Posted on

Financial Frenemies – what you need to know.

Friendship Day marks the celebration of the relationship we’ve shared with our friends, old and new. It’s a journey we cherish and hope to continue for a lifetime. Just as we trust these long lasting friendships to have our backs when we need them the most, there’s another critical aspect of our lives that we need to give a lot of thought to – our money management. Savings and investments are not habits that come naturally to everyone. These are lessons we learn along the way as we grow up, start earning and are told to take care of our finances. Yes, it’s for the very same reason that we make friends for – to have something of our own and more so, enough of it to fall back on when the need arises.

If you are new to financial planning and don’t understand how to invest, what to invest in and other related queries, it’s best to consult a financial planning advisor who can guide you well with this. While family members are advisors for life, it’s helpful to seek guidance from an expert who can provide clarity to you in your journey. Amongst the plethora of investment options available in the market, it’s important to know which ones suit you the most and invest accordingly. There are various choices which may seem very obvious or the most recommended however, it’s important to do your research and understand if they are really worth investing or consider other avenues.

It’s easy to fall prey to plans or people who promise high returns with low risks. While such plans do exist, they may not necessarily be real or lucrative offers in the first place. Speak Asia and Stock Guru are two such examples of dubious schemes in 2011 and 2012 respectively, wherein very high returns aka promising to double in a span of 6 months, proved to be a red flag in itself. Ankur Sachdeva from Delhi invested Rs. 11.6 lakhs in Stock Guru in 2012. He was initially skeptical and invested Rs. 2 lakhs in the scheme. When he received Rs. 40,000 back in the first month, he invested Rs. 10 lakhs more to never have got back anything in return. A very basic principle to bear in mind while investing in any scheme is to check if it has been verified by some regulatory authority such as SEBI. Reading the fine print is cumbersome in most cases so make sure to have a lot of questions for your advisor. Anything or anyone promising unbelievable returns in a short duration should ideally not be trusted. Anything that is too good to be true is never true.

Life insurance is another vehicle which is mistaken for investment because of its triple benefits of a cover for life, long term savings and tax benefits. Endowment plans are the most traditional and very often considered to be the safest forms of investments. However, these policies not only give sub-optimal returns of 4-6%, but also force the policyholder into a multi-year commitment. While there is a way out, which is to surrender the policy if you have paid the premiums for a minimum number of years, you are sure to face a loss when you do so. These investments not only prevent investing in other lucrative avenues but also don’t give returns which do justice to such long term commitments. Not to forget, very long lock-in periods which means that you could end up investing for as long as 20-30 years where the interest is only accumulated, not compounded.

As an investor, it’s also very important to be cautious of falling prey to trading. The thrill is a given with quick high returns that trading gives however, very often most of the investors have no idea of what business the company is in or why is it that the price of a stock is going up or down. Let us look at a simple scenario. Say for example Mr. A believes that the price of Stock X is likely to go up by 10% today and hence he buys at Rs. 100. X indeed rises to Rs. 110 and Mr. A sells it off to Mr. B who also buys it with a belief that the price will rise further. X further rises to Rs. 118 and Mr. B sells it off to Mr. C. Obviously, Mr. C also wants to make money and believes that the upward movement will continue. He therefore sells it off to Mr. D at Rs. 128. This continues till that moment when the cycle breaks. The last man standing ends up making a loss. As stated above, in this cycle, there is a high probability that none of the players have any idea why the price is behaving the way it is and even the fact that someone will eventually pay a price in anticipation of the price rising further. Trading is a risky activity and is under no circumstances a medium of creating wealth. While a lot of people have made money with trading, there is no guarantee that you will be one of them.

While there are several such financial frenemies out there that can misguide investors, it’s best to start with professional help and take things in your hands in a couple of years of learning the ropes. Our expert advice is to first identify your financial goals, investment horizon and risk appetite to know how, where and how much to invest. Mutual funds are a great way to start with through SIP as they can always be tailored to your needs whether, short, mid or long term. Having a mixed portfolio also ensures that not all your eggs are put in the same basket. After all, there is no greater wealth in this world than peace of mind. So, befriend the savings habit and trust us with all your financial planning needs. Wishing you all a happy & financially prudent friendship day!

Posted on

PPFAS – CAGRfunds conviction recommendation

PPFAS Fund Report

Parag Parikh Long Term Equity Fund (PPLTE) is the only equity fund that is managed by the investment team of PPFAS. As a recent entrant in the Mutual Fund Industry (fund was launched in May 2013), it is not the most popular fund in the market. At least we do not see people including them in the “Top 10 Funds to invest in 2019” list (Frankly, we find such lists to be very silly).

There are several reasons why we believe that PPLTE is a good addition to the portfolio for investors who exhibit all of the following traits:

a) Looking to add equity exposure
b) Willing to not withdraw their investments for 7-8 years
c) Keen to add some overseas diversification to their investments
d) Unwilling to risk capital erosion in lieu of high returns
e) Want to prioritize downside protection for times when markets don’t seem to be too ecstatic

If you think you are the one we are referring to, you should contact us to check if this is a worthy addition to your existing portfolio.

Reasons why we like PPLTE

Sector Allocation

PPFAS Sector Allocation

Several things stand out when we look at the sector allocation of this fund.

a) 22% of the corpus is kept in liquid resources, waiting to be deployed when opportunities emerge. Some might say that this will drag returns down (since liquid resources at best earn you around 6-7%), but let us tell you that investing in businesses at a price that seems affordable is better than buying something expensive. Also, investing when one finds good businesses to invest in is also an important consideration for long term wealth generation

“It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price” – Warren Buffet

b) Substantial overseas exposure (~28%) adds to geographical diversification (orange bars are completely overseas). Out of this total overseas exposure, around 9.7% is in Google and 4.3% in Facebook. That adds to some real diversification to your portfolio! (Source: PPFAS Feb – March Factsheet)

Skin in the game

7.07% of the AUM represents own equity of the key persons in the fund management team. When people who are managing our funds have invested their own savings into the same, we know the commitment is for real. It is a good corporate governance practice to have their own financial being is linked with that of the investors. We give them a big thumbs up for this one.

Out-performance with focus on downside protection

As can be seen from the chart below, the fund has outperformed its benchmark (Nifty / BSE 500 TRI) at all times considering point to point returns. In terms of Alpha, the fund ranks #2 within the Multi-Cap category. PPFAS Performance comparison

However, out-performance is not what excites us. Active funds, after all, are supposed to out-perform their respective benchmarks.

What seems interesting and commendable to us is the ability of the fund to protect the downside during times of correction. Let us look at the 3 year rolling returns of the fund. The highest rolling return is 25% and the lowest that the fund has given over a 3 year period is 10%.

PPFAS Rolling Returns

This means a lot of things for you as an investor if you would have held your investment for a 3 year period at any point in time:

a) You would have generated a CAGR of at least 10% even if you would have exited at the very low point of the market which was some time in the second half of the last year

b) You would not have seen a negative return for a 3 year period on your portfolio EVER

c) You would not have lost your peace of mind over losing your money

For investors who are uncomfortable with too much volatility, the above means a lot. We believe that the reason the fund has been able to demonstrate this performance is because of its patient and down to earth fund managers – Rajeev Thakkar and Raunak Onkar. Although this is not a guarantee for the future, the above track record during testing times gives additional comfort to investors.

Mr. Thakkar is quite active on twitter and we suggest you follow him to understand his ideology if you are an existing investor or are likely to become one.

In case you have any further query, do reach out to us on contact@cagrfunds.com

Posted on

Learning from Warren Buffet Series – Part 5

Berkshire Hathaway Shareholder letter – 1983-85

Key Takeaways from the letters (in no particular order)

Learning 1

Allocation of capital is the key – Allocation of capital is the key factor to judge a business management or a fund manager. It is one of the most crucial factors which decide the fate of the business or fund. We as investors need to keep an eye on the capital allocation decisions of management. We often see management retaining large sums of the business earnings and reinvesting it in lower return of investment projects, unrelated businesses, just so that management can expand their empire or at times we see companies having a high dividend payout ratio when they actually need to deploy capital in their business. Both these circumstances are alarming. Market in general rewards management which has a history of good capital allocation decisions.

This is true for businesses and individuals alike as capital is not free, every decision we as individuals take to save, spend or invest capital matters.

Learning 2

Become a learning machine – To be successful one need to keep learning and updating oneself. To become a learning machine one has to voraciously read, think and aim to become little wiser every day. This concept been beautifully captured in an article on the Buffet formula in the widely read and followed blog “Farnam Street”. I strongly suggest that you read the full article here.

The biggest difficulty in life is not learning new things; it is to unlearn the old. Keynes articulated the problem crisply when he said: “The difficulty lies not in the new ideas but in escaping from the old ones.”

Learning 3

Invest in management who eat their own cooking – Buffet in his 1983 annual letter to shareholders lists down the major business principles which he follows and one of the most important one is that he has an ownership orientation instead of thinking like a manager. He and other directors are all major shareholders of Berkshire Hathaway. This is one of the key takeaways for us as investors – look for companies with high Promoter holdings or mutual funds where the fund managers have their own funds invested.

Learning 4

Study your failures rather than your success – Buffet emphasizes that both in life and other aspects of life studying and learning from your mistakes is of great importance. He embodies it by giving a full detailed account of his reason of shutting down the textile business and the loss in earnings caused by the delay in taking this decision.

Learning from our mistakes has one added advantage we tend to not repeat them again in future (hopefully). As Charlie Munger says “All I want to know is where I’m going to die so I’ll never go there.”

Learn more from Warren Buffet through previous parts of our series:

Part 1 | Part 2 | Part 3 | Part 4

Posted on

Women and Money: A Long Distance Relationship

Financial Planning for Women

A large part of our belief system is based on how we are conditioned since childhood. I come from a time when most grand – mothers around me were quintessential homemakers. They were entrusted with the responsibility of taking care of the home, family and kids, while the men in the family were solely and fully responsible for making “money” decisions.

Our mothers (mostly) grew up and thereafter lived in an environment where “finances” continued to be a male dominated subject. The only money related involvement that most home maker mothers have had is with respect to the monthly petty cash they handle. While it seems like a rather tiny part of family finances, most mothers have again demonstrated a great amount of adeptness at that. If you have not given this a thought, it is time you go back and ask your mother how she planned her monthly “kharcha” and “bachat”. In most cases, she will also map out her savings to the various deployment needs that she had well planned for in advance.

Why then is “money” still a male dominated domain? I have been interacting with people, both men and women through various online platforms. The level of participation that I witness from the female community is shamefully low as far as India is concerned.

Do women refrain from taking an active role in personal finance? Or have they been unintentionally not involved enough by the male community? My view is, partly both.

This fact has remained this way for decades now. Yet the existence of this fact is far more dangerous now than ever before. A couple of situations that I iterate below are reasons why women need to prioritize their involvement in decisions around personal finance:

  1. The absolute number of women in the Indian workforce has been increasing. Handling the monthly petty cash is not the only money they need to manage.
  2. Working women tend to work for lesser number of years as compared to their male counterparts. This is on account of maternity and family priorities. This means that their quantum of savings could to be lower than their male counterparts. However, that does not reduce the money they will need to fund their own retirement.
  3. Women usually have a life expectancy greater than that of men. So they need to plan for longer number of retirement years.
  4. A lot more women are becoming socially independent. This results in a difference in priorities and preferences even between married couples. Financial planning of the family therefore needs the wife to be as involved as the husband.
  5. When young, we generally do not foresee unfortunate situations in life. A women who is suddenly divorced or widowed could end up in an extremely struggling situation, if she has no involvement in family finances

And these are just some of the many reasons. Times are indeed changing and we do have a few female clients who play a very active role in financial decision making (Read more here). However, they are still a very few. It is time that men and women assume equal responsibility to play a more inclusive role in defining the individual and collective goals, manage cash flows and draft out an implementable financial plan.

CAGR For Her is an initiative aimed at bringing more women into main stream decision making around personal finance. It is about mentoring, coaching and guiding women to play a more inclusive role in financial planning for the family. My aim is to simplify complexities and talk personal finance in a language that is relevant for today’s women.

In case you wish to have a chat, contact me on the below coordinates:
Email: shruti.agrawal@cagrfunds.com
Phone: +91 98670 954324