New Year.. New Beginnings..

Human mind requires some kind of incentive to start anything afresh. Somethings which are not mandatory or made compulsory are never handled well. Self-discipline is one of the key challenges in voluntary activities. This is all the more accentuated in cases of finance and investments.

April 1st is a new financial year beginning. The Lunar & Solar calendar new years are just around the corner in the first fortnight of April. What better way to usher in new year than to make some serious commitments for the well-being of the two most important people in life.. YOU & YOUR FAMILY…

Let me jot down some common gaps which I found in various discussions in different forums. These are not necessarily an exhaustive list, but is definitely a starting point in case the reader identifies themselves with any of them.

1. Cash Flow: The first and the most fundamental part of any financial journey is to capture the cash flow. With the advent of cards especially credit cards, the flow can be uninterrupted and pretty regular. What starts off as a trickle soon snowballs into a waterfall. The investor who is embarking on the journey of financial well-being should first take into account the cash flow i.e. What are incoming (Salary, Rent Income, Interest Income etc) versus what are outgoing (Rent/EMI, lifestyle, school education etc..). This step is to just collect the data
2. Budget: Once the raw data is available, analyze them and understand your cash flow. It’s very easy to focus on the majors and identify potential money-suckers. But the main culprit would be the credit cards. Analyze your spending pattern and identify which are mandatory and which are discretionary. Consider to reduce the discretionary expenditure over a period of time. (One piece of realistic advice: Friends/Relatives who stick like ants to Jaggery wouldn’t be around when the money dries up). Once the analysis is complete, draw up a budget for 3 months and track how well you are performing as compared to projected expenditure. Refine your process every 3 months till you become comfortable with the same and you should be able to project upto an year’s expenditure
3. Loans: There are good loans, there are bad loans and then there are EGO loans.. Good loans include those spent on purchasing or refurbishing a home, buying a car, educational loan. Bad loans include personal loans taken to clear credit card debt, Credit card outstanding converted to EMIs, anything that is converted into EMI, Loan to finance the latest swanky phone,  Gold Loans (Ask any 60+ year old person, you will get your answer as to why this is bad). Now that we have set the ground rules clear, what is this EGO loan? Well, I define this to be any loan which is servicing an asset which was bought as part of EGO trip as compared to financial prudence. For ex: Stretching beyond one’s means to take a high-end apartment, Buying the latest iPhone when other loans are outstanding, Buying a high end car when the real requirement could be a hatchback etc.. Again, these are personal decisions. However, when an individual is planning to buy them, a careful analysis of the need v/s reality needs to be performed. To sum it up, in my view, the total outgo for all loans combined shouldn’t exceed more than 35% of income. A parting shot: No company or no one in this world guarantees a salary till EMI tenure is completed. Ask those who have lost job what it means to have an outstanding EMI.
4. Emergency Fund: Everyone requires an emergency fund in case of unforeseen circumstances like job discontinuity, job loss or other personal issues. How much is enough? Well, I feel that a bare minimum of 6 months of expenditure should be saved. This includes all household expenditure (lifestyle), EMIs/Rents, School Fees, Insurance payment for cars/bikes/health insurance etc.
5. Health Insurance: Everyone would have a company provided health insurance. However, it is important to have a personal health insurance plan. Why? Suppose, you join a startup where there is no health insurance cover? Or, suppose you want to retire at 45 where company provided health insurance ceases? It’s best to have one’s own health insurance plan for safeguarding against future medical costs.
6. Goal Planning: Identify and note down your goals. Get realistic about the numbers and do factor in Inflation. Draw up an investment plan for meeting your goals and be diligent about your investments. As a bare minimum, one should target to save 30% of income for their financial goals. Increase this number as your disposable income grows.
7. Have Fun: Beyond all this financial prudence mumbo-jumbo, it’s very important to have fun and live life to the fullest. Catch the latest movie. Go out with family to that resort or take vacation. Develop a hobby. Whatever you want to do, take a judicious financial call and enjoy. After all, one earns for enjoying with family and treasuring those lovely moments.

This is just the tip of ice-berg and each one of the above can be elaborated into much detailed points. However, the idea is to plant a seed so that the reader can consider if something applies to them and if so, some affirmative action is taken in that direction.

One last point: Invest on studying about the financial products you plan to invest in. This knowledge investment will stand you in good stead over time.

Happy New Year in advance… Happy Investing.. Have Fun !!

Do drop in your views/thoughts/suggestions/feedback about the same..

Stocks Portfolio Construction

In my previous posts, I have captured my thought process about selection of stocks as well as the reasons and rationale for the same. Over a period of time, I am trying to refine the decision making process and trying to simplify my overall approach. At one point of time, doubts started to creep in when the number of stocks exceeded 20. Was I over-diversifying or was I being too cautious?  Caught in this whirlpool, I decided to read up a bit and pick brains of few experts I hold I high stead. Along the way, I stumbled upon this wonderful article about a fund manager who manages just 12 stocks.

Now, my confusion just got too much and I decided I needed to do something about this and take the bull by the horns. I have a family, a career, my hobbies and many more such stuff, than to be worried about reading balance sheets. Having said that, having only 8 stocks and betting on them isn’t my cup of tea.So, what will I do?

I plan to have 3-5 mini portfolios each having a dedicated mandate. Across these portfolios (each can have up-to 10 stocks), I aim to encompass all Sectors, Market Caps, PSU/Private and Niche plays. I will define 5 portfolios with a specific mandate and a max. allocation as a relation to overall portfolio. These are the portfolios, their mandates and relative max. allocations.

1. Dividend Masters (max: 20%) – Comprised of mainly cash rich PSUs, market leaders in their own regard, providing regular dividends (even after 2016 budget announcements)
2. Bell-weather Giants (max: 40%) – Comprised of mainly bluechip Tech, Pharma, Banking or consumer giants who provide the stability to the portfolio
3. Growth Spurts (max: 30%) – Comprised of Mid/Small cap companies, niche play companies, undiscovered gems (atleast I hope so)
4. Agri Earners (max: 5%) – Comprised of companies catering to the agricultural development of the country. See my previous post for more details
5. Defence Savers (max: 5%) – Comprised of companies catering to the defence sector

This is my current thought process and I aim to play around with the percentages once I become more picky about the sectors I want to invest more in. Some ground rules for my stock picking would be:

• Dividend masters will be in the range of 10% (min) to 20% (max)
• Bell-Weather Giants will never go below 30% of my portfolio and shall be limited to 50% of overall portfolio at the upper side
• Growth Spurts will never exceed more than 50% and go below 20%
• Agri Earners and Defence savers will never exceed 10% each
• A particular stock will not be more than 15% of a portfolio i.e. each portfolio shall have at-least 6 stocks.

Having said this, I mapped our combined portfolio into this strategy and this is how it looks. Please note that I have churned some stocks and taken some strategic decisions on a couple of counters based on my understanding.

I am yet to invest into Agri or Defence sectors and this snapshot gives me the right impetus to focus my upcoming investments. With this strategy, I hope I will be able to beat the index and a potential MF returns by some percentage points.

I would like to thank my friend Rajesh Katikam for asking the pertinent questions which forced me to clarify my own thinking to come up with this strategy.

Dividends Bonanza

In the budget speech of 2016, Hon. Finance Minister introduced an additional 10% tax on dividend income once it exceeds Rs. 10 Lakhs. Majority of the companies have significant promoter holding, which means that Dividend income is a big source of income to these promoters. Currently, dividends are not taxed as only Dividend Distribution Tax is paid upfront by the company disbursing the same.

With this new, a lot of companies have rushed to announce dividends. Even PSUs have rushed to announce their dividends, which means the primary promoter which in this case is Government will stand to benefit significantly from these steps.

To share a perspective, I am capturing the list of dividends received or receivable in my

Going forward, one can expect that the dividends will be low due to the proposed taxation. The cash which used to be disbursed as Dividends will now reflect in the P/L statements. Would this translate into additional Bonus shares OR would companies consider buying out the shares? As an investor, I definitely hope that the companies continue to reward their stockholders through dividends. Pragmatically, I know I can expect lower numbers going forward, but I sincerely hope that they don’t stop giving dividends all together.

For now, invest the surplus wisely…

Goals Based Investing

Today, I want to cover my current thought process on Goals based Investing and share my current journey and how I am aiming to achieve my goals. Before I delve into the details, it is very important to understand that prior to creating such a plan, one needs to have a clear understanding of the cash flow. In other words, an investor should know the cash flow and mandatory commitments i.e. Budget.  The distribution of the funds across different goals needs to be thought-through carefully and with some planning, one can aim to achieve their goals with discipline and ease.

What are Goals?

Goals by definition is a milestone which one wishes to achieve. The goals in the context of this post define financial goals which any individual would like to achieve. The goals could be different at different stages of life. Each one of us is unique and hence, we will have our own preferences and priorities.

Some examples of Goals include Buying a House, Buying a Vehicle, Foreign Vacation, Children’s Education, Children’s Marriage and finally, the big one, RETIREMENT.

The list is a pretty exhaustive one and will appear daunting when you put them down to paper. However, the first and the foremost critical step is to actually identify the goals, define them and plan for the same. In this post, I will take through an illustration on how one could plan for a Goal and achieve their dreams.

Goals Demystified

In this section, I will try to explain how to plan for a goal. For example, let’s consider that I am planning for my child’s XI and XII education i.e. assuming that my salary would take care of everything till X standard.

Step 01: Define the goal: Goal 1 -XI and XII Education for xxxxxx

Step 02: Find out the current day cost. The easiest way to arrive at this figure is to talk to parents whose kids are in this stage of life. You can easily find them in your place of work or in your extended family or friends. Let’s put a number, say Rs: 400,000 for 2 years combined.

Step 03: Now, comes the most important part i.e. assuming a rate of inflation. Though many popular websites and authors advocate a 7-8% figure, I am personally convinced that this wouldn’t be sufficient. At a bare minimum, one should consider Rate of Inflation as 10%. For all practical considerations below, I shall be working with this number.

Step 04: Next, the other important factor is the assumption on the rate of return. Again, the verdict is out in open with figures ranging from 8% – 15%. Typically, most websites advocate a 12% – 15% as the rate of return for the instrument. Though this is definitely achievable over the long run, I would prefer to consider 10% as the rate of return to match my inflation.

Step 05: Now, let’s choose the instrument of choice for investing. In the previous steps, I am considering a post tax based return. Please don’t do the mistake of considering an instrument without the tax implications. This is extremely critical when you are choosing the instrument . For example, never make the mistake of considering FD for the investments, because of tax implications. Let’s consider that a FD returns 10% (some co-operative banks do give this rate). The real rate of return is 10% * (1 – tax rate). So, if one is in the max. tax bracket, this would work out to be 10% * (1 – 0.309) = 6.91% which is way below the inflation. In other words, your post-tax returns are lagging behind inflation and this is a huge risk, as you will not be able to achieve your goal.

For this post, I am considering Equity based Mutual Funds as the instrument of choice due to it’s tax friendly nature. Currently, Short-Term Capital Gains is taxed at 15% plus additional cess and Long-Term Capital Gains is tax free.

Step 06: Finally, determine the time you have for the goal i.e. Years. I would suggest that consider that you would require your money earlier itself i.e. atleast an year earlier. Say if I have another 5 years to go, I would consider the no. of years for investment as 4 years.

Now that we have our building blocks, let’s get to work. Let the math begin..

Goal 1: XI and XII Education
Current Cost (C): Rs. 400,000
Rate of Inflation (RI): 10%
Years to goal (Y): 5
Inflation Corrected Value (IC) = (C) * power((1+RI), Y) = Rs. 650,000.

Now, let’s plan the SIP required to achieve the goal. Goto SIP Planner in moneycontrol.

Key in the values. Expected Rate of Return as 10% (to match inflation) and Value of my investment after as 5 (years to goal – Y). Now, play around with the investment for the month until the maturity amount is shown to be closer to our desired value. For the example above, the investment comes to Rs. 8500.

Voila !! You have your own plan in place. Find a good diversified mutual fund and start investing !!!

Kids Marriage Planning

One final note on planning for marriages. Initially, I followed this approach to come at my goals’ figure. However, the final figure looked very very daunting and scary. I then decided to split the expenditure into 2 parts.

One part is entirely dedicated to Bullion i.e. decide how much of Gold and Silver you would require. Once this is decided, you can accumulate them over a period of time by buying 999 Silver or 24 Ct Gold Coins. When the marriage comes, you need to just exchange the silver and gold bullion and pay a small difference for making and wastage.

The other part is to determine the cash for the function, gifts, purchases etc and plan according to the aforementioned method.

Happy Investing !!! Stay Healthy !!! Stay Wealthy !!!

Stock Watchlist – Agriculture

Budget 2016 has set a clear mandate from the government to invest and improve the farming sector. This is definitely a very encouraging move as a citizen of the country as this sector feeds the nation. Shri. Lal Bahadur Shastri had coined the slogan “Jai Jawan, Jai Kisan“. I don’t think we can live peacefully in a country without either of them.

As an investor, I am interested in growing my investment and reaping benefits of the same over a period of time. If I am able to invest into the farming or agriculture sector and yet reap the benefits as a true investor, then it’s absolute sone pe suhaga. Some discussions with friends encouraged me to take up an exercise to identify potential sweet deals in Agriculture and related sector that could make it’s investors wealthy and happy.

The following is a selection of stocks which will be part of my watchlist going forward. I intend to invest them over a period of time and will make my investments public as and when I do that.

Disclaimer: I don’t hold investments in any of the stocks below except Kaveri Seeds.

Tractors – VST Tillers & Tractors Ltd:

• P/E: 17
• Div Yld: 1.03%
• Good OPM: 18%
• NPM: 12%
• ROCE: 30
• Zero Debt
• 53% Promoter holding
• Only 3 players – Profit to Sales: 12.5%
• Much better numbers compared to Escorts whose OPM is 4%, NPM is around 2% with some debt
• Prompt Tax payment @ 30%
• Excellent ROE
• Bangalore headquartered – Pass it’s HQ everyday on my way to work !!!

Agro-Chemicals – Dhanuka Agritech:

• OPM: 16%
• NPM: 13%
• ROCE: 30%
• RONW: 25%
• Almost debt free
• 75% promoter holding
• 3rd amongst peers

Fertilizers – Coromandel International:

• P/E: 15
• Div Yld: 2.58%
• Promoter Holding: 62%
• ROCE = RONW: 18%
• Reducing Debt
• Good Tax Payouts
• Profit Growth has been bad last 3 years, but best of the lot in Fertilizers
• WAIT AND WATCH in this sector as all companies have significant issues with profit growth

Seeds – Kaveri Seed Company:

• P/E: 15
• Div Yld: 1.92%
• NPM/OPM: 27% – Improving YoY
• ROCE = RONW: ~40%
• Promoter Stake: 58%
• Excellent Sales Growth, Profit Growth and ROE
• NOTE: I am an existing shareholder and hence, my views on this company could be biased

Aquaculture – Avanti Feeds:

• P/E: 12
• Div Yld: 1.36%
• OPM: 10%
• NPM: 6% – Very low as a business
• ROCE: 50%
• RONW: 43%
• Almost debt free
• Promoter Stake: 44% – a little low for my liking
• Amazing numbers in Sales Growth, Profit Growth and ROE
• Wait and watch – May add in dips

These are my initial 5 stocks of interest. I am yet to look for other interesting areas, but will welcome any further suggestions on specific stocks or areas of interest.

Watch this space for more updates !!!

 

Budget Shopping – 2016

What happens when luck meets preparation .. Lot’s of excitement. I had such an event on Feb 29 2016. While I was waiting for investing into the stock market, an opportunity presented itself on this wonderful day and I did some shopping prior to the budget speech.

The entire market was filled with speculation and I was drawn into some of those for sometime now. However, some sanity prevailed and I had a clear plan of what I wanted to do, IF something I was hoping for materialized.

Materialize it did.. I landed executing most of my orders before the Hon. Finance Minister started his speech. The only regret and I do mean it with a lot of pain is my inability to buy one stock which I was pursuing for sometime. Aurobindo Pharma. While a new opportunity will present itself, I am quite happy with the shopping basket and the price that I paid for my purchases.

Before I go further, I would like to quote Ratan Tata as I am a firm believer in Tata philosophy and Ratan Tata is definitely one of my idols.

Ratan Tata: “I don’t believe in taking right decisions, I take decisions and make them right.”

Without further ado, here is the updated portfolio of mine along with that of my wife’s.

Self Portfolio:

Spouse Portfolio:

Comments/Suggestions/Feedback/Questions are most welcome