 Click Image to view larger size Debt fund investors or income seekers usually look for better returns than bank deposits. However, if this higher return comes at the cost of safety of capital, then it makes no sense. One excellent avenue which is safe and still offers much superior returns are a category of investments termed as Banking & PSU Debt Funds
1. Quality These schemes mostly invest in bonds or debentures issued by Banking firms and PSUs. The portfolio is, therefore, made of the highest credit quality. Bonds or debentures of most PSUs carry the highest credit rating as these are owned by the government of India and enjoy quasi-sovereign status. Some of the prominent Govt PSUs held in these scheme portfolio are NHAI, FCI, Rural Electrification Corp, NTPC, Power Finance Corp, SIDBI and NABARD, among others. Most PSUs are rated AAA or equivalent as the government ownership ensures comfort of Principal and Interest repayment. Bonds or debentures of banking entities are rated AAA or AA depending on the tenure. These are also of impeccable credit quality. While banking and PSU funds can invest up to 20% of the portfolio in other instruments, most have invested the allocation in safe Government Bonds. With such a high credit quality, banking and PSU funds have remained resilient even as some other schemes have taken hits from recent credit episodes. With an inherently high quality portfolio, banking and PSU funds offer much better returns (See image above) and also serve as safe haven. 2. Liquidity Banking and PSU funds also score high on the liquidity front. The bonds and debentures of PSUs and banks boast high liquidity in the secondary market. Given that these are well traded, fund managers can easily buy and sell these bonds to capture pricing opportunities. Such opportunities arise from tactically managing the portfolio as fund managers switch between short-term and long-term maturity bonds depending on the interest rate scenario. In a falling interest rate scenario like previous and current year, these bonds can provide significant capital appreciation, in addition to interest income. The Banking and PSU funds have benefited from softening interest rates by positioning the portfolio towards medium-term to long-term bonds. But if you had invested in a Bank FD, such appreciation in principal over and above interest income is just not possible. Besides, as interest rates come down, when you renew the Bank FD, you will have to settle for lower interest rate slab. Hence, Banking and PSU Funds offer a big advantage to get safe returns and also benefit from falling interest rates, instead of getting worried about it!! 3. Superior Performance & Returns These funds have stood out on the performance front. Over the past year, these funds have clocked nearly 9% returns. This is only behind Govt. Security funds and Long duration funds which benefited the most from the down-trending interest rates. 4. De-risk the portfolio So should you consider banking and PSU funds? The focus on high credit quality, short-to-medium maturities and inherent high liquidity make these funds very attractive for your portfolio's debt allocation and income seeking investors. These perfectly fit the needs of an investor looking for higher returns than bank FDs, without taking added risk, an excellent choice for risk-averse investors. Debt fund investors can derisk the portfolio by parking a part of their investment allocation in these funds 5. Investment Options
6. Conclusion In the current time when Bank FD rates have dropped significantly, Covid threatens to slow down the economy and with businesses trying to re-establish normalcy, investors will find lot of comfort in Banking and PSU funds with their investments in safe and high quality bonds. Given that further interest rate cuts are likely, these funds with higher portfolio duration are likely to do much better than FD products. Additionally, with uncertain cash flow from businesses, there is a visible shift of big investement money from Lower credit rated (A and below) to high quality AAA rated and Govt of India (Gilts) securities. This can further enhance returns in Banking and PSU Fund portfolios due to demand - supply equation favoring such funds. To discuss your specific needs and get right investment guidance for Banking and PSU Funds >>> Contact us
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 Real estate is one of the largest sectors in the Indian economy. Real estate has multiple sub-segments like Residential, Commercial (offices/malls etc) and Infrastructure (roads, bridges, airports, rail etc) assets.
Real estate investing offers a great way to diversify one's investment portfolio as the returns from Real estate sector is less correlated with other assets like equity and debt, hence balances one's portfolio. There are two major ways one can take exposure to Real estate in India. *1. Conventional Route* Invest in Residential or Commercial properties in one or more cities. Here, suburbs or upcoming smaller towns may be a good option considering the potentia for appreciation. The advantages are: - Get Tax breaks - For Principal and Interest payment - Self-occupancy benefit - Pride of ownership for the family - Feeling of Safety, Security and control - Pledgeability - Low price fluctuation - Long Term Capital gains Taxation (with Inflation indexation, can be set off by investing in Capital gain bonds) The disadvantages are: - High initial cost - Purchase and transfer logistics and costs (registration, stamp duty etc) - Finding tenants initially and ongoing basis - Repairs/maintenance cost - Property tax, Water tax, Insurance etc - Society or building maintenance costs - Low liquidity - Cant dispose off the property quickly due to lack of transparent price discovery - Concentration risk (Limitation of investing in 1-2 properties in 1-2 towns, low diversification, very expensive to invest in International locations) - Other risks - Frauds in Title deed, Tenant Encroachment, Tresspassing, Structural damages due to force majeure etc The returns from Conventional property investing will be slow yet steady, ranging from rental income of 1% to 4% of initial investment with gradual appreciation. *Over a period of 20-25 years, conventional real estate delivers 6% to 14% p.a returns*, net of costs depending on the invested property, whether residential or commercial. If one has time, patience and large budget (initial investment), one can prefer to take the conventional route. *2. Securitized (Financial) Route* (Equities and Debt) In this model, the real estate assets or sectors / industries that benefit from real estate sector are available as *financial assets (or financial securities)* to invest. Thru this route one can invest in *Commercial or Residential Real estate* assets by investing in Financial securities where the underlying assets are real estate properties (or) a stream of rental or annuity income from multiple properties (Infrastructure, Commercial or residential properties) (or) ownership of real estate enterprises (or) ownership of enterprises that benefit from growth of real estate (e.g, Steel, Cement, Logistics, Paint, Tiles, home finance etc) Such securities can take the form of *Equity (Stocks) or Debt (Asset Backed (ABS) / Mortgage Backed (MBS) / Collateralized Debt (CDO), including REITs / InVITs* This route offers excellent diversification by spreading one's investment starting from small sum of Rs. 25,000 (lumpsum) or invest Rs. 5000 monthly (SIP) into a diversified portfolio spanning: - Multiple Cities / towns (even invest in International real estate) - Multiple Builders / Promoter real estate assets - Multiple Sub segments (Infrastructure, Commercial, Residential) - Multiple Industries (Steel, Cement, Tiles, Home Finance, Paint, Facility Mgt etc) The advantages are: - *Very easy to manage* (from anywhere in the world, with just a mobile app) - *Great liquidity* - Can sell or redeem part of the investment anytime, as this is a significant draw back in Conventional real estate investment - *Pledgeable* (just like a normal property, to take loan or borrow via Loan against shares or Loan against MF) - *Get Tax Breaks* (u/s 80C - given the investment is into ELSS category schemes) - *Economical and cost competitive* (zero expense of repair, painting, maintenance, property tax, monthly costs, finding tenants, brokerage, registration, stamp duty etc). Just the cost of acquisition (for stocks) and fund management fees (for mutual funds) - *Ease of Gifting and Transfer* - Can be transitioned to descendants (son/daughter) just by adding nominee details at time of investment or even later on. - *Professional Management* - Securitized assets are professionally managed by mangement team of individual companies (or) mutual fund managers who specialize in real estate sector hence lesser worry for investor - *Higher returns* - Both rental type of ongoing income (thru dividends or interest payment and growth / appreciation, which is nearly 1.5 to 2 times conventional real estate returns can be realized. - Long Term Capital gains upto Rs 1.0 L is TAX FREE (for equity assets) after 1 year holding period. For investment in Debt securities treatment is similar to Conventional Real estate The disadvantages are: - Lack of physical touch and feel - Fluctuation in asset prices (Stock price / Net asset values) - Feeling of lack of control - Tax break on account of Interest (part of EMI) is not available As the real estate market gets more institutionalized with stringent regulations like *RERA* being implemented, investors are increasingly moving towards Securitized route to invest in Real Estate assets, as it is much simpler, has better liquidity and offers better returns too!! Want to invest in Real estate through Securitized route? Reach us for professional advice at *https://www.dhanayo.ga/contact.html* (or) via *Click-to-Call button* (left wall) in our our website  Major investment returns come from those markets which have the four key economic drivers in abundance i.e.,
Resources 1. Land, 2. Labour, 3. Capital, 4. Enterprise (Business Skills) Of the above resources, Asia has abundance of 1, 2 and 4. When it comes to Capital, it is available in plenty globally from developed countries (who earn low interest rates and seek better returns). To leverage the above, one has to incur cost of: 1. Rent 2. Wages 3. Interest / Dividend and earn 4. Profits (benefits) As investors, you have the opportunity to contribute item 3 (Capital) and benefit from Item 4 (Profits) From the enclosed image, the message is clear where the bumper growth and returns will come in future. So, are you well invested in the markets that really matter? Know more how you can benefit from the extraordinary future growth of these economies. Start the journey of building a financially stable future for your family today. An investor education initiative from DHANAYOGA | www.dhanayo.ga  As a financial advisor I meet many professionals and families regularly to understand their needs and advise them suitably. Often the topic of discussion is in “how prices have gone up” and “how difficult it is to save now” and “how much interest rates have dropped resulting in low returns” etc.. etc..
I usually pose a simple question to them. How much do you spend monthly on the morning newspaper delivered to your house. The answer I get is Rs 120-150 p.m. I then ask how many years will you read the newspaper and the obvious response is “entire lifetime” say 80 yrs. I then tell them if you just saved the money spent on the newspaper (Rs 150 p.m) thru your life time and if we assume just 2% p.a inflation on newspaper prices (which you will anyway pay without questioning) and this money saved fetches an 8% p.a return, then how much it will become? Most people give a wild guess that is far off the mark!! Well, the answer is Rs 1.46 crore - in your lifetime!! Shocking, but true!! See the workings in image attached. I stopped reading newspapers more that 5 yrs back and still stay well informed. How about you?  Recently I was reading an article by Meb Faber on Tactical Allocation approach to Equity investing using the Sector Rotation model. This approach takes a short to medium term view that complements a long term asset allocation strategy. We tried to apply this to the Indian equity markets.
In this approach, the top "X" sectors (could be top 1, 2 3 etc) which have shown good performance over recent 1 / 3 / 6 / 12 month period are identified and ranked and the portfolio is split across the top "X" sectors. Let's say we choose the "Top 3" sectors. The money is equally allocated @33.33% across the Top 3 sectors. The portfolio is re-balanced every month. If at the end of a month, a currently allocated sector falls out of top 3, the money is taken out of that sector and invested into the new sector that has come into to Top 3. For simplicity of illustration, we have taken the last 1 year performance of each sector using the respective sector indices. We have calculated the 1 week and 1/3/6/12 month rankings in terms of returns of each sector indices. We have taken an overall ranking (by summing 1 Week and 1/3/6/12 month rankings and further ranked the top 3 sectors. It is assumed the funds were invested in these 3 sectors in equal proportion, for the purpose of this illustration. We have created a simple worksheet to illustrate it. We have taken all BSE Sector indices and ranked them in terms of 1/3/6/12 month performance. We have also added a 1 Week performance as an additional parameter. he top 3 for each time period is shown in highlighted color. The overall rank of each time period is totalled and the overall ranking is shown in the last column to the right. For e.g., as date, the top 3 sectors (on a 1 Month ranking basis) to invest the funds are banking, power and metals. Also you can see over the last 1 year, how the rankings have shifted across sectors as you move to more recent time periods. The momentum investing gives weightage to more recent performing (aka Virat Kohli) as opposed to those who had performed well earlier, but are no loner in "form" (to use a cricket analogy!!) One can implement this approach by investing in the respective index or etfs tracking the relevant sectors. This is also useful if one wishes to shuffle the portfolio and reallocate funds to sectoral funds which are often cyclical in nature, so as to catch the wave and surf ahead. Click here to View Live Worksheet On the evening the demonetization announcement was made, (Nov 8), I was travelling back to Chennai from Mumbai. While on the journey, I was giving a thought on what would be the implications of this event and how we could apply it to Dhanayoga's Financial and Investment advisory business. Given that building client portfolios is one of our key services, we thought why not build a "DeMo" Portfolio and see how it performs. One option was to just build a mock portfolio and track it periodically. But this is no fun, if there is no real money going into the portfolio. Instead we at Dhanayoga built a real equity investment portfolio identifying companies that will benefit from Demonetization and invested real funds from our own cash kitty (call it "Conviction"). Today it is three months since Demonetization was announced. Let's see how our portfolio has performed during post DeMo quarter. (see image below)  Dhanayoga DeMo Portfolio Performance | Period: Nov 10, 2016 to Feb 7 - 2017 Dhanayoga "DeMo" portfolio has delivered 15.7% (absolute returns) in just three months flat, whereas both Sensex and Nifty returns stood at 3.6%. That is an Alpha of 12.1% for the THREE month period!! During the same period, how did the various Mutual Funds Perform?
The 2017 budget has been unveiled. Dhanayoga has built a new "BudJET" Equity portfolio identifying stocks that will significantly benefit from the budget. Look out for our periodic update soon!! Do you wish to start the journey of creating "Value driven wealth"? Learn more about us at www.dhanayo.ga  In my initial days as a lay investor, when mutual funds were gaining in popularity, I had decided to invest in three mutual fund schemes. The total investment was about Rs 2.0 Lakhs. Those were the last and only investments I made in mutual funds. Soon after, I have chosen to invest in direct equity by doing rigorous research, back testing and building optimal portfolios with cutting edge mathematical modelling frameworks.
One main reason I chose to shift to mutual funds was the issue of "value and integrity conflict" in the way mutual funds invested my money. When I was looking through the portfolios holdings of the schemes, I noticed stocks of certain businesses which were considered "socially not responsible" (a polite word for businesses that prospered from unhealthy products and services such as cigarettes, liquor, gutka etc). As an individual I'm a tee-totaller and non-smoker. Watching my money deployed in these businesses was simply unacceptable, as it directly conflicted with my personal value system as an investor. This accelerated my shift to direct equity where one has complete control of the sectors and firms to invest and avoid potential conflict to one's deeply held personal values.
You have a choice to address this dilemma, by considering direct equity investing (or) get real selective about funds that can assure you they make "socially responsible" investing decisions in their portfolio. When stocks are professionally identified and a portfolio is built that also aligns with your personal and family values and life needs with the help of a professional investment adviser, one can expect to achieve value driven wealth creation. To consider building "Value driven Wealth", welcome to get in touch People investing in Mutual funds can either invest one shot (say Bulk investment) or opt for Systematic Investment (SIP). Whichever option you choose to go with, an understanding on the "distribution mode" explained below can help you to earn significant higher return in the long term.
Mutual funds are sold to investors for investment in two options namely
RIP is often the ONLY mode typically offered by your Intermediary (Bank, Mutual fund Distributors, most Online Financial Portals and Financial startups etc), whereas DIP (Direct Investment Plan) option is something you need to specifically ask for (and demand). Most investors are neither informed or aware of the DIP Option (nor) do the intermediaries share this information with you willingly, unless you specifically ask for it (caveat emptor!). Direct Investment plans (DIP) were introduced in 2013. If you are a mutual fund investor who has been investing prior to 2013, certainly you will be enrolled in the RIP (Regular Investment Plan) only. If you are an investor who has started investing in MF post 2013 (but did not bother to ask for the Direct plan option (like most investors), because you did not know it existed (or) your intermediary hid it from you), you would most likely been enrolled in RIP option. Dhanayoga did a quick analysis of what is the % of return that investors stand to lose when they go through the Regular Investment Plan (RIP) vs. Direct Investment Plan (DIP). The results are quite revealing and can help an investor to become wiser and switch to DIP mode from RIP mode. The figure below displays the incremental return that you can earn if you chose the DIP (Direct Investment Plan) instead of RIP (Regular Investment Plan) mode, for every 1L invested. Duration 10% Return p.a 15% Return p.a 20% Return p.a 25% Return P.a 5 Years 7,455 8,898 10,542 12,404 10 Years 24,568 36,588 53,576 77,246 15 Years 60,734 1,12,846 2,04,238 3,60,838 20 Years 1,33,481 3,09,422 6,92,166 14,98,489 25 Years 2,75,076 7,95,529 21,99,464 58,34,765 Note
Based on above illustration, For e.g, If you invested 1 Lakh in a mutual fund that gives an average annual return of 20% p.a and for a period of 15 year period, the additional return that you can earn (if invested in DIP instead of RIP) is INR 2,04,238, which is evidently quite substantial. So what can you do now?
If you are a new or existing investor planning invest in mutual funds, prefer the Direct Investment option. Wishing you a very Happy and Prosperous New Year 2017!! Invest responsibly and smartly!! Sethu V Dhanayoga Value Driven Wealth www.dhanayo.ga Financial Planning and Investment Advisory services SEBI has released a consultation paper that aims to fix the issue of mis-selling of financial products, mutual fund distributors claiming to be "investment advisors" and the role and scope of independent financial and investment advisors. Read more at SEBI's site http://www.sebi.gov.in/cms/sebi_data/attachdocs/1475839876350.pdf
This will help SEBI to get a perspective of "Investor's voice" and take it into consideration while formulating such regulations. This is a great opportunity to influence an important regulation that can go a long way in representing the real investor's interest. Read more at SEBI's site http://www.sebi.gov.in/cms/sebi_data/attachdocs/1475839876350.pdf You can get the e-mail id to respond in Page 30 of the above pdf document and share your inputs on specific sections / clause which you wish to comment upon. It is very common for the typical employed person (or) Self employed professional to park most of their household savings in Bank Fixed Deposits (FD). But do FD's earn a worthwhile return for you?. Let's see..
For one to appreciate returns on your FD investments, it is essential to understand a term called "After Tax Real rate of return". The After Tax real rate of return is calculated as Nominal Rate of Return from FDs (%) - Tax Deduction at Source (TDS) - Prevailing Inflation Rate (%). Let us look at this example, Fixed Deposit Interest Rate - 7.0% (View page) Inflation Rate - 4.2% (View RBI Website) Tax Rate for FD Interest - 10% (applicable if yearly interest accrued is Rs. 10,000 or above) Hence, the After Tax Real rate of return is calculated as: Interest earned = 7.0% Tax Deducted is 10% on 7.0% = 0.7 % After Tax Real Rate of Return = 7.0 - 0.7% = 6.3% Prevailing Inflation Rate = 4.2% After Tax Real Rate of Return % = 6.3 - 4.2 = 2.1% (from FDs) In contrast, let's look at someone investing in equities. For illustration, let us take the example of a leading company like Hindustan Lever, a leading Consumer Goods company operating in the Indian market, whose products are widely used by a large segment of population. The yearly (annual) returns delivered by Hindustan Unilever is 17.2% (View source) (Its share price moved from INR 361 in Nov 2011 to INR 802 in 2016, with multiple dividends thru the years. Applying the simple compound interest formula, the yearly rate of return works out to 17.2%. Hence, real rate of return = 17.2 - 4.2 = 13.0% (From Equity investment) As a bonus, returns realized from equity investments DO NOT GET taxed (0% tax if investment is held for one year or more), so the After tax real rate of return is same as above i.e., 13.0% Interestingly, buying the shares of a well selected portfolio of companies helps you to "ride the inflation" as the prices of the products of most companies keep increasing to adjust for inflation. So, instead of being affected by inflation (or) your returns getting needlessly eroded, you can "make inflation your friend" by investing in equities of well selected portfolio of companies. Whether you wish to invest your hard earned money in Fixed Deposits that generate just 2.1% returns (or) equities of well selected portfolio of companies that can generate significantly superior returns is finally a call for you to take. If you need expert help, welcome to get in touch with us |
AuthorSethu V, Founder of Dhanayoga. I'm a Serial Entrepreneur, Management Consultant, Value Investor and Certified Investment Adviser. Connect me at http://linkedin.com/in/venkatsethu Archives
May 2020
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