Let the money compound. What we call a ‘mere’ 17 per cent return becomes a phenomenal 50x in twenty-four years. Only 17 per cent? What if it was, say, 15 per cent? Fifteen per cent would multiply your money 28 times in twenty-four years; 12 per cent would ‘only’ increase it 15 times. (Location 42)
Money is made largely when you sleep. If you listen to rumours, then the markets will crash every second year, and you should take your money out. Just doing that takes you out of the game, and you have no idea when to get back in. The end result is that you just watch the markets go all the way up regardless. (Location 48)
You don’t need that much money to make money. You can start with nothing, or very little, (Location 59)
The first crore you make will largely come from your income, from the work you do. Your profession will pay you a salary, or your business will generate the cash, or you’ll join a start-up, which is acquired and, voila, you have some money. (Location 74)
This also means in the first few years of your life, focus on just saving as much as you can. Saving is a complex beast. You can do it meaningfully by just creating fixed deposits each month. This may be supremely inefficient for taxes and all that, but let’s not focus on that just yet. (Location 76)
You take risk when the reward is meaningful. (Location 87)
Initially, your savings are meagre because early in the game you typically spend 80 per cent of your income anyhow. If the little you save goes into stocks, and stocks do badly, you’ll be miserable. (Location 89)
Instead if you put the money in fixed deposits or, even better, if you invest the money into learning more about your industry or job, buying courses online, or getting another degree perhaps, you’ll get more bang for your buck. (Location 92)
Note: Invest in yourself in the early days of the career
Initially, focus on increasing your income. When you get to a figure that’s respectable – say 8 to 10 months of expenses – that’s when you start moving incremental money into equity, or into other risky asset classes. (Location 96)
People with liabilities, dependants or those who don’t have a safety net must first focus on having enough in the no-risk bucket to allow them to sleep at night. (Location 144)
Many of us are naturally unconditioned to risk-taking. Does losing money, even temporarily, scare you? If the answer is a sheepish yes, then a higher amount of money in a risk bucket is unhealthy. (Location 145)
So whatever you have left, over and above necessities, use it for the things you really want to do. (Location 158)
To put it in investing terminology, if you’re salaried, you have a leverage factor of 1 ⇒ the amount you work = a salary of x. More work = more pay. (Location 168)
As you grow older, you gain leverageable assets – your experience and your contacts. You can now work less (relying on your experience and contacts) and earn just as much, or work just as much and earn more, (Location 169)
If you start a company, you can pay other people to work for you, and earn you money. (Location 171)
When your money works for you, you further increase your leverage, (Location 173)
Focus on increasing your leverage. Whether it is by active investing or working or starting a company, your aim is to build assets (money or business ownership) that can be leveraged. (Location 175)
The more leverage you have, the less taxes you pay as a percentage of income. (Location 185)
Equity investments are always taxed at lower rates than corporate profits, which in turn are taxed at lower rates than consulting income, and salaries. (Location 191)
saving a little more has a greater impact on your returns, in the long run, than simply finding that fantastic stock, or bond, or mutual fund. People focus too much on the latter aspect. It’s the former – saving more – that has a greater impact on long-term goals. The saying goes: If you have an hour to cut a tree, you should spend 50 minutes sharpening the axe. But it’s boring! (Location 224)
Note: How much money you put in saving matters more. By simply raising the amount you save by 10% each year can help you save more even if the investment tool has lower rates of return
Carve out a little amount to play with in markets and have some fun. This should be less than 5 per cent of your money. Just use that as a sandbox to do things that sound interesting. Buying a stock. That new IPO. Some ‘futures and options’. It’s an education, and it’s a source of entertainment. But it’s probably not going to enrich your life meaningfully in monetary terms, at least not at first. (Location 230)
Note: The lessons learnt from such a sandbox will teach invaluable lessons about the stock market
First, you need an emergency fund. This is a fund that meets your expenses for about six months. (Location 245)
Once you have that, park it in liquid funds or fixed deposits. Put it in a place that you can withdraw cash from within 24 hours. Do not consider this money part of your net worth any more. (Location 248)
Note: This is about the emergency fund. (6 months of expenses)
Effectively, not having an emergency fund is like a car driver refusing to wear a seat belt because it feels less comfortable. (Location 261)
Now, when you buy insurance, just buy term insurance with no money back if you survive. That’s the simplest cheapest solution. Everything else will cost too much, so you’ll buy too little of it and be under-insured. (Location 357)
Note: Life insurance is only required if you think that having one less breadwinner will bring problems for your family or dependents
Why can’t I take a policy where, if I survive, I get my money back? There are such policies, but they offer you a big problem – not enough insurance. (Location 359)
Then, buy a ‘super top up’ plan. This is a simple concept – if you get hospitalized and the bill is up to Rs 5 lakh, you pay. Beyond that, the insurer pays. (Location 371)
Note: Regarding health insurance
If you’re looking for insurance for your parents, don’t add them to your plan. It makes things altogether more expensive. Buy a separate cover for them, which will reduce the overall cost. (Location 373)
Note: Health insurance
Don’t just say you are covered because your company has an insurance plan. If you lose your job, you will lose the insurance as well, and that could be the worst possible time to be not-insured. (Location 375)
Note: Health insurance
The logic of buying into mutual funds is simple. As the funds pitch it: Give us your money and we’ll manage it for you because you have no idea what to buy to make a profit. (Location 384)
But sometimes, the funds, or rather, the people who run them, decide to enrich themselves at your expense. Doing good for themselves takes higher priority over doing good to you. (Location 392)
Give your adviser the money to manage. It was just easier, and the adviser would execute transactions on your behalf and you didn’t face the logistics problems of finding time, or making the effort to call your broker. This concept expanded into something that’s now called a mutual fund. A bunch of investors would pool in money, and a manager would invest the pool. Every day, the pool had a collective value, and each investor held a percentage of that value, based on how much she had invested. (Location 409)
This simple concept led to the first mutual fund. This happened way too long ago, in 1774, in Holland. (Location 413)
The Indian mutual fund story started centuries later, in 1963. The Unit Trust of India (UTI) was formed… (Location 414)
In 1964, UTI launched India’s first mutual fund scheme, the US-64. This was a huge deal in the sense that people could invest small amounts and still make lots of money. But it was the most horribly run system you could imagine. Or rather, it was run a lot worse than you can probably imagine. What’s more, it was a monopoly. No private sector organization was allowed to run a mutual fund. So there was no way to improve things. The fund bought stocks, but it… (Location 418)
But this NAV was apparently a figment of someone’s imagination. It turned out there was no relationship between the NAV and the actual underlying valuation of the stocks held by the fund. This was possible largely because regulators were non-existent. Even when SEBI (Securities and Exchange Board… (Location 423)
UTI faced competition only in 1987, when SBI (State Bank of India) and Canara Bank were allowed to set up… (Location 426)
The fund would regularly declare an NAV that was much higher than the value of the stocks it held. This was fine while there were cash inflows with more and more people looking to invest. Any redemptions of units at NAV could be funded out of the inflows, which were coming to UTI at the same NAV. But after 1998, the fund saw larger redemptions compared to purchases, which meant that the fund had to pay out net cash at the higher NAV. In 1998, for instance, the NAV per unit was declared to be Rs 14.25 (the price at which you could sell units).* But the underlying valuation of the stocks translated to just Rs 9.68! That meant that the fund was trading units at a far higher price than it could afford. Why would it do that? This was primarily because of ego. The UTI management didn’t want to tell the world that the NAV had fallen because of market conditions. That would make them look bad and incompetent at managing investments. So they did the next best thing: Pretended everything was fine. Unfortunately for the UTI management, people figured out that it had set the NAV way above intrinsic value. So the redemptions continued to be higher than the inflows. The government knew this and tried to help. The ethical way to set this right would have been to force UTI to reveal the true NAV. This would have hurt some investors but at least, it would have anchored the fund to some… (Location 428)
This kinda-sorta helped, but then, there was an avalanche in 2001. After the US dotcom bust of 2000 and the Ketan Parekh scam (also 2000), stock valuations plunged 60 per cent. This was horrible and UTI cancelled its dividend because it didn’t have the money to pay it. The government had to step in and ‘rescue’ the fund. So it offered investors two choices: We’ll pay you Rs 12 per unit (or Rs 10 if you have more than 5000 units). Take the money upfront, or take it in the form of a government-guaranteed tax-free bond for five years at 6.75 per cent interest. In return for the bailout, the government took over all the shares owned by UTI’s US-64. The value of those shares at the time was much less than Rs 10 a unit – in fact it was around Rs 5.81.** So it looked like they were doing investors a favour and ‘bailing them out’. Investors who exited felt like kings – the government paid over Rs 8500 crore in 2003 for the bailout, and the shares were worth a lot less than that at the time. The kicker: More than a decade later, the government would end up earning a total return of over Rs 1,00,000 crore from those shares, which included some blue-chip private companies, as well as many duds. (Location 443)
the rule is that mutual funds must reveal their portfolio in full, every month. (Location 455)
we learnt you couldn’t ‘guarantee’ a dividend or return, the way UTI did. This is why mutual funds today can’t tell you how much they can give you tomorrow, even if they hold only cash. (Today’s NAV is fine. Tomorrow’s a no-no. Absolutely no guarantees of any sort can be given about the future.) (Location 456)
investors should probably have not taken their money back when the government made that offer. Instead, they should have demanded transparency and accepted a lower NAV. (Who am I kidding?) This would have given them much higher returns later. (Location 458)
Note: Regarding the payout offered by the Government of India when bailing out UTI
the saga of UTI is why Indian mutual funds are regulated the way they are. This is why regulators are so careful to outline what mutual funds can and cannot do. (Location 461)
UTI did nasty things – committed outright fraud in fact – and got away clean as an institution. The government did a bailout. Many UTI executives continued to be heavyweights in the finance industry. (Location 462)
a dividend pay-out for a mutual fund is the same as no dividend – you get some money, but your fund value goes down by the same amount. Note: This is why mutual funds that distribute dividend are now called ‘Transfer of Income Distribution cum Capital Withdrawal Plan’. (Location 494)
the government has very strict regulations for organized mutual funds. They must have a sponsor (usually a bank), a set of trustees (some of whom are independent persons), and an asset management company (AMC) that runs each mutual fund through a fund manager who works for the AMC. (Location 498)
Every fund has to publish a clear mandate that defines the types and sizes of stocks and other assets it can buy and hold, the maximum it can hold in cash or non-core assets, etc. It has to declare its NAV daily, and it has to allow redemption at that NAV. Every AMC can have only one fund for one type of investment, which means only one large-cap equity fund, one small-cap equity fund, etc. (Location 500)
Many websites out there rank mutual funds based on ‘performance’. How well has a fund done in the recent past? Take these funds and rank them all by one year returns and choose maybe the top two or three. Very quickly, you realize this is a losing strategy. You’ve just selected a fund that got supremely lucky, and after you got in, you see that the subsequent-year fund performance has been terrible! (Location 508)
‘AUM. Assets Under Management. How much money the fund has. Rs 1 crore is like nothing. There’s no point going with tiny funds, where the manager can’t even justify a salary at his one per cent fees. At least 100 crore or more, please.’ (Location 514)
Note: The value of Rs 1 crore is, in rough words, the value of the fund. It is too low for a mutual fund
We need the funds that rank well in the three year and five year time frames. Not just the one year. (Location 519)
We have something called the BSE Sensex and something called the NSE Nifty. These are indices – groups of stocks, which contain the top stocks of each stock exchange. (Location 558)
most mutual funds struggle to beat the Nifty. And no matter when you look, the Nifty index always seems to be consistently among the top performers. (Location 563)
An index mutual fund is simply a fund that follows an index. What if a mutual fund just invested in the top 100 stocks as reflected by the Nifty 100 index? If you bought that fund alone, you are likely to be in the top performing funds. (Location 564)
Fees are typically linked to high fund manager salaries, a research team, etc. With an active mutual fund, you’ll need research analysts to draw up projections, talk to management, get street feedback about a company, etc. With an index fund, you have no such need. You just invest in the index companies. The fund doesn’t have a choice because that’s what the mandate is. This reduces fund management fees. (Location 566)
A typical fund that charges 1 per cent asset management fees will earn Rs 10 crore when it has Rs 1000 crore under management. This pays for all the salaries. Given lower staffing needs, an index fund that has Rs 1000 crore AUM might only charge Rs 2 crore as fees – which is 0.2 per cent. (Location 569)
But with only 0.2 per cent expense ratios, there’s no room for commissions. So, no one pitches index funds to you. (Location 576)
The ETF or Exchange Traded Fund is an index fund that’s traded on a stock exchange. Instead of buying directly from the mutual fund. (Location 585)
The ETF is just an index fund packaged to be sold on the stock exchange. You can buy units directly on the exchange, from other people who want to sell. This is different from a mutual fund which you transact (buy or sell) only with the AMC itself. (Location 587)
You might want to add an international index, such as Nasdaq100, to the mix. There are mutual funds that allow you to access the international indices, relatively cheaply. Plus, this would give you a hedge against the rupee getting weaker because you own a dollar asset and, over time, the rupee has gotten consistently weaker. (Location 597)
mutual funds can buy a lot of things. Stocks. Bonds. Fixed deposit–type things. Gold. Gold-backed bonds. (Location 621)
such funds – called liquid funds – have given higher returns than fixed deposits. And remember, a fixed deposit gives interest that is taxed. I could keep money in a liquid fund for years and not pay any taxes till I sell. (Location 640)
Note: Liquid funds - Such mutual funds which invest in other types of instruments too, not just stocks. They’ll probably buy bonds, lend money to government, etc
they can do a whole lot of things. Here’s a list: Equity funds: Invest in stocks • Large-cap funds: We’re going to invest in the largest 100 companies for the most part. Largest in terms of market capitalization, meaning what you would get if every single share of the company was sold at that price on that day. • Mid-cap funds: Okay, we’ll go slightly lower. Stocks 101 to 250, in terms of size. • Small-cap funds: We love to inflict pain on ourselves, so we’ll scrape the bottom of the barrel. Potentially huge returns but also big risks. • Large- and mid-cap funds: Tell me you’re cheating. Which one are you? (Both, they answer.) • Multi-cap funds: We can do a little bit of everything. But we’ll have everything, from pickle to main course to dessert. • Flexi-cap funds: We can buy whatever we want, okay? Debt funds: Invest in fixed income • Overnight funds: Invest in stuff that if you put money and take it out tomorrow, you’re unlikely to lose money. Very complex stuff, which is mostly interbank instruments. • Liquid funds: Buy bonds that ‘mature’ in three months or less. • Ultra-short-term, low duration and short-term funds: Fancy names for funds that buy fixed income securities targeted to mature between three months and three years. • PSU and banking debt funds: Give loans to the public sector, or banks only. • Gilt funds: The government is your best friend if you’re a Gilt fund, and you aren’t allowed to have any other best friends. • Dynamic bond funds, corporate bond funds: You already hate this book, don’t you? • Credit risk funds: Just invest in equity, yaar. Really high-risk stuff that Nobel Prize winners lose money in! Hybrid funds • We’re going to cheat and do a bit of the debt thing and a bit of the equity thing and call it aggressive hybrid and conservative hybrid and all that. • Why? We can charge higher fees than doing them separately. But there’s a better explanation: Sometimes it helps keep things simple. A 20 per cent equity, 80 per cent debt fund might be the right fit as a single product for someone who doesn’t want too much of an equity exposure, but not too little either. The long-term returns of these funds tend to beat fixed deposit returns without adding substantial risk. • Arbitrage funds: A special kind of tax-protected fund that invests in equity stocks, but also goes ‘short’ (sells the stock with a contract that settles on a future date). This provides low-risk arbitrage, and the returns tend to be the same as debt funds of the liquid or ultra-short-term sort. The tax advantage is that you get taxed on these funds as if they were equity funds, which is far lower than taxation on debt funds. (Location 671)
Note: Types of mutual funds
You have to look at the category of the fund and the kind of stocks one is allowed to invest in. Additionally, you’re going to need to check if the fund actually buys in accordance with the mandate. If the largest holding in a small-cap fund is HDFC Bank (which is among the three largest and most valuable Indian stocks), you know there’s something wrong with this story. The fund has just become an ‘index hugger’, a term that indicates when a manager simply buys the top index stocks in large quantities just so that his fund can keep pace with the index. (Location 699)
there’s usually a direct proportion between risk and reward. That means this: The higher the reward, the… (Location 703)
Higher rewards usually involve higher risk, and if you think about it some more: • The highest reward in the first half of 2021 was in bitcoin. And this fell 50 per cent in less than a week, in May 2021 alone. The risk is that the price can wipe out your capital before you know it. (Volatility.) • Equity, over long periods of time, has given superlative returns. But there have been 30 per cent losses in the short term as well, if you watched in the interim. • The lowest risk seems to be in short-term government securities. The government won’t default. But the reward is just as low. (Russia and Argentina have also defaulted on government bonds so even these are not totally safe. Nothing is.) (Location 736)
What should make you suspicious is the offer of a high return at a ‘low risk’. That just does not happen; (Location 743)
Buy a Nasdaq 100 index fund. India currently doesn’t have a great set of funds that target other countries, but Indian investors can invest rupees in a Hang Seng Index ETF (covering Hong Kong), a China fund by Edelweiss and a set of funds that combine global investing with Indian stocks, from houses like DSP and Parag Parikh. (Location 744)
SEBI saw this and in 2013, the regulator decreed that every fund must also offer schemes in a no-commission mode. They called them ‘direct’ plans. No commissions would be made from such a plan, so the ‘expense ratio’ would be lower. All current commissions paying plans would be called ‘Regular’ plans. (Location 808)
regular funds underperform by a lot more than just commission-based differences. (Location 823)
The thing is that people don’t like to pay the adviser directly. So they end up getting sold the ‘regular’ funds instead. This way you don’t pay from your pocket to the adviser. You pay in a complex, hidden way, and you actually pay a lot more! Even worse: You pay for life (as long as you’re invested). (Location 826)
If you buy from a site that has ‘direct’ in its name, this usually means you will get the ‘regular’ plan. (Location 830)
buy directly from the website of the mutual fund itself because the fund has to offer this or else, it gets a stern talking-to from Sebi. (Location 832)
mutual funds also get money from their investments – the stocks they buy pay dividends. The bonds they buy pay interest. This ‘income’ can be passed on to you, or reinvested back into the fund. You can choose to get this income as a dividend, by choosing the ‘dividend’ plan. This means the fund must pay out dividends regularly, and you get the income. This income is taxed (as of 2021). (Location 834)
If you choose the ‘growth’ option, you don’t get any income, and the fund will use that income and reinvest it right back. This is great – you don’t pay any taxes, and your money compounds itself. (Location 838)
Why would anyone choose ‘dividends’? Again, this is history playing mean tricks. Earlier, dividends were not taxed at all, but selling a mutual fund was. So you wanted dividends even if it meant taking them out and reinvesting them back into the same fund. There were even ‘automatic dividend reinvestment’ options that did this for you. This gave rise to even ‘daily dividend’ options in mutual funds – when you could get a dividend every single day, and reinvest that back. (Location 839)
The growth option is simpler. All the money stays in the fund, which reinvests any money it receives. If you want some money, you sell a few units, and that money is a ‘capital gain’, and gets taxed at a lower rate than dividend income (if you’ve held the fund for over a certain time period). (Location 844)
So the simple rule, even if you want ‘income’ from your funds, is: • Buy the growth option • Sell a little every month or quarter, and take home the income Over time, this is a far more tax-efficient strategy. (Location 848)
You would think a fund can be bought or sold any time you wanted. That’s only in open-ended funds which are sold and redeemed directly by the fund house. But there are other cases where funds are ‘closed-ended’, where you can only buy in a New Fund Offer, and then at no other time. Even selling, or redemptions, are allowed by the AMC only after a period of time. (Location 855)
Why would anybody buy a closed fund? This allows people to lock their money in for a fixed period of time. Sometimes it can help save tax. The Indian tax laws allows you to adjust your purchase price up for inflation for long-term capital gains in debt funds. But a year is considered to be between April and March. If you buy a fund in March 2021, and it is sold in April 2024, the tax department thinks four years have passed, which gives you four years of inflation that is not taxed. For a return of 6 per cent where inflation is 4 per cent, the taxes you pay can drop substantially with closed-ended funds. Closed-ended schemes are often sold aggressively. That’s also because they provide high commissions. After all, if you’re locked in for three years, then it’s three years of fees that the AMC can see, so they share higher commissions to attract more distributors. As a buyer, you might end up losing all the tax benefits to higher commissions! (Location 857)
Given that mutual funds publish their portfolios every month, you can quickly see what lies within the portfolios of each of the funds you own. The red flags are: (a) Perpetual bonds with a ‘call’ date: There are banking bonds and other perpetual bonds where the concept is: We’ll take your money and never pay you back the principal (hence, perpetual). We’ll pay higher interest rates (if we pay at all). Also on some day in the future we have the right (but not the obligation) to pay you back the principal and cancel the bonds. Mutual funds buy such bonds in the hope that they will give great returns, and still be bought back (which returns the principal). After the fiascos of Yes Bank and DHFL, where the company could not pay back the money (either principal or interest), these mutual funds had to take a hit. More meaningfully, you, as an investor in such funds, would have taken a hit. Perpetual bonds can be dangerous. (b) Last year’s returns don’t matter: People buy funds after they have done well in a given year. But debt funds are slaves to interest rate cycles. If rates fall, they make money. If rates go up, they lose money. Here’s why rate cuts are profitable for debt funds. Say, there’s Rs 100 in fixed deposit at 8 per cent interest, maturing a year later to yield Rs 108. The next day, the Reserve bank of India (RBI) cuts interest rates so much that new FDs are now offering 6 per cent. If you could sell the FD, then someone should be willing to pay Rs 101.90 for it, to get the same 6 per cent since if you invest 101.90 and get back 108 in a year, your return is 6 per cent. This is why, when rates go down, the price of a bond (which is like a tradeable FD) goes up. Debt funds hold portfolios of bonds, which gain value when rates fall, and lose money when rates go up. After a cycle has plateaued, you can expect interest rates to reverse direction, or maybe remain stable. The debt funds cannot make the same profits they did in the past. Disappointments then cause people to exit, possibly at the wrong time, because the cycle may change again. (c) Companies on the verge of disaster borrow and default: Reliance Communications was backed by one of India’s richest families, but it still went bankrupt. When the trouble becomes known, a mutual fund manager may no longer be able to sell securities issued by that company. So they remain in the fund’s portfolio and this can hurt you as an investor if they default. You must assume the mutual fund architecture requires all risk be taken by you, the investor. The debt fund, which is considered safe, might be so 99 per cent of the time. But live long enough, and chase enough in the way of high-return debt, and you’ll experience the other 1 per cent, which they don’t tell you about. (Location 876)
SEBI has changed how debt funds need to reveal their risk in two directions, to the public. • Interest rate risk: If there’s a change in interest rates, how heavily is the fund impacted? The answer to that lies in how much time is remaining on the bonds they hold, in terms of time to maturity. A more mathematical term is ‘duration’, which tells us how much impact the bonds will see in the price if the interest rate were to change. SEBI divides this into short term (duration of less than one year), medium (up to three years) and long term (more than three). • Credit risk: This is effectively the risk of your not getting your money back. The risk is on the unitholders. So they classify ‘low’ credit risk as only the most pristine of securities. (Government bonds and very highly rated PSUs and corporates will qualify.) Medium credit risk is just a couple notches lower in terms of rating. Everything else is ‘high’ credit risk. (Location 898)
A fund can only choose to be in one of these boxes. If the portfolio they hold changes over time, and they land up with higher risk, they are required to inform unitholders. (Location 920)
Note: This is one of the regulations on mutual funds
What you should do is select only the low- and medium-risk boxes in either interest rate or credit risk, especially when you don’t understand the debt market. (Location 921)
Portfolio Management Service (PMS). Here, the SEBI mandated minimum investment is Rs 50 lakh, and the manager gets to decide how to deploy your money, much like a mutual fund, but with two specific differences: • The investments are made in your name, so you retain the ownership and voting rights. In a mutual fund, it’s the fund that owns the stock and will vote – you have no say. • The portfolio manager can also take a portion of profits as his fees, apart from an annual management fee. Mutual funds cannot share in the profits of your investments. (Location 932)
Such services, however, may not have the transparency provided by mutual funds in terms of returns, what they hold, and how often they churn. This information must be obtained privately from each PMS separately. It is suitable for those that have the ability to understand their investments better so that they can take the kind of risk they’re comfortable with, while a manager does the heavy lifting. Or, in the case of an asset allocation-style PMS, the investor wants to outsource the act of deploying money into a combination of safety and risky investments according to their own risk profile. (Location 945)
Note: Some more on Portfolio Management Services (PMS)
There’s also the concept of an alternative investment fund (AIF). Such investments allow people to invest in early- or late-stage private companies (venture capital) or in fixed income instruments from corporates. (Location 949)
There’s another variety that allows people to invest in stocks or derivatives, with a little twist: Leverage. In certain cases, markets allow you to invest one rupee and benefit as if you had invested two. If the investment doubles, you make four times your money. In the same vein, if the… (Location 951)
Note: Some more on Alternate Investment Fund (AIF)
The concept of PMS and AIF is for someone who needs special attention compared to a mutual fund investor. Often, people already have mutual funds and dabble in a PMS in addition. Many use PMS (like ours) for asset allocation and discipline. In general, avoid over aggression and promises of… (Location 957)
Work on asset allocation: How much debt (low risk) and how much equity (high risk) should you own? The answer to this question lies almost entirely in how much time you have left before retirement (or to any goal). a. More than ten years left: You can go more than 80 per cent equity. b. Three to ten years left: You can go between 50 per cent and 80 per cent equity. c. Less than three years: You can go for 30 per cent equity or so. d. If you don’t want to know, just use 50 per cent equity, 50 per cent debt. 2. Second, work on the equity allocation. a. If you don’t have time, choose index funds for equity: i. 33 per cent India top 50 ii. 33 per cent India second rung iii. 33 per cent US top 100 3. Fixed income fund choices – a banking and PSU debt fund and a gilt fund work reasonably well. 4. Always go for… (Location 964)
Note: A factor to consider when building a fund portfolio
AMC: The asset management company. Or, the company that takes the fees from the mutual funds you invest in, and actually… (Location 979)
‘Assets Under Management’. This is often a fund manager chant. AUM is essentially all the money the… (Location 980)
Expense ratio: How much does the mutual fund pay the AMC? The answer is the expense ratio, or the TER (the ‘total’ expense ratio). Total, because you have different kinds of expenses – the management fee,… (Location 982)
NAV: The net asset value of the fund. You buy ‘units’ of a fund. If a fund has 100 units and the stocks it owns are worth Rs… (Location 985)
SIP: A systematic investment plan. The idea is that if you invest regularly in something, it’ll grow to make you a lot of money. A SIP makes a lot of sense, unless you already have a lot of money to invest, (Location 991)
Lump sum: This is when you put in a single investment rather than promise to do a regular SIP. You could do it with a lot of money, or with very little. An SIP is, in fact, a set of lump sums invested over time. (Location 994)
SWP: The systematic withdrawal plan. Invest once, and take out money regularly. This is for the kind of people that have got a salary forever. (Location 996)
STP: The systematic transfer plan. This is where you invest in one thing but withdraw from it to systematically invest (transfer) in another thing. (Location 1001)
CAGR: The compound annual growth rate (CAGR) is simply a mechanism to understand how one particular investment has performed. If you invest Rs 1000 and it becomes Rs 2000 in five years, then the CAGR is about 14 per cent. The formula is: Amount = Principal × (1+CAGR)^Period (Location 1005)
XIRR: A complex term that’s an extended internal rate of return. Think of it like this. I invested Rs 1000 five years ago and it became Rs 2000. What’s my return? Simple – run a formula and it’s roughly 14 per cent per annum (CAGR). But what if I did a monthly investment of Rs 20 for five years, and it became Rs 2000? You might think – hey, I invested Rs 1200 (sixty months, Rs 20 a month) but I only got Rs 2000, so shouldn’t it be around 10.7 per cent, if you use the return calculator? No. Your return is a whopping 20 per cent. This is because the sum is invested over time, rather than all at once. The Rs 20 you invested sixty months ago has earned interest for that whole period while the Rs 20 you invested last month has earned interest for only one month. (Location 1007)
The XIRR tells you what kind of returns you have made on your spread-out investments, assuming that all your investments had the exact same return. (Location 1014)
On Life Insurance, the question you must really answer is: If I die today, how much will my dependants need to live the rest of their lives? The answer is different for different people, but take a rough calculation of 40 years of expenses and account for inflation. (Location 1030)
We aren’t including real estate or gold in these calculations. Those are different beasts. I wouldn’t recommend either purely as an investment. You buy a house to live in, sure. Beyond that, dabbling in real estate is like running a speculative business. (Location 1035)
First, if you don’t know what to do, just put 50 per cent of your money in the risk bucket, and 50 per cent in non-risk. This is simple enough. (Location 1038)
You can make a quick estimate on how much you’re going to need for their college expenses. If your child is eight years old, then fees for college will be needed ten years later, when she’s eighteen. If you think a college education costs Rs 40 lakh today, you’ll need around Rs 80 lakh then. This is not as difficult to achieve as you may think. Starting from zero, you can invest Rs 35,000 a month, and at 10 per cent returns, you’ll get there in ten years. (This assumes you can scale up the savings by 5 per cent extra every year.) (Location 1043)
If you spend Rs 1,00,000 per month today and you’re thirty-one years old, you are likely to spend Rs 4,00,000 per month or so by the time you’re sixty (at 5 per cent inflation). To generate that much, and then more, for the rest of your life, assuming you live till the ripe old age of ninety, you’ll need Rs 10.44 crore at the time you retire. A simple formula for you is: Amount you need = Annual Expenses Now × Years remaining to retirement × 3 Note: Only apply this formula if you have at least ten years left to retirement. If you’re closer to retirement the standard formula doesn’t work; you will need more money. (Location 1053)
Put about 30 per cent of your post-tax income into savings, and if it grows at 10 per cent, you should see yourself reach the Rs 11 crore mark by the time you retire. And then, as you grow older, you want to reduce your risk. In your thirties, you can take higher risks, so even 100 per cent equity allocation is okay. In your forties and fifties, you may need to reduce the risk you take. Taper down to 20 per cent equity by retirement. (Location 1083)
The passive route is for those who don’t have the time or inclination or skill. Here you know what has to go into equity and what is in debt (from the strategy discussion). Then, you can just use a combination of Indian index funds – a large-cap index fund, a mid-cap index fund and an international index fund. At the time of writing, we’d suggest a Nifty Index fund, a Next-50 Index funds (ICICI has both) and then, a US Nasdaq 100 Fund (Motilal or Kotak). On the fixed income side, you choose a simpler mechanism. Government securities for the long term, since they aren’t likely to default and have some safety, and PSU and banking debt funds for the short term. These may provide a slightly higher return sometimes, but there’s less fear of default, given the bank and/or PSU tag. (Location 1098)
For actively selecting mutual funds, you need to regularly assess performance – perhaps once a year, or once in six months. Then a careful selection of top funds in each kind of strategy makes sense. Some mid-cap, some small-cap and some large-cap, with perhaps a tactically temporary addition of certain sector funds when a sector looks poised to change direction. Add in international and gold funds and you have a lot of choices. (Location 1108)
you can use different instruments, such as gold bonds, or gold mutual funds, which save you the trouble of handling physical gold or trusting jewellers (remember Nirav Modi is a jeweller!). The best might be a sovereign gold bond, issued by the government – this bond gives you interest and pays back the price of gold in seven years after issue. The fundamental issue with gold is that it’s actually an instrument of fear, a hedge against inflation, or a nasty government. Increasingly, though, as the world gets more financially aware, it makes more sense to bet governments will survive. Gold is one of India’s largest imports and the government is trying hard to reduce this. Over time, if they are successful, the price of gold too will correct downwards. Having said that, it’s logical and better to invest in a productive asset instead. Stocks and bonds provide dividends or interest, and contribute to economic growth. (Location 1129)
Fixing your portfolio Typically, a lot of us have done strange things in the past and we have no idea where to begin to fix these. So 1. Get a handle on things: Find out where your money is, and put that down on a spreadsheet. Tabulate all the mutual funds, stocks and other investment you own. 2. Build your strategy: Get yourself a debt to equity ratio based on your goals, and thought processes, as described above. 3. Decide on tactics: Will you continue your current investments or move them to a more passive set? If you stay, should you just get rid of the weakest investments? My view is that if anything is less than 1 per cent of your portfolio, it’s not worth keeping – so you could use that as a starting point to re-evaluate your current portfolio. 4. Plan a transition: Once you know your debt–equity ratio, you might decide you hold way too many funds or investments. If that’s the case, plan a transition into what you will do next. You may need to plan for taxation, transaction costs and timing. This can be done over months or quarters, rather than all at once. There are many online resources to learn and grow. Always remember this: If it’s too complicated to understand, you shouldn’t have it. (Location 1137)
Get all your information together in one place. Bank accounts and numbers, demat and trading accounts, mutual fund accounts, and so on. Put all this information in a spreadsheet and ensure that at least one other person has access to this spreadsheet. Preferably two persons. (Location 1318)
Note: Things to do ensure that my death does not impact my family
Use joint bank accounts: Get at least one joint account with your spouse. In a joint account, either person can operate the account. (Location 1328)
Set up nominees: For bank accounts, mutual funds and demat accounts, you can set up a nominee. A nominee is a person that the account will be transferred to in the event of your death. (Location 1330)
Tell your spouse: You need to inform your spouse or a close family member about how much money you have and where it’s stored. (Location 1335)
Keep key contacts: If you have an insurance agent, a financial adviser, or even a deeply trustworthy friend, please ensure the contact details of such a person are available to your family. (Location 1338)
Once a quarter, get yourself a tall drink and review the above information. (Location 1340)
You can only will away property you own. If you have inherited any property, you can’t will it away. You can sell it and then use the proceeds to buy something else, which you can then will to whoever you like. (Location 1361)
Sometimes, however, you will need to be the one doing the transition. This could be a friend or a family member who passed away, and you’re now being asked to help. This is when you need to do a few things. Identify the assets: This is complex, if the person has left no records. You can use the person’s phone to check SMS logs for messages from banks, and then connect with the banks to find out more details. You can also check the person’s emails to see if there are loans, bank accounts, etc. Everyone who has a demat account or a mutual fund will have their details in NSDL or CDSL, the core depositories in India. Both provide something called a consolidated account statement (CAS) downloadable from their websites, if you provide a PAN number. You can use this to cross-verify what they own. Some insurance policies may also be available in such reports. (Location 1366)
Physical assets are where you will need to see the items – a car, a house, or gold. You must find the ownership… (Location 1372)
Plan the transfer: For all accounts that have nominees, you must identify the nominees and have them take possession of the accounts. Then the money and proceeds can be transferred to the legal heirs. Some people may not leave a nominee in their accounts. For them, based on how much money is involved, you might need to work to build the following documents: • If they have left a will, then the will must be probated, a concept that allows a court to say: Yes, indeed, this person has left a will and we will not distribute the assets around. Some places will charge a fee as a percentage of the assets, in order to probate the will (usually with an upper cap) and some places may not require a probate (such as Delhi). • If there’s no will, then for smaller amounts (typically less than a few lakh) you might obtain a legal heirship certificate. This is a certificate given by a local registrar stating who the legal heirs are. Along with this, the bank or mutual fund will demand an affidavit and indemnity bond to release the proceeds of the accounts. • For larger amounts, where there is no will, you will need a succession certificate. This will need you to go to a civil court, and prove that the legal heirs are indeed the only ones (you may have to place an advertisement in a newspaper, etc.). With the probated will, a legal heirship certificate or a succession certificate, you will need to contact every bank, every mutual fund or every demat service provider… (Location 1374)
Claim insurance policies: You will need to claim insurance policies. Usually policies have a nomination, so all you… (Location 1389)
Clear the loans: If people have loans on a house, they might have an insurance policy backing the loan. This allows the loan to be paid, and any excess amount refunded to the family. If not, you’ll have to find a way to pay the loan (or forfeit the assets). A quick note here: if there is a personal loan which is not secured by an asset, there is no need for the legal heir to pay for it. Car loans and home loans are secured. But a personal loan is not. However, note that if the person who dies leaves behind some assets which are transferred to an heir, then the lender can go… (Location 1390)
Mutual fund information valueresearchonline.com Value research is where you get information on all mutual funds in India. Shows returns, expense ratio, comparison with other funds Moneycontrol, ET Money, etc. Websites containing information on mutual funds, trailing Mutual fund websites like SBImf.com, hdfcmf.com Sites of the asset managers that run the mutual funds, with regular disclosures of portfolio, unit prices and other things (Location 1400)
Note: Resources for online research
Start-ups: Kuvera, Groww, Paytm Money Allow you to buy ‘Direct’ mutual funds onlne Distributors: Scripbox, Fundsindia, Wealthy.in Only allow ‘Regular’ mutual funds but some have nice tooling and product baskets Brokers: Zerodha Coin, Angel Broking, ICICI Direct, Sharekhan All brokerage websites that allow you to buy regular funds (only Zerodha allows Direct). Some of them will keep your funds in your demat account mfuonline.com Mutual Fund Utility – a company that is set up by all mutual funds together – allows you to purchase funds online RTAs: camsonline.com and mfs.kfintech.com/ These companies are the underlying registrars and allow you to login and transact directly from their website. Only funds that they service can be bought here Websites of the actual fund houses: Just search for IDFC, ICICI, HDFC, Nippon, etc. with the word ‘mutual fund’ at the end Allow you to buy only the funds from their own offering. However, this assures you better control and service (Location 1409)
Note: Where to buy mutual funds
screener.in Great site containing 10-year financials. You can also screen for stocks that meet your favourite criteria – like low P/E but great growth, etc. trendlyne.com Stock analysis site that also contains information on conference calls, transcripts and so on tijori.in Information on sectors, and many sector-specific information and data visualized in an easy-to-understand way investing.com and barchart.com Charts and international listed stocks and bonds (Location 1423)
plan.capitalmindwealth.com Our site that helps you plot goals and build your personal financial plan including for retirement, child’s education, etc. (Disclosure: this is my company’s site) Online intermediaries such as Groww, Kuvera, Kotak, etc. Basic calculators for personal finance and retirement (Location 1431)
Note: Help with financial planning
Figure out who you are – a strong fundamentals-based investor, a price-based ‘technical’ investor, or simply a person who prefers to stay passive because, man, you have better things to do with your life. (Location 1449)
if you earn Rs 10 in profits per share and you price a share at Rs 100, the P/E ratio is 10. Again, the faster you expect to grow, the higher the P/E ratio your shares may be valued at. (Location 1473)
To organize such buying and selling, there are commercial ‘stock exchanges’. BSE and NSE are the two biggest exchanges in India, though there are other, smaller exchanges. An exchange provides a common marketplace for people to trade shares. The sales happen on an auction format on computer screens: Buyers ‘bid’ for shares at the price they are willing to pay, and sellers ‘ask’ for a price from buyers. Exchanges match these prices and the shares are transferred along with payments. ‘Brokers’ facilitate these trades, and you pay a fee as ‘brokerage’. Part of this fee goes to the stock exchange. (Location 1507)
Note: Trading of stocks or shares
Here’s the basic paperwork (actually digital since it can all be done online) you need to be able to buy stocks in India: • You have to open a ‘demat’ (short for dematerialized) account, and a trading account. • The demat account is where you store the stocks you own. Stocks are traded via digital certificates, not paper shares. • A trading account is held with the broker through whom you trade. In general, when you sell, you transfer stocks to your broker, and he transfers stocks to your demat account when you buy. • To ease this process, you usually hold the demat account with the same service provider with whom you have the trading account. This is usually the broker, who allows you to buy, sell and store shares, for a fee. (It’s fine to hold several demat accounts and use several brokers too but let’s not complicate things at this stage.) • Does this mean that if the broker goes bust, you lose all your shares? • The answer (after a bunch of brokers went bust) is no. • Actually the digital certificates of the shares are recorded at a ‘Depository’. There are two big-daddy depositories, NSDL (National Securities Depository Limited) and CDSL (Central Depository Services Limited). • If your broker shuts shop, your shares are still held in one or the other of the depositories (they talk to each other) and that keeps you safer. (Location 1514)
When you don’t understand something, don’t participate in it at the peak of a buying frenzy. And if you do get sucked in, learn to sell it fast. Because when you didn’t get in knowing much, you should get out while the going is good. (Location 1592)
there’s no point doing something because you’re getting FOMO. There’s got to be a better reason and a better way. (Location 1596)
Every listed company is required to reveal its profit and loss statement every quarter. (Location 1623)
Steel can be made in two ways: You take iron ore (which is iron oxide), and burn out the oxide at very high temperatures in a basic oxygen furnace (BOF) and you’re left with iron. Combine that with carbon (by burning coal) and you get steel. This is a polluting process, but countries like India and China that have had scant regard for their citizens’ health use this process widely. (Location 1671)
The other way is to take steel that’s already out there – in cars, in other scrap – and melt it at very high temperatures. For that, you use electrodes which form an electric arc. The heat produced takes temperatures to 4000 degrees Celsius. These electrodes are made of graphite – a form of carbon that can survive at those temperatures and continue to conduct electricity. This is far less polluting than the BOF route. (Location 1674)
A lot of industries are cyclical. The cycles can be long or short. To truly understand cyclicals, you have to be on top of the industry and you need to learn to exit before prices crash in the down-cycle. (Location 1687)
There’s another problem with the P/E ratio. Sometimes a company seems expensive when measured by the pure P/E ratio. (Location 1689)
Buying companies when they are expensive can seem like a good strategy if you believe, strongly, that the companies will never fail, and will always be valued at that much. This may not be the case, though, even for the best brands in the world. (Location 1701)
it may be that the profits shown on the profit and loss (P&L) statements hide certain important information which is only revealed in the balance sheet. (Location 1720)
the balance sheet is the boring thing. It shows much more useful information but it’s harder to understand. It tells you about debt levels, what kind of money sits in inventory and working capital, and other things such as investments, liabilities, reserves, etc. (Location 1722)
Experienced investors learn to treat a bank’s stated profits with caution and look for tells in entries like ‘Provisions & Contingencies’, where the bank is writing off bad loans. (Location 1776)
The cash flow statement is another charming device. It’s what tells you where the cash comes in and where it goes out. It is much more difficult to manipulate cashflows without committing outright fraud than concealing details in the P&L or Balance sheet. (Location 1792)
Infrastructure Investment Trust (InvIT). This is a vehicle for grouping together infrastructure cash flows (like transmission lines where payment from the electricity commissions may stretch for 30 years) and allowing investors to take little pieces of these pool, called units. The InvIT effectively purchases the underlying transmission lines, for instance, and maintains them, and passes on all the money collected, minus costs, to the unitholders. The profit and loss statement and the balance sheet are muddled – they will show some depreciation of the underlying assets, and the numbers might show a loss as well. The balance sheet, too, is not as relevant. The main thing here is the cash flow – how much money is coming in from the assets every month? This determines how much investors get paid. In such a case you would actually ignore the balance sheet and P&L, and instead focus on the cash flow statement. (Location 1796)
The CFS gives you an idea of how well a company is generating cash. A company that makes a lot of profit but has to keep more and more of it stuck in working capital is inherently unhealthy, because that means the cash generated is not ‘free’ – it is needed to continue to run the business. The lack of free cash flow is not sometimes evident in one-off years, so you have to add up cash flows over years to understand the true nature of the business. (Location 1802)
You don’t want to believe management blindly, just because they sound nice. There are cautionary signs, lapses in governance and wilful ignorance that become apparent only in bad times. (Location 1832)
When SEBI started to see issues with governance, it told auditors that it intended to hold them responsible if they didn’t cross-verify data that management told them. In a few companies, the auditors resigned. Soon, it became evident that in some companies, the auditor was actually quite uncomfortable with the accounting processes, and given stronger oversight, they didn’t want to ruin their own reputations. (Location 1833)
You should be a little aloof and not get too cosy with management. You needed the numbers to work for you. You needed to learn about the red flags in companies. And you needed to avoid buying if there were red flags. (Location 1844)
There’s a stock named Tata Investments. This is a holding company controlled by you know who. Tata Investments owns a bunch of Tata companies. Like Tata Motors and Tata Steel. But they also own stakes in a substantial number of non-Tata companies. Such as HDFC Bank and Reliance Industries and other big names. In March 2020, if you added up the market value of their holdings in just listed stocks and mutual funds, you would get a whopping Rs 7400 crore or Rs 1576 per share. But the price in March 2020 was Rs 660 per share. You might say, oh, there was a pandemic. But even a year later, in May 2021, the value of their holdings was Rs 2750 per share and the market price was a mere Rs 1110. How is this even possible? If I took over the entire company and sold the underlying stocks, I could get more than double my money. Isn’t this a bargain? Sure it is. But Tata Investments has always been a bargain. The stock has traded between 40 per cent and 50 per cent of its ‘intrinsic value’. This is what you call a ‘value trap’. You can see there’s value. It’s so obvious because the stuff they own is listed – just take the quantity and multiply by the current market price of each stock, and you get the value of what they own. And yet, no one’s willing to pay more than 50 per cent of that value, in the stock market. There are many such companies. Bajaj Holding, for instance, owns a significant chunk of shares in the Bajaj group of companies. It trades at about 60 per cent below the value of the stocks it owns. Bombay Burmah Trading Corporation (BBTC) has ownership in Wadia companies like Britannia and Bombay Dyeing, and typically trades at 60 per cent discount to the value it holds. This discount is not without reason. Promoter companies typically don’t sell their stocks. They hold because they want to continue to control those companies. If you’re a promoter, you don’t want to get voted out of key decisions, so you own significant chunks of the stock. These holding companies may be listed, and they are effectively promoters of group companies, but they will not sell the shares they own, because they want to keep control. You can keep buying the holding companies at a discount to their value, and you won’t make any money because the shares will never be sold. (Location 1859)
Note: Value Traps
Given that, promoter holding companies are just value traps. They might never realize the value of the underlying assets. So the market discounts them substantially. Buying them for ‘intrinsic value’ is a waste of money. (Location 1878)
A value trap is a frustrating way to participate in the market, I realized. You might put a little bit of your money here, but there’s no reason why such stocks should be your ticket to a long-term paradise. (Location 1884)
Stock markets have daily prices. Sometimes those prices form similar patterns. A stock price that keeps going up every week, or every month, might actually see those prices continue upwards. And in reality this almost always happens. A stock that’s going up, tends to keep going up. And if it falls, it keeps falling for a while. (Location 1906)
There are statistical methods for looking at prices, and when this is done in financial markets, it’s called technical analysis. (Location 1914)
Take the moving average of a stock price. This is simply the average of, say, the last ten days of prices. If we’re looking today, we sum up the last ten days of prices (not today), and average, just the same way you’d look at Virat Kohli’s batting scores. Taken yesterday, it was the ten days before yesterday. The ‘window’ of ten days moves every day, which is why it’s a moving average. Why ten? It may be 20, 100, 200 – the number of days is something you choose. Now twenty days is typically a month of trades (since markets are closed on weekends) – so a twenty-day moving average (20 DMA) will give you the average of the stock price for the past month. If a stock trades above its 20 DMA, it’s in an uptrend. If it was trading below it, and then moves to above the 20 DMA, it’s a ‘crossover’. Which could tell you this – if I buy this stock, and this trend sustains, I will make a profit. But often, something as simple as this is not very tradable. Because a stock could whipsaw – move above one day, and move below the next. So you could add more parameters. A stock needs to be above both the 20 DMA and the 100 DMA. That might tell you a trend. You can even ‘back-test’ this possibility because you know the past prices. You can say, ‘If I’d done this last year, would I have made money?’ The answer is easy to calculate – just run it as if it had been done last year, and see the results. (Location 1915)
Technical analysis says this is the only truth that matters – at what price can you buy or sell today? (Location 1929)
There are many such programs available – the most popular being amibroker.com and ninjatrader.com. A set of other sites also allow you to ‘test’ your hypothesis better. This is not a trivial process – you will need to understand statistics, trading techniques and also the art of running the back test. (Location 1941)
The biggest problem here is behavioural – you need discipline. It goes so much against our grain to expect trends to sustain that we tend to belittle any opinion that says so. Since we are afraid that the trend will turn the minute after we invest, we think that anyone making money trading a trend is just lucky and undeserving. (Location 1944)
following a trend is likely to be profitable. But you are likely to lose a lot of trades when trend-following, so you must ensure that for every time that you lose, you get out early, and when you win, you stay in the trade. (Location 1962)
if stocks go too far in one direction, they’ll come back to the average. Take the 20 DMA we discussed before. Can a stock stay forever above its 20 DMA? Possibly not, because at some point, it’s going to take a breather and the moving average, being a little slow, will catch up. And you might be able to take a short-term position on a move that takes it back to the moving average. You can sell at the extreme and buy it back when the stock reverses. (Location 1975)
Every commodity has a cycle. Steel and aluminium do, and so do tyres and petrochemicals and even food items. When the stocks in the sector are in despair, you could check to see if it’s at the bottom of a cycle, and take a meaningful bet that the cycle will turn around. (Location 1978)
There’s the fundamentals and balance sheets and all that. There are value traps. Then there’s cyclicals. Then trend following with just price patterns. Or mean reversion, or arbitrage. Or special situations. (Location 2025)
Say you invest in 10 stocks every month. It’s the same stocks, except you replace a few of them every three years. Some stocks will go up. Some stocks will fall. You choose to invest a little more in stocks that have gone up, and a little less in stocks that have fallen. Over the years, this simple concept can make you far more money than any energetic action. You don’t need EVERY stock to give you phenomenal returns – just a few will do. Since you don’t know which of these stocks will give you insane returns, you just invest in all, rewarding the ones that do well with a little more money every month. (Location 2053)
But when you have 10 stocks, if only one of them goes 10x in terms of returns, you want that stock to be the biggest in your portfolio. You don’t want to keep booking profits from that stock and putting more money in another stock which is great on paper but is just not moving at all. (Location 2062)
The art of money management is to ride your profits and reduce your ownership of the stocks that aren’t winning. In this context, you might have to let some stocks become really large chunks of your portfolio. (Location 2064)
However, 50 per cent in one stock may not be desirable for diversification, so you can set rules like this: • Maximum 25 per cent of the portfolio in one stock. • Every month, when you have money, keep buying the same stocks. Don’t keep looking for new ones. • If a stock does well, reward it by buying more of it. • Don’t be afraid of replacing stocks or even letting them become really small parts of your portfolio. In the end, the losers don’t matter. The winners do. • Don’t get married to your stocks. Even the best will falter. Just make sure that you don’t hurt too much – another reason why stock-wise portfolio limits make sense. • Diversify: Don’t put too much money into one sector. Use international investing to get access to different types of stocks. • Don’t keep too many positions at less than 1 per cent of your portfolio. If you do that you might not even beat an index fund. • Have a strategy to enter and exit. Want to enter? Start with a 3 per cent position and keep building up as price rises. Need to exit? Exit half of the position first, and wait a while to exit the rest. • Know when to break the above rules. There will be enough extreme cases in your lifetime that you’ll learn when the rules may not apply and everything has to change. It’s usually temporary and you will find yourself getting back to these rules over and over again. (Location 2067)
Buffett himself hasn’t held things forever. A report by John Hughes, Jing Liu and Meeshan Zhang discovered that Buffett’s median holding period of a stock was one year, with 30 per cent of his stocks sold in six months. (Location 2132)
When people tell you one thing, but they’re apparently doing something else, you should be on the side of looking at what they’re doing, not what they’re saying. People say a lot of things needlessly, and sometimes just to get the questioner off their back. People also change their views with time, and in markets such changes are much required. (Location 2140)
Everyone wants to ‘average down’ – buy much more of a stock when it falls. This works every once in a while, such as just after the stock market tanked during the early days of the Covid-19 pandemic, when stocks fell 40 per cent, but in the next year doubled from their lows. Buying those lows would have given you a thrill – what an incredible stock picker you are! Yet, in most cases, the knives just keep falling. A stock that falls 90 per cent is one that first fell 80 per cent and then halved. Some of these are dud businesses, some see frauds, and others are just going through very tough times. (Location 2185)
perhaps it’s best to wait till the stock price recovers a good portion of those losses before you get back in. The best time to catch a falling knife is never. (Location 2198)
This is the essence of capitalism. Companies die, and when they do, shareholders bear the losses. (Location 2230)
The point is that a portfolio-based approach – where you have many positions – works better than betting on a single stock. In any portfolio – just about any portfolio – you will have stocks that do well, and stocks that are laggards. Most of the portfolio returns will come from one-fifth of your stocks – the rest will remain a blot. (Location 2246)
It pays to diversify. And it pays to look at overall portfolio returns. The individual stock returns are not useful to concentrate on. They are only good conversation topics at parties. (Location 2259)
Legends say that once upon a time bankers were staid, honest, hard-working people who would know who you were, remember your birthday, and advise you not to buy that car because you couldn’t afford it. That breed either never existed, or it has retired, or maybe been kicked upstairs into management. The banker you’ll meet is a ‘customer-facing relationship manager’ who sees you as a target parked at a centre of a pattern of alternating black and white concentric circles. In fact, they even call you a ‘target’ when they’re talking shop among themselves. (Location 2319)
Listen to people by all means, but don’t suspend your judgement or blindly take advice. (Location 2352)
It needs considerably deeper skills to interpret and analyse IPOs, since the company has little history to go by. The bankers who say it’s great also earn a commission from selling the shares, so they’re biased. Buying an IPO for ‘listing gains’ is a fad that never dies, but it’s fraught with risk. When the experienced investor finds reading an IPO prospectus daunting, it’s difficult for the novice to find enough meaning to invest with any confidence. But IPOs are hyped up, and oversubscribed many times over, so much that there is a random lottery conducted to allocate shares. An old hand said this best: If you want an IPO, you’re not going to get any shares allocated. If you get any shares allocated, you probably don’t want any! (Location 2364)
How much insurance do you need? A rough estimate is that whatever money you have should cover your family expenses for at least the next thirty to forty years. (Location 2435)
‘Pure term’ insurance is the only real deal: Your family gets paid if you die, and your premium is lost when you don’t. Anything else, usually called ULIPs, money-back, endowment or savings policies, involves a small amount of insurance and a higher degree of saving. Even if it sounds like killing two birds with one cheque, you shouldn’t mix investment and insurance – because you don’t get enough of either when you do. (Location 2464)
In the longer term, I expect the tax benefits of insurance to go away. There are two areas to this – first, insurance proceeds of any sort are tax-free, even where the insurance cover is next to nothing and the product was primarily a product to save money. The second is a tax deduction on the amount invested every year, subject to an upper overall limit. Both these tax breaks are under threat in the longer term, as the government tries to find new means of raising revenue to meet increasing deficits. Additionally, it’s untenable that long-term savings of one nature – insurance or PF – are non-taxable, but buying long-dated government bonds or (non-equity) mutual funds makes you pay tax on the gains. Lastly, if the government introduces a tax for inheritance (a proposal under discussion) then life insurance with a large one-time payment becomes an easy way to avoid such a tax. So I reckon it is quite likely that the government will plug the loophole sometime by making ‘insurance as an investment’ liable to tax. My guess is, within a decade, we are likely to see the tax-free exit status of many schemes vanish or dwindle. At the least, this will force you to invest in low-yielding annuities if you want to retain a tax advantage. Put it another way: To assume that if I buy, I will not be charged a tax on exit even after twenty years is fraught with risk. (Location 2475)
As a rule of thumb, anything that gives you higher returns than the best bank deposit you can find probably involves some levels of risk and these risks may be cleverly hidden. Understanding risk is a complex concept – and it’s better to take a simple product if you don’t have the time to analyse something in detail, or understand that there may be better alternative products with the same risk profile. (Location 2637)
there is nothing like a zero-risk investment – as people holding outer European debt discovered. Russian debt holders discovered in 1998 that even government debt paid in local currency (rubles) was not beyond risk, even when the government has the power to print money. That crisis took down Nobel Prize winners. (Location 2640)
A three-bedroom apartment in South Bengaluru sells for about Rs 1.2 crore in 2021. The monthly instalment on a twenty-year loan is about Rs 1 lakh a month. The rent, for that same house, will be about Rs 30,000 a month. You could pay rent and take a fancy holiday every month if you give up the ‘badge’ of owning a house. But house prices go up, don’t they? You might be paying now, but you’ll save so much that you’ll have rupee bills flying around you in a decade. This again is another way to sucker you. (Location 2661)
Don’t leave any amount outstanding on your credit card (Location 2719)
Once you have an outstanding amount left after the due date, even one rupee, you pay interest from the day you transacted. Even if that transaction was BEFORE the due date. Also, any MORE transactions attract interest from day one. (Location 2724)
If you can’t pay on any month, please do not revolve your loans. Ask your bank – or just about any bank – for a personal loan, which will be far cheaper than this (and there’s no GST on interest on a personal loan). (Location 2730)
Options and forex trades are about discipline. (Location 3142)
