Credo Capital

“Bull markets are born on pessimism, grown on scepticism, mature on optimism and die on euphoria. The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.” Sir John Marks Templeton

The biggest complain that one hears from investors seems to be the past returns have been poor (in the last 5 years) hence prefer the safe FD (never mind that adding inflation and taxes the real return could be negative). Second complaint is that the equity markets are too volatile and risky. Buy low sell high is all ok but how low is low and how high is high?  Not all of us are experts and we have seen that even experts can go wrong ( or usually go wrong 🙂  ) To address these need to buy equity as the valuations go lower and sell as valuation gets higher and keep the rest in bonds is a good way to do this. Let us see one such unique Mutual Fund.

FT India PE Ratio Fund of Fund

What is the idea sirji? Simple enough, markets keep swinging like a pendulum from one end of pessimism and the other end of euphoria, the fund values the market based on Price to earnings ratio (a simple formula to measure how cheap or expensive overall market indices are) and keeps selling equity and buying bonds as markets become costlier and sells bonds and buys equity as they become cheaper. So this first means comparatively lesser risk since at higher prices, stocks are sold and lower prices they are bought. Meanwhile the money in bonds also gets interest income.

The key thing is buying low and selling high, idea professed by all great investors be it Warren Buffett or Sir John Templeton ( this fund is from Franklin Templeton India incidentally) but hard to practice.

How does it work? This is a fund of fund structure i.e. the fund invests in its own Franklin Bluechip Fund (profiled last month in our column) and Templeton India Income Fund (a bond fund). As market keeps becoming costly, equity fund is sold and money moved to bonds, when equity is going down bond fund is sold and equity fund is bought. The allocation between equity and bond fund is given below.

Recognizing that market works in cycles and there is no way to say how high is high or how low is low, the fund lowers or increases exposure but is never fully into equity or into debt.

Why Invest

This fund was started way back in 2003 and would complete 10 years in Oct 2013. Its latest price is 46.29 implying an 18% return over last 9 years, in the same time period BSE SENSEX has delivered 16.35% returns. So an investor has got better returns with comparatively lower risk.  Even in the volatile past of last 5 years the fund has given 7.67% vs. NSE Nifty returns of (–) 0.62%

Costs & Taxation

This is a fund of fund and hence taxed as a non equity fund. So short term gains will be taxed at the marginal rates of the investor and long term gains will be either 10% without indexation or 20% with indexation whichever is lower. Ideally this fund is meant for 5 years + holding time but I would recommend for even longer periods. It makes a good entry point for investors who have not invested in equity or are afraid of the volatility of the markets.  Cost (expense ratio) is a bit high since it is a fund of fund approximately 2.71% per annum however my take is that the advantage of buying low and selling high automatically makes it attractive for me even with the cost.

Risks: Though there is a disclaimer at the bottom, there is no harm in repeating that Mutual funds do not and can not guarantee returns and there is no assurance for either principal or returns, not only that past performance may or may not be repeated in future. However, investing wisely in equity markets remains the corner stone of capitalism, and the only known way to beat inflation. I think it will remain that way.

Min Investment Amount : Rs 5000. Min Investment Period : 1% Exit load applicable if investment is sold before 1 year, nil after 1 year.

Source:  Scheme Factsheet, Morningstar.in, Valueresearchonline.com

Disclaimer : Mutual Fund investments are subject to market risks, please read scheme related documents carefully.

Author is a Certified Financial Planner based in Chennai.

An article on The Mint newspaper for which i contributed. Old one but the message is relevant ( actual reason is i forgot to post it earlier 🙂

http://www.livemint.com/2011/04/04212641/Four-products-for-beating-infl.html

You can be a crorepati by hardwork or sheer luck and usually a combination of both in varying degrees, the real question is can you stay on as a crorepati and even improve on your wealth. A small article on what to do with sudden gains that seem for many lucky people to disappear even faster.  My discussion on the same in Economic Times.

http://articles.economictimes.indiatimes.com/2011-12-01/news/30463210_1_reality-show-fortune-goa

Part 2 of the previous post on basics of Financial Planning focusing on goals.

Last issue we saw the necessity to first budget our income and expense, then control debt so that our emis are within a comfortable range & having adequate life insurance via a term plan for all earning members of the household and health insurance for all the members of your family. These steps like budgeting, controlling and eventually eliminating all debt except for home loans, being adequately insured for life and health are the foundations and equal to starting on the financial road to a productive work life and a peaceful retirement. Starting without these steps in place is like starting to travel a long journey in a car with little fuel, less money to buy fuel and to top it off the tires not in good condition, it is a recipe for disaster & we should avoid such mistakes in our financial planning journey too.

Let us continue where we left off last time on the road to financial planning.

Tax Planning: Government gives umpteen number of tax breaks to all of us to alleviate the heavy tax burden the working class heroes to some extent. These start from the well known 80C of 1 Lac, the new 80CCC for Infrastructure bonds to tax free investments like PPF to tax break on children’s education expenses /home loan repayments / charity gifts etc. Ensure that this is used to the maximum so not only you save and invest but you get tax breaks on the investments too.  Easiest thing is to ask a Chartered Accountant but the best is to know it yourself by getting around financial planning blogosphere or buy books on the subject.

Finally have your investment papers are in order by ensuring that all your investments be it SB Ac or FD or Shares or Mutual Funds etc have a nominee in place and your spouse knows where these papers / receipts etc are kept.

Now let us start the exciting and rewarding journey of Financial Planning

Saving, Investing and your basic goals in Life

1. Let savings be your first expense: Every month keep aside some money from your salary account by either enrolling in a Recurring Deposit or monthly investment program by which the amount is auto debited. This ensures that you first get comfortable in the act of savings. This should be a meaningful amount starting at least with say 20% of income or more. People who are very good in budgeting and planning even from rural areas save / invest close to 40% of income which is great.
2. Fund your retirement plan: Usually this is done automatically for the salaried class via Provident Fund that is deducted from salary but many of us have the tendency to take loans on it or break it when we change jobs. Best is to transfer the account when we change jobs so that it is actually used for the purpose it is meant to be i.e. to fund retirement. Even with the PF savings it may not be enough for retirement thanks to rising healthcare and other living expense. Recently a news paper surveyed retired people whose pensions are way below today’s expense. It is better to save another 10% of income on this goal and estimate how much would be required month on month for retirement so that this goal is taken care of. For those who are not covered by pension and even to those who are covered but feel it is not enough Public Provident Fund offers the best choice, it is better to max out that first and then look at other options such as equity mutual funds etc.,

3. Home purchase

Many of us would like to own our home as after all a mans home is his castle as the English say. A generation ago there was no concept of home loan so buying  a home was for the lucky few today with higher disposable incomes and tax breaks buying a home is the first investment that people think of once they are married.  There are many important things to consider before you opt for that home loan.

1. Can you afford the EMI? Since owning your home is a once in lifetime decision for many people they rush headlong to sign on the dotted line and worry later. It would be better to check first if you can afford the EMI’s for next 15 or 20 years.
2. Have you saved for the down payment? Typically you need about 15% of the cost of the house as down payment. So you need to save this first, I have seen many people not having saved for this but borrowing down payment money too and end up paying EMI as well as repaying loan taken from friends / relatives down payment and unable to pay the monthly living expense bills on time.
3. Never overextend your home loan – when you see a house the tendency is to overshoot. Many people opt for a bigger house that they can not afford and to top it all spend too much on fixtures etc so that they over shoot their already strained home budget.
4. While buying a home is one of the best investment that you can make as it gives you peace of mind and could act as a retirement funding investment ( via reverse mortgages or letting out the house for rent etc). It should turn into a burden today.

4. Childrens Education

Now any saving beyond this ( I can hear you say what savings but have heart, we are a nation of big savers !!) needs to be funded for other goals such as children’s education

While this is a laudable goal remember that today there are loans available for education and your child would be more responsible in repaying if he opts for a loan, you can pay a part of the fees if necessary. Again many parents overextend this expense too by aiming very high. Good education does not cost much, what costs much is usually not a very good way to educate your child.

It is better to plan separately for this goal, having a PPF account in the name of the children and investing the rest in equity mutual funds via monthly systematic investment plan (SIP) is a better bet in my opinion but you can allocate more or less to both based on your own appetite and tolerance to risk. Most of the child insurance plans etc usually are not a good way to invest since the costs are higher than a mutual fund and naturally returns are lower. Best to have a PPF account in childs name and an equity fund SIP.

Childrens Marriage : This is a goal probably unique to us. We would like to get our children married well if not in style. Marriage costs keep rising higher then inflation thanks to newer line entries that were not done before such as stage arrangement, rich buffett spreads etc. Even a typical middle class marriage today costs a lot and hence it is better to start saving for this goal early on. Best is to set aside some money monthly or to combine with savings for the children in combination of safe and risky but high return long term investments ( PPF+ Equity MFs are my recipe).

There are other minor goals such as Holidays or buying a car etc that we need to account for too. However the above goals are major and hence need to be looked at first.

Checklist

• Do I have enough insurance cover?

1. Life

2. Health

• Do I know what my recurring and non recurring expenses are?

• Do I have some money left after all the bills are paid every month?

• Do I know where I can trim expenses or increase Income? Or better still Both?

Taxes

• Am I utilizing all the tax breaks that im entitiled to?

Invesmtents

• Are my investments appropriate for my goals, time frame and my risk taking capacity or have I bought something that I don’t understand?

Many No’s to the above questions means that you should really take control of your finances better.

Suggestion for planning : Some investment sites offer planning tools, there are also softwares that can take care of budgeting. Actually if we are up to it a spreadsheet can do the job.

The article can be viewed on the magazine’s  site online here : http://www.industrialeconomist.com/January2012/44.html

This is a 2 part series on basics of Financial Planning that i wrote for Industrial Economist recently.

Financial Planning – A beginner’s guide:

Financial Planning is an active approach to taking charge of one’s future and plan for the same. Investors usually fret about market volatility, and  make piecemeal investment decisions. After some time they lose track of what they have done till  now and whether it is helpful for their future.

Destination : The Goal

Financial Planning starts with setting a destination ie a goal of what we want to achieve this could be a short term goal that you would like to achieve in next 1 – 5 years or long term like retirement after 20 years. These should be written on paper with the estimated cost for the goals today and should ideally be placed where you can see it.

Starting Point : Where are you now?

Now its time to see where we are financially. List your assets and liabilities also track your income and expenses so that you get a picture of your assets + monthly savings that you can set aside for your goals. Ensure that you track your income and expenses in  budeget sheet or diary or an online budgeting software so that you can see where the money is going. Most of us are likely not to have a great picture here as far as budgeting is concerned but that is not an issue. Taking up financial planning will improve your picture going forward.

Budgeting is an exercise that many would prefer not to do but it needs to be done and with the technology available today there are many free applications to download and use on your PC or mobile or cloud applications that will help you budget.  Usually by cutting small expense like eating out 2 times a week instead of say 3 times or going to one movie per month etc many save couple of thou sands that they did not know existed before.

The Road : Avoiding traffic jams.

These are the inevitable lemons that life would throw at us now and then. These are unplanned eventualities like Illness, recessions, having to buy a new car etc. While these are inevitable they are not hopeless situations and we can minimize the impact:

1. Control Debt : Ensure that borrowing is the last option, while borrowing for a house is fine as you save on rent and get tax benefits plus the security of having an asset that is your own, taking loans to buy gadgets is a bad idea. So is overextending on the home loan many people end up costlier house then what they can afford to pay for mortgage. This makes what is supposed be the peaceful life of living in one’s own house into a nightmare of EMI payment.
2. Insurance : All liabilities like Home Loans, Education loans need to be covered with a Term insurance  plan so that in case of any eventuality the family does not have to sell the house or be unable to pay.  Beyond this adequate insurance needs to be taken so that family does not suffer for anything and same lifestyle as today is maintained.  Term Life Insurance cost is very low and has to be compulsorily taken, the cost will usually be less than what one spends on mobile bill every month. Health Insurance is also a must for your family so that the entire familys health is covered to a large extent.
3.  Noah didn’t start building an ark after it started raining: Saving for a rainy day is understood by everyo ne what needs to be done is to save for say 6 months family expenses including all EMIs etc and keep the money separately. This will help in any emergency and help us face the emergency without panicking. Though 6 months expense may look big at first, we can start with 15 days  to one month of expense and work upwards. This is a mini goal by itself and many people feel the mastery over their financial future once they attain this.

Next week we will start the trip of financial planning and look at the major goals

You can view the article here : http://www.industrialeconomist.com/December%202011/36.html

You need a budget!

To quote Mr. Micawbers advice to David Copperfield “Annual income twenty pounds, annual expenditure nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds and six, result misery”

But most of think that we are actually saving i.e. we are spending less then we earn but if we ever were to write down our expenses every day we would be surprised surely after 365 days!!

Unfortunately many people think that they are earning well but in reality are not left with much. In advising clients I have seen that there is a tendency to think that they are ‘rich’. However when we try to chalk down what exactly was that they have saved compared to income some find that the savings is very little if at all. In fact in today’s world it’s not enough if we make 20 pounds and spend 19 result is not happiness but only 1 pound left!!

So, how does this happen. When we think about income we know it as salary is stable however expenses don’t happen monthly all the time. School fees are once in 4 months; Power is once in two months. Festivals, Holidays happen a few times a year and then there are the surprises. These are totally unpredictable what we can do is first record them preferably in advance. Here is how it can be done simply: List all expenses be it monthly, quarterly, annually, keep aside a certain amount for unpredictable’s. Now add up all of these and divide by 12. This is my monthly expense approximately.

See my Jan 2012 income and expense Just looking at this I feel happy because im saving 17000. Immediately I think of that great tablet pc which costs “only” 25000 Rs & rush to buy it with my “savings”.

What I conveniently forget is there are school fees due in February and the December Holidays happily spent with a credit card is due too. So when February ends I have only 12000 in hand still not bad but not as great as 17000 savings, right?

Now if we check what is due in March we see that since the old and faithful TV died, we need a new one so off goes another 21000, suddenly 2 big expenses one known ( Gym Fees) and the other unknown ( TV conking off) have now set us back to deficit.

If I had converted all my expenses to monthly then I would have known there is a deficit happening and be prepared for it instead of being negatively surprised at the deficit.

This is much more important for professionals or business persons whose earnings are never the same month on month. So they not only have to contend with jumpy expenses but jumpy income too & what’s more they don’t have an automatic savings plan or medical insurance like working class people do.

This article was published by the Chennai based Industrial Economist magazine in the last issue. Can be viewed online here http://industrialeconomist.com/curr/42.html

A very good interview by IDFC MF Dy CEO says that most investors come in when the PE ratio for the markets are in the highest band ie between 19-25 times earnings and get little or no returns for next few years which makes them disillussioned with both markets and investing itself.

What the IDFC folks have done it is created a market signal much like a traffic signal with Red , Amber and Green signals ( these are valuations so the index number does not matter for example at 16000 points if the EPS for index is 1600 its dirt cheap and at 12000 points if the EPS for index is 600 the markets are very costly..so just reading the index level doesnt tell the full story)

Red signals PE of more then 19 meaning markets are richly valued and risks are high

Amber signals fair  valuations at PE of >16>19

Green with less than 16 PE means markets are undervalued, they may be just undervalue at say 15 pe or highly overvalued at 12 pe.

Now a word of caution here markets simply dont fly from green to red offering a quick way to make money but sort of meander a long time at green and amber before suddenly shooting up which means that as usual patience pays. Also just because its in red zone doesnt mean you need to sell all your holdings because markets may be in red zone all the way from 19-25 thats almost a 30% range so they can go high and keep going higher too.

The main issue is that in green zone the valuations are low because mostly the news flow is negative, economy is slowing down, Inflation is high etc. These are not the times when investors generally prefer to buy but this is the only way to get good returns not when there is a slew of IPOs ,fund launches and everyone is painting a rosy picture.

Secondly green and amber zones are best for SIPs too as markets seems to stay in these zones a longer time frame than red zone which makes them ideal for accumulation.

The only hitch here is if the EPS of sensex keeps going down bringing the signal from green to amber to red without prices moving up, this remote possibility happens when earnings drop are significant but the good news is that while these can be bad for a single stock usually earnings of sensex are blended so well that chances of everything going wrong at same time is nil..even if it does like in 2008 markets fall rapidly and enter green zone again making the valuations attractive.

So an lay investor can use the PE ratio as a good valuation tool and entry point for both lumpsum purchase as well as SIPs to get superior returns. There are funds specifically designed that move from debt to equity or vice versa based on the PE ratios such as FT India PE ratio Fund of Fund, Principal Smart Equity Fund. FT India PE Fund for examples moves between Franklin Bluechip and Templeton India Income Fund based on the PE multiple being higher or lower and has given almost same returns as Franklin India Bluechip Fund over last 5 years with much less volatility.

The full interview by IDFC Dy CEO can be read here http://wealthforumezine.net/AMCSpeakIDFC091011.html

Mr Pattabhi Ram, a Chartered Accountant and academic was profiled in Mint recently. Proud to have clients like him.

http://www.livemint.com/2010/12/30191213/A-planner-adds-a-new-perspecti.html?atype=tp