch rather than the credit quality of the instruments. All other factors remaining the same, the quality of papers like AAA Vs AA might matter. But, Franklin has been managing the funds in this fashion for over a decade without any issues, investing in lower credit quality instruments, and providing substantial additional returns to its investors. 


Leave no stone unturned to help your clients realize maximum profits from their investment - Arthur C. Nielsen

<Blog # PenguWIN 1076 – Debt Mutual Funds Simplified>

Covid-19 Shakeup

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Greetings from PenguWIN,

The continuous fall in the equity markets has spooked almost every investor. While 2008 was a major crash in value terms, the Corona Virus impact has caused one of the fastest crashes that the stock markets have witnessed – i.e. about 33% down in less than 2 months (Sensex reached 42,273 on 20th Jan 2020) and 31.3% down from 20th Feb which is less than a month.

The question that everyone has in their mind and some people have asked me is when will we reach a bottom and turnaround. While no one can give a correct answer, which is how the stock market works, I wanted to share my opinion as an investor in the Indian Equity market for over 18 years now.

Whenever markets have gone down it has always come back strongly and breached the previous high. It’s a question of time and that could happen in a matter of few weeks or months.

The big impact to markets in the past were factors including scams, dotcom, financial crisis and the impact of SARS, Swine Flu, Ebola which are considered more dangerous than Covid 19 was negligible. However, with the power of social media, today, the spread of news and events is extremely high and gets exaggerated. The moment the Virus gets controlled like what we hear about China, markets will turnaround extremely fast. So, please do not keep looking at market information which is the best thing to do in situations like this

The number and volume of investments in Indian Equity markets by Indian investors has become significantly high including provident fund investments, insurance companies and the steady flow of SIPs which was not the case earlier, where retail investors were very limited.

The one-year FD rate offered by SBI is 5.9%. Assuming the investor has an income of 10L plus the post-tax return will work out to about 3.9%. Equities on a long term will definitely be able to provide about 11-12% and post-tax return would be about 10%. Even if we assume that the post-tax return is only 9%, the differential return will definitely be 5%+ and hence equity markets that shakes us like this, at times, cannot be ignored.

While no one can deny the fact that the experience we are undergoing is unpleasant, without pain there is no gain. Please remember that we are in a situation today were bank depositors are put in moratorium (limits on operating the account) and other than sovereign instruments (Small savings, Provident fund), nothing is absolutely safe.

<Blog # PenguWIN 1075 – Covid-19 Shakeup>

Category: Mutual Funds