Tag Archives: Wealth Adviser

My Learnings from Stock Market

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Greetings from PenguWIN,

I am sure every investor, especially those who have been investing for more than 3 years, would have their equity returns at all-time high. The compounded annual growth rate, CAGR, has risen to enviable levels, something which I haven’t seen in the past 18 years, since I have been investing.

From a long term perspective we can expect this number to be 11-14% which is Inflation plus our GDP(India’s Gross Domestic Product or aggregate value of goods and services at market price).

I wanted to share a few observations in this scenario:

  • Don’t get anchored on the fancy numbers that you see in your portfolio now and the reality in the long run, atleast the next decade would be 11-14%. No other asset class can come even closer to this, unless you are counting on black money

 

  • Interest rates are expected to be low. So, you can bid adieu fixed income returns, including Bank FD, Post Office NSC, PPF of more than 8% (8% itself is a little high). Post taxes and inflation this would be negative or close to zero. So, it would be difficult to almost impossible for investors, not to take any equity exposure. In the past there were planners who advised investors to move totally out of equity once they retire and survive with Bank FDs, Post Office MIS, SCSS, Annuities and so on. Those days are gone and unless you build a huge net-worth or corpus or would be receiving inflation adjusted pension from Government, chances are you will not have a peaceful retirement, without exposure to equity 

 

  • Financial Assets are relatively safe and have high liquidity. You don’t need to run behind your tenants, usurpers, courts or wait for years to monetize your assets. The trend that I see over the past few years is that the youngsters or many in my generation don’t have a liking for Real Estate as an asset class. Women in the same age group are not excited about huge amount of Jewelry or Silk sarees. Sleek and simple is the order of the day. If you leave an asset like golden belt (not sure what it’s called) that is worn by ladies around the hips with silk sarees, the chances are it will never come out of the locker or going to get traded for something of better use.

 

  • A few of our investors could not take the volatility that the equity markets provide. I normally say that equity investments are for over 5 years’ time horizon and blended or hybrid products can be looked at for 3 years. They listen to it, feel convinced and start the journey. However they keep losing patience whenever there are dips and need to be reinforced.  Nothing comes free and you need to be prepared for the roller coaster ride. 2 of our customers missed the current run, big time, though one has already started again in the last quarter. I wish I could have counselled them better and asked them to hold. The opportunity loss for them was huge. I had a similar situation in 2008-9 crisis when my wealth erosion was significantly high. But, I persisted and stayed quietly. No mentors or anyone to look up to during that period and it was DIY. I have never been let down since then and comfortably rode the numerous falls since then.

 

  • I keep reading that there are lot of youngsters who take inputs from various sites, applications and there are plenty out there. I have seen atleast 12 people giving market tips, teach stock market basis, defend a few stocks or say they are the next Infosys or HUL or Amazon or Google. Where is DSQ, Pentafour, Satyam, BaaN, Microland now? Where is Anil DAG now, who was given equal or close to (MDAG) that in 2007, the worst corporate story that I have come across in the entire world. How many people know that for a Flipkart or Zomato or Oyo there were dozens of companies that never saw the limelight. Without understanding our markets, people have started chasing Amazon, Google, Facebook FAANG and what not with websites enabling to buy international stocks

 

           Euphoria of New Fund Offers – 

                                                                                                          …..To be continued

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>