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Budget 2018: What should investors be doing?

The much awaited Union Budget 2018 was presented and views as usual are multi-fold and diverse. Here is a short summary of the key questions that must be on your mind as an investor. Please feel free to post any further questions as comments or reach out to us on contact@cagrfunds.com. You can also Whatsapp us your queries on +91 9769356440.

Which are the sectors which are under Government focus?

The focus of the NDA Government is on strengthening the ground level infrastructure and thus the focus has truly been on the lower pyramid of the society. Most of the budgetary support has been rolled out to sectors which therefore impact the rural economy. Key sectors that are under focus are:

Agriculture & Rural – Focus on agriculture was an expected move this year.
  • MSPs to be 1.5 times the cost of input to the farmer. This should benefit all agri input companies (Seeds, Fertilizers, Pesticides)
  • Focus on improving access to maximum MSPs – Historically, farmers have not received the MSPs that they have deserved. While the Government claims to be committed to improving access, we need to wait and watch the success of the same.
  • Promotion of Organic farming – Will be useful for seed companies, not so good for fertilizers and pesticide companies. But given the small scale of organic farming in India, the impact is not expected to be material
  • Cold Storage – They are likely to be positively impacted if Operation Green is implemented well. A good part of potato production in India gets wasted and hence this is a welcome move
  • Overall, several initiatives have been rolled out for improving the rural livelihood. Actual benefits will depend on implementation
Health – Several initiatives have been rolled out for the Heathcare sectorHealthcare sector.
  • Flagship National Health Programme to cover 50cr people. Poor families to have better health insurance coverage
  • Focus on medical research
  • Use of generic drugs likely to increase

Should you then start investing in the thematic funds related to the above sectors?

Every year the budget rolls out some enhanced and some new policies for the key sectors. Short term sops lead to short term gains while structural reforms have a very long term play. From a broader picture perspective, sectors which are over exposed and dependant on Government policies should be avoided as any change in the Government itself or their priorities can have a very significant impact on particular sectors.

We therefore suggest that taking concentrated exposures in particular sectors should be avoided. In mutual funds, diversified exposures are always safer.

What is the tax implication on Equity?

Implication of Budget 2018 on Equity

What is grandfathering of returns?

If your investment in Mutual Funds and Equity is there for more than 1 year there would be a tax of 10% on the profit earned which was 0% as of now. For this they have considered Base Year as 31/01/2018 and profit calculation will be based on the higher of the two values – actual purchase price and the price on 31st January 2018.

For Example, consider that you have invested INR 100 on 1st September 2016 and you redeemed on 2nd April 2018.

Price on 2nd April 2018: INR 180

Price on 31st January 2018: INR 150

Long Term Capital Gains:  INR 180 – 150 (since this is higher than the actual purchase price of INR 100) = INR 30

Tax to be paid: 10% of INR 30.

Short Term Capital Gain remain unchanged at 15%.

With long term capital gains tax on equity being levied, are equity mutual funds still an attractive investment avenue?

Equity as an asset class is still attractive when we compare the returns with other asset classes. The benefit of compounding your money at a higher rate is immense when you are planning for your long term financial goal. Further, this taxation does take away some of your gains in the form of taxes, but even after the tax implication the post-tax returns are far more lucrative than other asset classes.

What does it mean for the debt mutual funds?

Debt funds still remain an attractive investment vehicle for people in the 20-30% tax bracket. In the present budget there has been no change in the tax structure for debt mutual funds so it remains an attractive investment avenue to gain from the benefit of indexation in the long run. Read more about how and when are Debt funds useful here.

What does it mean for you if you are a senior citizen?

The budget gives a big relief to senior citizen. Any interest a senior citizen earns either from fixed deposit or savings bank account is exempt to an extent of Rs. 50000.

So if you are a senior citizen and want to park an amount up to Rs. 700,000 for 1-5 years, then a fixed deposit now makes better financial sense for you.

What does it mean for you as a retail equity investor?

If you want to invest for the purpose of wealth creation with a time horizon of more than 5 years

For retail investors on a relative basis equity mutual funds still remain an attractive asset class. On a risk adjusted basis it will still outscore other asset classes. As a retail investor you will gain financial independence by saving more and maintaining your asset allocation as per your risk appetite. Also, it is recommended that choose “Growth” schemes as dividends are now taxable at 10%.

If you want to invest for 3 – 5 years (but more than 1 year) to generate better returns

For people who were using dividend option for such measures will have to re-look as dividends now will be taxed at 10%. However, a hybrid product such as a balanced fund may still outperform other possible asset classes for this objective. Therefore it is suggested that you take exposure in “Growth” options of balanced equity funds through the SIP or STP route. Lump sum (one time) investments in equity or equity mutual funds for such time frame should be avoided.

If you want to park your money for use between 1 – 3 years

Ultra – Short Term and Short Term debt funds where there is no change in taxation still remain an attractive investment avenue.

If you want to park your money for use within 1 year

Arbitrage funds as a category will become relatively less attractive as you will have to pay 10% taxes on dividends received. However, if you are in the 30% tax bracket, this is still a more lucrative option than other alternatives available (since Ultra Short term debt funds are also giving lower than average returns). On the debt side there is no change

If your existing holdings are in below types of funds, then what actions should you be taking?

Arbitrage funds – Stay invested till March 2018 since all changes take effect from April 2018.

  • If you are in 20 -30% tax bracket and withdrawal is planned within 1 year: Continue to stay invested in Arbitrage Funds even after March 2018
  • If you are in 20 – 30% tax bracket and withdrawal is planned after 1 year: Split exposure between Arbitrage Funds and Short Term Debt Funds
  • If you are in 10% tax bracket: Shift to Ultra Short Term and Short Term Debt Funds

Ultra Short Term Debt / Liquid Funds – Continue to stay invested. If funds are not required to be deployed in next 3 years, you can consider taking small exposures in equity on market corrections (if they happen over the next few weeks)

Dynamic Bond Funds – We are not recommending dynamic bond funds in the present scenario seeing the volatile debt markets to retail investors.

Short Term Funds – Short Term funds have had small hits because of the debt market volatility.

  • Investors should not look into the category for less than 1 year. For less than 1 year stick to ultra-short term funds
  • Some of you would have seen less returns in the short term funds in the last 3 months because of a sudden spike. We would like to emphasize that during our discussion with you we had suggested these funds for a horizon of more than 1 year. So please hold on the investments as the returns are likely to improve in the next 3-6 months

Duration Funds – We still hold our previous view of sticking to short term bond funds and accrual funds seeing the interest rate scenario.

Equity funds – As long as your time horizon is more than 5 years, stay invested. However, periodic look at the portfolio for re-allocation and re-balancing is inevitable. At CAGRfunds, we are committed to your wealth creation. While we are planning to start are annual re-allocation and re-balancing exercise after 15th February, 2018, do reach out to us if you want to discuss your portfolio prior to that.

Overall take: We feel that as retail investors we will benefit far more by focusing on the basics (which is our hand) which is consistent increase in our savings. Ensuring regular investments over a long period of time will help us reap the true benefit of compounding and create wealth over the long run. We therefore highly encourage starting / moving to the SIP mode of investment. While short term trading / speculation in direct stocks was never recommended for retail investors, it becomes all the more unattractive now. Also, the objective of investment at the first place is not to save tax. It is to build wealth. Equity mutual funds and a diversified portfolio continue to keep the objective intact and hence no major changes are required in the face of tax implication.

The only way to secure your future is to build it!

Disclaimer : This update is as per the information available as on 1st February 2018 from the budget document

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Learning from Warren Buffet Series – Part 1

What is this series about?

We have all heard a lot about the ace investor Warren Buffet. But how many of us have really read through his letters? So here we are, launching a learning series where our expert Mr. Kshitiz Jain summarizes the learning from each of his letters and connects it to what it means for us. So whether you invest in stocks or mutual funds, do takeaway some key learning for investing in general!

Also, participate in sharing the knowledge. So do Comment / Share / Like.

Berkshire Hathaway Shareholder letter – 1977

Characteristics of Good Management : Buffet letters gives us a lot of insight on this matter
  1. Buffet prefers to give his shareholders bad news first, followed by good news. There are various evidences throughout the letters. This is a hallmark of good management, while reading annual reports look for these characteristics.
  2. Good Management will readily accepts its mistake and instead of finding excuses looks to either cut losses or keep their shareholders well informed about their mistake and learning from it. Buffet accepts that Textile business has not been working well and explains in detail the reason why they are continuing with the business.
  3. Good management will give clear guidance and instead of being just overly optimistic, good management will manage shareholder expectations honestly.
  4. Managerial Discipline even in the wake of industry wide malpractices.
Investing gyaan: Buffet gives us a unique insight in his style of investing
  1. While investing in stocks evaluate as if you are buying ownership of the company and not just looking to earn short term gains.
  2. Buffet defines the type of business, one should invest in:
    1. One that we can understand,
    2. With favorable long-term prospects,
    3. Operated by honest and competent people
    4. Available at a very attractive price.
  3. Long term investment horizon and ignoring short term volatility  – “Most of our large stock positions are going to be held for many years and the scorecard on our investment decisions will be provided by business results over that period and not by prices on any given day.”
  4. Invest in companies or industries where the industry scenario is favorable, this gives the company scope to make mistakes, learn and move on – “One of the lessons your management has learned – and, unfortunately, sometimes re-learned – is the importance of being in businesses where tailwinds prevail rather than headwinds.”
  5. Stock market gives you opportunities to buy outstanding businesses at discounts which will not be available, if you are looking to acquire entire companies – “Our experience has been that pro-rata portions of truly outstanding businesses sometimes sell in the securities markets at very large discounts from the prices they would command in negotiated transactions involving entire companies. Consequently, bargains in business ownership, which simply are not available directly through corporate acquisition, can be obtained indirectly through stock ownership.  When prices are appropriate, we are willing to take very large positions in selected companies, not with any intention of taking control and not foreseeing sell-out or merger, but with the expectation that excellent business results by corporations will translate over the long term into correspondingly excellent market value and dividend results for owners, minority as well as majority.”
My two cents

Buffet helps us to answer two of the most important question that an investor needs to answer. I have tried to extend these learning further for mutual fund investors.

Where to invest?

Invest in good quality well managed businesses that you understand and are available at attractive prices. This is one of the most important learning that investors should always try to invest in quality business, even if they may not be the flavor of the month. A good quality well managed business that is currently out of favor is the best thing that can happen for an investor. Similarly, good quality mutual funds managed by fund managers with long term track records may under perform for short periods in between but will give higher returns in the long term.

How to identify good management?

Management that is honest, manages shareholders expectations with clear guidance, readily accepts mistakes and disciplined. Similarly, a mutual fund manager who has a disciplined approach to investing and does not waver from his investing style and fund mandate even in tough market situations would be someone to entrust your investments with.

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Mutual funds investing with CAGR has been a delight

A few years back I met my cousin and we were discussing how I should be deploying my recently started salary inflow. That was the first time I came across the term “Mutual funds”. I was never a finance person and never intended to be one. My uncle told me that I could do anything with my money but not invest them in mutual funds. He apparently had a 2 year experience with equity mutual funds and he had faced a significant loss on that front. So he was pretty much convinced that mutual funds were risky and had the potential of eroding away all your hard earned money. And so was I.

I met the CAGR team through a common friend. And trust me, I had no intentions of investing in any risky instrument ever. I was quite amused when I told them this and they responded by saying “Absolutely, you shouldn’t”. They asked me why I was so averse to mutual funds and I told them the short story that I just told you. They asked me to spend 30mins with them and they promised, they won’t sell anything to me.

So the next day, we met at one of the Bandra CCDs and thus started the myth breaking chain for me! Following are the facts that they exposed me to that day:

  1. Every investor has a certain “risk appetite”. If you love sky diving and have traded in stocks in the past, you certainly have the willingness to take some risk.
  2. Risk is not same as loss. If something is risky, it does not mean it will result in sure shot loss. You would not have been reading this if you have tried sky diving and if risk meant loss.
  3. Risk means a probability of losing money under a certain set of circumstances
  4. There are no free lunches in life. You cannot create a huge amount of wealth from banks / people / institutions who promise you a certain return, because guarantee for anything in life comes at a premium. And forgoing higher returns is the premium you pay for the guarantee you seek.
  5. Mutual funds have both equity and debt asset classes. So if you are a low risk investor who wants cannot witness some volatility in the investment from time to time, then you should restrict yourself to debt mutual funds and settle with lower returns
  6. But, if you can invest a certain fixed amount every month (SIP), let it stay invested for more than 3-5 years, witness some volatility from time to time and exit when markets are on an upswing (rather than panicking and booking profit during correction), then you can invest in a portfolio of equity funds.

It was a good half an hour knowledge session about various categories of funds, concepts such as asset allocation, risk profile, risk-return trade off and so on. They did not sell me anything, yet I was sold to their knowledge and the time they invested on me. I therefore expressed my interest to start and they suggested that I should start with a small amount to first gain conviction. Conviction not about good returns (that can only be evaluated over the long term) but how SIPs are a good way to start saving and creating wealth.

I am now a loyal CAGR client. I started with multiple SIPs as well as switched to tax saving mutual funds to save taxes.

I like the CAGR team not just for their consultative approach, but also for how they have designed their online platform. I invest my money in just two clicks and the dashboard is so informative that it gives you all the information you need as well as skips any unwarranted information. Very clean, simple, tidy without any information clutter. For someone like me with no financial knowledge, the DIY mode makes really easy for me to invest my money in mutual funds without any handholding / assistance from anyone else.

P.S. – I love the additions they make on their blogs. I feel a lot more in control of my money now!

Story has been contributed by Puneet Kochale who has been a CAGR client since January 2017. Puneet is an MBA graduate from FMS – Delhi. 

Call / whatsapp us on +91 9769356440 for a free financial consultation! Alternatively, leave a comment on the post and we shall be happy to get back!

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How are CAGR’s lawyer clients successfully managing to stay on top of their finances?

sip vs lumpsum

Lawyers are known to have extremely busy lives. With multiple cases lined up across various locations, most of their time is spent either travelling or reading tons and tons of case laws. This leaves them with very little or no time to manage their wealth. As a result, a large sum of money is almost always lying in the bank or traditional investment products such as Fixed Deposits.

How do these lawyers then stay on top of their finances?

At CAGR, we spoke to several lawyers to get their view on this subject. We received some interesting insights about professionals who are extremely busy with their work and have little time to spend on growing their wealth.

  • Nature of work is such that it demands substantial amount of time to be spent on professional requirements
  • Have some knowledge about financial assets such as mutual funds, but have little time to spend researching on the same
  • Automated digital platforms to start investing are convenient, especially if transaction time is reduced to a few seconds
  • Have an extremely high need for developing a trust based relationship with their financial planner who can cater to their queries and requests real time

With several lawyers as our clients, we have experienced the enough elements time and again. And delivering on requirements such as above has been the DNA of CAGR’s offering. In our view, lawyers need a good mix of hand holding and quick processing. Neither do they have the time to research on various investment instruments, nor do they want to spend time in transaction formalities. A trustworthy and seamless investment experience is a core requirement. In addition, every now and then we have received a Whatsapp message with a quick query about a lesser known investment instrument and a quick take on whether the concerned client should invest in the same. In our experience with lawyers, a seamless digital platform is only a hygiene factor. The reason our clients have loved us so far is because of the customized and hybrid model that we offer. Anytime Anywhere – Let us Grow Together!

Call / Whatsapp us on +91 97693 56440 for a FREE financial consultation!