Do you need a financial advisor

 One of the question that often comes about in Investing is - Should you go in for an advisor.

Often people feel that why should I pay 25K or 50K to an advisor when i can do it myself.

My take is on this.

If you have a small portfolio of say less than 25 Lakhs, it would be advisable to go in for a self investing, but with the following criteria:

a) You should not take risks i.e. put in large positioning i.e buy 10,000 shares of one company.

b) You invest in fairly good companies with regular profit, Sales, dividend paying etc.

c) You diversify into various companies and sectors - FMCG, Banking, Cement, Infra etc etc and with 2-3 companies in each

d)  You read a lot and take a call on basic understanding.

e) You have some understanding of financing - int rates, loan, returns etc.

The above may give you a fair return over time, but this is where advisor comes in.

An Advisor is 100% into reading, analysing stocks and other financial instruments and fairly good at financial analysis. He looks at trends - momemtum, fundamental and technical analysis on a daily basis and is able to structure his investment that will give a possibly better return than the generally passive investment we do as an individual. Of course, he could fail too.

Even if you pay a 25K to 50K to an advisor, but your return on your investment is say 5% higher than what you invest (given lack of time) on say 10 Lakhs, you are covering your fees with a better knowledge. If your returns are higher and your portfolio amount is larger, then all the more reasons to use an advisor.

Another fundamental advantage of an advisor is that we generally focus on market mein kya chal raha hai. Thus focus is on stock or mf or FD. The advisor goes through a whole gamut of different class of assets and looks at best returns possible.

For eg. if you invested in stocks and mf and market for 2-3 years is completely down, the two option is -a) let me dump everything and put in an FD or b) let me hold it (like the analysts say) for 3-4 years when market will pick up slowly. Technically, you are losing your say, 10-12% return for these 3- 5 years or getting a small 3-4% (net of taxes) on an FD. Here the financial advisor could have helped in seeing the trend ahead and moved your assets to Gold, RE or any other class of assets that will still fetch you a return of 10-12%, if not more. This agility comes with an advisor and not at an individual level as generally we are lethargic and do not have time to go through the various investment processes.

But selection of an advisor is very critical. There are many sales agents masquerading as advisor, whose only job is to churn your portfolio every now and then to get their commissions or their advice is based on how much commission they will get on your investment in a particular sector ( insurance/ipo agents are such type )

Selecting an advisor you should put some broad guidelines for him.

a) I want to invest in MF and Equities (large and mid caps only)

b) I do not want to invest in any insurance product ( you do that separately and do not combine with investing

c) I do not wish to invest in IPOs or such risky products.

d) My risk profile is moderate, not taking too many risks.- I am comfortable with a 15-18% returns.

This helps both you and advisor as to what broad parameters he has to work with.

There is one more area of investment, but this is purely for rich people. This is called PMS (Portfolio Management System). This requires minimum 50 lakh rupee investment and you do not discuss or question the advisor. He is supposed to provide you returns of 20% and above, which may or may not happen. They take mgt. fees even if they achieved a loss and have a fee above a threshhold if they achieve i.e. if they give you 25% return and the threshold is 20%, they will take cut on the 5% extra they have promised. As I said, you invest only if you have lots of money and is good for HNIs. The PMS can churn, invest wherever they want be it IPO, GOLD, AIF, RE, REIT etc. etc. Given their huge AUM they are capable of driving down their investment and getting better returns than you would normally get. For eg, I say that I am ready to invest in pre IPO at 3 Rs per share and a 30% stake, while when the IPO comes it will be priced at 50 Rs per share for normal person.

Thus to improve your return you need a financial advisor. For investment as a hobby you do not require a financial advisor, but above criteria to be kept in mind and there are various websites now a days providing you data and learning( eg screener, freefincal.com, tijori, trendlyne, chartlink, zerodha.com/varsity, value research online, moneycontrol, etmoney, jago investor, MF website and many many more.

Happy investing- Be it for returns or past time.

 

 

 

 

 

 

 

 

MY MF INDIA CONSTRUCT VIEW

                                                             MUTUAL FUND (INDIA) construct

Max 2 different AMC funds in each

1) INDEX (2*3=6_)                           Sensex            Nifty        Nifty Next

2) CAPS   (2*4=8)                             Large            Mid           Small (small %age)   Multicap

3) MULTI ASSET   (2*1=2)                         Multi asset

4) SECTOR (2*4-=8)                           Banking    Pharma        IT        INFRA

5)  DEBT  (2*3=6)                        Corp Bond    GILT        Liquid

Depending on your risk profile the % age in each category above can vary. I prefer once I set the above category, I accumulate in it, rather than jumping into different MFs and categories. The above is 30 funds. You can even make it 15 funds depending on your comfort level with AMC. I prefer to see 5-7 years return (CAGR) and decide/invest accordingly.

 If medium term goal is there, once you achieve 50% or more return in a fund, liquidate 75% and put it in debt,  as if market goes down when your goal is reached you will have cash flow issues. Start liquidating 3-4 years or if market is in euphoria to debt funds.

If Long term goal, keep investing and the market value becomes basically your EGO to talk how you did well in stock market. You can during Euphoria period or a 50-75% return, liquidate and keep the funds in liquid to invest more when it goes down.

After constructing the above, and recently after MAGA and Trump, I noticed that it is better to diversify your portfolio further. Given that one is not aware of stocks in diff countries, better to stick to investing in Index. Index funds of following countries are advised and up to you to choose this or a better doing Index fund or ETF.

a) MF investing in Europe

b) MF investing in Japan

c) MF investing in China

d) MF investing in USA

e) MF investing in Emerging markets

I chose the above order, primarily because of current POTUS maverick action. One could see wild gyrations, and one could see people worried about their assets in US. Till now the USD is the central currency, but if some other currency replaces USD, it will see a substantial reduction in US investment.

I am totally against Bitcoin, even though I started tracking at 1 or 2 $ to a bit coin as I found no underlying asset or enough confidence in their backers. Mt Gox, Sam Bankmen further eroded my confidence in it. Though as per current price it is around 70,000$.

As I have said in another Blog money need not be the only source of happiness.

My MF construct

 Each one have their own style of investing. Some focus on diversification, some on concentration, some on thematics and so on.

My construct for a MF is as follows:

50% Index funds (equal weightage or more towards Indian schemes)

a) Sensex

b) Nifty

c) Nifty Next

d) S&P

e) China Shanghai

f) Japan Nikkie  Index

g) European Index

20% Multi and Flexi Funds

a) Multi Asset fund

b) Flexi cap Fund

10% Mid/Small cap Funds

a) Mid cap funds

b) Small cap funds

10% Thematic Funds

a) Banking

b) Pharma

c) IT

d) Chemical

e) Infra

Ok, now that we have done, some reasoning for the above. 

Most of us do not have the time or inclination or ability to read and analyse the stock market. Thus 60% is put in Index which reflects the best of the stock market companies churned every now and then. So you are primarily invested in best of the companies all the time. Rare that you may lose based on the past trends.

You may have noticed I have not added Large cap funds. These are primarily in the index, so it will only duplicate.

Next is the multi asset (diff class of assets like gold, etc) and Flexi cap which has a mixture of large, small and midcap. These protect you from volatility.

 Then comes the risk part in small and mid cap. If you want a slightly better returns a certain level of risk is taken and it is in this group. 

Finally, thematic sectors. I notice that the market tends to work on themes. Thus Banking may be flavor of the month, then pharma etc. So this has a small risk, but returns can be higher. But a lot depends on when you get in and get out.

As can be seen, this is MY CONSTRUCT AND NO RECOMENDATIONS IF THIS IS A GOOD ONE. I believe, however that this can be a safe and non risky one with returns that should be reasonable. If you want more risk and returns decrease index and go more with small/Mid cap or thematic.

MF helps in getting a return without the worry of analysing/taking a buy/sell call etc. It is best left to experts.

I have not touched debt funds as those with poor, but steady returns may not beat inflation and can be only used at retirement for security of capital reasons.

Standard Rules

What Is the Rule of 72?

The Rule of 72 is a quick, useful formula that is popularly used to estimate the number of years required to double the invested money at a given annual rate of return.

• The Rule of 72 is a simplified formula that calculates how long it'll take for an investment to double in value, based on its rate of return.
• The Rule of 72 applies to compounded interest rates and is reasonably accurate for interest rates that fall in the range of 6% and 10%.
• Years To Double: 72 / Expected Rate of Return For Eg 72/6% means it will take 12 years for money to double at 6% 
  

 

What Is the 4% Rule?

The 4% rule is a guideline that recommends retirees withdraw 4% of their retirement funds in the first year after retiring, and then remove the same dollar amount, adjusted for inflation, every year thereafter. 

• The rule seeks to establish a steady and safe income stream that will meet a retiree's current and future financial needs.
• The rule was created using historical data on stock and bond returns over the 50-year period from 1926 to 1976. Some experts suggest 3% is a safer withdrawal rate with current interest rates; others think 5% could be OK
• Life expectancy plays an important role in determining a sustainable rate.

 

What is 100-Age rule?
 
 
Determining the allocation of assets is a pivotal choice for investors, and a widely used initial guideline by many advisors is the “100 minus age" rule. This principle recommends investing the result of subtracting your age from 100 in equities, with the remaining portion allocated to debt instruments. For example, a 35-year-old would allocate 65 per cent to equities and 35 per cent to debt based on this rule.

Brian Feroldi

Rule of 114
How much time in years it will take for your money to triple. Divide 114 by the interest rate at which you are compounding your money.
Rule of 144
How much time in years it will take for your money to quadruple. Divide 144 by the interest rate at which are compounding your money.

Rule of 70
How time it will take in years for your buying power to erode. Divide 70 by the current inflation rate to see how many years it will take for your purchasing power to half.

The 10, 5, 3 Rule
You can expect to earn 10% annually from stocks, 5% from bonds, and 3% from cash.

The 3-6 Rule
Put away at least 3-6 months worth of expenses and keep it in cash. This is your emergency fund.

 

The 15% Rule
Set aside at least 15% of your salary for retirement.

Age x Income / 10 Rule
This rule shows how good you are at building wealth. Multiply your age times your pre-tax income and divide by 10. This is what your net worth should be. I would rather divide by 5

Investing Gurus

 One sees many investing gurus, being talked about in glowing terms. One of them definitely is Warren Buffet.

Many of them have been giving a CAGR of  20% or more over the last so many years and one wonder's what is it that they possess that other ordinary investor do not possess.

My personal view is as follows:

a) One is their Patience. Their immense patience to wait out their convictions. They do research, study how the market will move and the demand and supply of the products they are investing in etc. All these in hindsight seems interesting and understandable, but was it at the time when they were investing. I can understand investing in a Coke or Gillette company thinking that people will continue to drink coke and men will continue to Shave and innovation and marketing to keep the products in shelf and attract. But things need not always be like this. Imagine someone investing in Nokia thinking mobile is the in thing and nothing can displace it. It went into oblivion for some time and space taken over by Apple and Samsung. Maybe not many would have thought these two will be such a success. Apple too went into a tailspin for some time before the brilliance of Steve jobs with ipod, iphone, ipad put it back on to the limelight. But in all of these investing gurus would have continued to remain invested and possibly bought some more.

b) Position Sizing- The second most important thing is they take large positions and accumulate over time. They get some close management information on how the things are working and where the business is leading. This is something you and I will not be privy to as our position is probably 100 or 200 shares or even 1000 shares while these investors have million shares. With position, they are able to get some information which others have to wait till it is public. One recent example is paytm bank and the RBI strictures. There is a rumour that many big ticket investors quit before the news came out as they were already aware of the goings on. And now they may pick it up at a lower price and thus control the number of shares which will help in future.

c) Conviction- Because of so many discussions with management of different companies, they get an idea of where the business is growing and what are the pitfalls. Our information is only when it is published and becomes a public document.  It can work both ways. Some business may say that there is a huge potential, which actually does not materialize, some may. Investing Gurus can afford to lose a Million to gain 10 million. Their diversified portfolio and position makes them lose less and gain more. Nobody can predict the future, but some can predict the direction of the future and these do. They also fail some time, but overall they are in the money. Harshad Mehta, the story goes, said that ACC Company equivalent will require huge capital to invest and nobody has that capital to build it. Thus his investment in that stock raised the ACC stock price to an extremely high value, but now it languishes as more players, either by takeover or new green field plant has come up increasing the capacity of cement many times.

d) And finally, the first few years of making millions is difficult, but once a large amount is made, multiplying it with a reasonable safety gives it a tremendous leverage that helps them in outperforming ordinary shareholders.

e) With their volume they can move the markets up or down and can through words and thoughts make other small investors follow through with their sayings and while not all practice this, many do.

So, what is the learning. Diversify a bit, increase position sizing in good companies (where you are convinced it will exist after 10 years also) and wait out long for the market to reach euphoric levels to cash out some of the investment if required. As you do this you will also learn more about the companies and markets which will help you invest wisely. Use screeners to get past 5-10 years data and see the trends and the P/E, ROCI, general trends of business in those areas to get a foothold in the market. Rolling returns are a better way to understand ongoing business.

Swimming and Investing

Swimming and Investing have much in common. If you do not know how to swim, you will be stuck in deep waters and with dreadful consequences. Similar is the investment pool. You will land in a big mess if you have not done your basic learnings.

Just before you jump into a pool, you need to wear a proper dress  in investing too you should have an expendable amount of money which you may lose but still not feel bad.

The next step in swimming  is testing the waters and remaining for some time in the shallow waters and kick around and see if you can float. Investing also requires you to read a lot and test a few of your hypothesis to see if it works or it fails and relearning them and trying to ensure you do not lose all your money at one go.

Then a few runs across the pool on the shallow side to see if you really picked up the basics in swimming. You may sometimes feel you are drowning, but since you are in shallow water, you can get back. Same way in investing, you can start with a few mutual funds and stocks and test the results of your hypothesis and even if you lose money you can still recover.

As you learn swimming and become better, you take more risks by going into the deeper side of the pool. In Investing, it is the  riskier shares or assets that you put your money in and the amount of money you put in ( position sizing).

If you have learnt your basics in a swimming pool, as you venture into the river or sea, you will notice that the pool now is not just a stable place, but has turbulence that is up and down. As you swim, you start picking up the up wave and float in the down wave. Investments journey is also like that over a long period of time. There are down periods where you invest slowly but surely in businesses you know will grow once the up periods come. And once the up periods come you will be rewarded substantially, which you may partly en cash and continue the ride or the swim.

 

Dakshinamurthy- A way to analyse stocks

 Dakshinamurthy- an invocation to learning is used here to analyze stocks. Of the various methods, this is one of the methods I have suggested to study stocks and my belief is that given the various parameters that are used in analyzing the stock, it is expected that most of the stocks analyzed this way will hold your investment ship steady for long. Like no one can predict future, there is no guarantee of these predictions going right as based on past data, but the past path that has been laid is a sign or indication that the future paths will also move in the right direction.

How to go about this analysis. 

I believe, a 5 year trend is neither too short or too long a period to analyse the stock. In an economic situation where every year changes, a look too far in the past may not provide the same perspective as a medium term analysis. Thus a 5 year trend is preferable.

 Second, the rating range is given. Rather than someone rate for you, it is better you rate to ensure consistency in the rating and as per your liking. Thus a high debt may be to your liking and may give a 6 or 7, while a person who shuns debt may give it 1 in case of high debt companies. Thus this analysis, rather than imposing someone's thought, tries to help you understand the business and rate it. This is an important learning as you gain confidence and convincing in a company you invest and can blame yourself and not others in the path of investing.

Third, I have provided a rough range as a guide and not fixed what should be the total at the end that gets you to a thresh hold that should make you comfortable in investing. This is because each individual is different and has to take his own responsibility/call to invest.

Fourth, I have below this formula given a brief of what each of this item means, which could guide you and make you learn in the art of investing.

 

				5 years trend
D	Debt	1-10		Zero debt 10, high debt 1
A	Asset Return	1-10		ROCE- @20%(10), less 1-9
K	Capital	1-10		Adequate funding/Promoter holding high/<10% 1, >70% 10
S	Sales Growth	1-10		Last 5 years Sales growth every year @10%10, else 1-9
H	Human Resources	1-10		Quality of HR/Attrition rate/Key mgt. change
I	interest coverage	1-10		EBIT/Interest
N	Networth	1-10		Reserves sufficient/P&L balances
A	Analysis-Ratio	1-10		OP Margin/GP Margin -growing-20%
M	Money-Cashflow	1-10		Consistent Free Cash flow
U	Understanding of business	1-10		What business/moat/future growth
R	Rate of Profit Growth	1-10		Last 5 years Profit growth every year @10%10, else 1-9. Rolling Returns growth
T	Type of Business	1-10		Nature of business-Steady (10), cyclical (5)
H	High/Low Trend of Share prices	1-10		Volatility / PE (<15,10) (>20,5)
Y	Yield of Dividend	1-10		Consistent Dividend trend, yields etc.

Assumed meaning of the terms used above
Remarks D Debt Higher debt involves higher risk A Asset Return Higher return shows better utilization of assets K Capital Higher Promoter holding shows promoters confidence S Sales Growth Shows Company's growing market. Demand H Human Resources Shows HR confidence in cpy. I interest coverage Debt taken and Interest is manageable. Higher cov better N Networth Build up of a fort for bad weather A Analysis-Ratio Butter of the Company. Likeability of product M Money-Cashflow Ability to remain afloat U Understanding of business Competition/Product uniqueness R Rate of Profit Growth Bottom line. Managing overhead costs. Rolling returns T Type of Business Ups and Downs H High/Low Trend of Share prices Market acceptability amongst brokers Y Yield of Dividend Payout. What Company is ready to pay out. Cap. Allocation
					Payout. What Company is ready to pay out. Cap. Allocation