Simple strategies to meet your cash flow needs after retirement

India is a saver’s economy. During the working years sacrifices are made for the benefit of the  family and retirement is keenly looked forward to. Advertisements of retirement products paint a picture of a comfortable retirement by the sea and that your life could be one happy vacation. However, in our experience as and when individuals start approaching their retirement they start to dread it. Questions such as are they well prepared for retirement, have they saved enough, and biggest dilemma faced is  where to invest this large sum of money in order to get a regular cash flow to become financially independent. What do you do to actually turn your retirement into one big happy vacation?

Effective cash flow management is the key to a successful retirement. The magic lies in creating a strategy that generates a regular inflation adjusted income for you and your surviving spouse, lasts you a life time and offers liquidity.

Strategy 1: Create a regular income stream

Every individual wants to be financially self sufficient. In the absence of a joint family, being financially independent is not a desire but a must have in your golden years. If you need money for your day to day expenses, then getting a payout once in 3 or 6 months doesn’t help. A lot of retirees rely on dividend income either from stocks or their mutual funds. This is a huge mistake which becomes evident with time when the steady income from salary has stopped completely. Receiving a dividend from your investments when you have a  salary feels great because it provides an additional income. What most people don’t realize is that the dividend is actually paid out at irregular intervals and the amount is also inconsistent. Similarly, the interest payout from your corporate FD might be on a quarterly basis or twice a year and now locked in until maturity.

How to execute this strategy?

To be financially independent at all times you have to ensure you have created multiple income streams and timed the out flow to suit your requirement. If you need to pay salaries and bills towards the start of the month, then set the payout around that time. Opt for monthly interest payout from FDs and set up a Systematic Withdrawal Plan (SWP) from your Mutual Fund investments on a monthly or bimonthly basis. This way you will know exactly when your next payout will happen and manage your expenses and bill settlements better. You will also be more in control of your finances rather than being helpless because of a bad strategy which can now not be easily changed.

Strategy 2: Generate an inflation adjusted income

Thanks to the increase in programs aimed towards investor education, many individuals understand and are aware of the impact of inflation on their income and wealth. The income that you receive should be able to beat inflation and help you live your life comfortably and on your terms. The current consumer inflation rate is at 4.17% however, it is essential to consider your lifestyle inflation which rises faster than food inflation. It would be wise to adjust your income against an inflation of 7-8%. The income that would have sufficed today will not manage to cover the same expenses next year due to inflation. On a yearly basis, you will notice that your bills are rising, so will the salary of your staff.

How to execute this strategy?

The interest income coming from your Fixed Deposits will not be able to implement this strategy since the returns are fixed and the amount is locked until maturity. You would not have the option to choose a higher payout even at the cost of wealth depletion.

This strategy can only to executed through a Systematic withdrawal Plan (SWP). With an SWP you have the option to increase or decrease the amount that is withdrawn from the investment. For eg. If your cash flow requirement is Rs 25000/month for the 1^st year, then with a Systematic withdrawal Plan you have the flexibility to adjust the payout by increasing it to Rs 27000/month which would be inflation adjusted. This way you can increase the payout from your debt funds using SWP strategy.

Strategy 3: Avoid excess liquidity as a part of contingency planning

Most senior citizens seek comfort in keeping large amounts of cash lying in their bank accounts. This they say is for emergencies and contingencies in case they need a lot of cash all of a sudden. Assume you have Rs 50 lakhs for your retirement corpus out of which if  5-10 lakhs are kept in your bank account for comfort then this is a very expensive way to deal with emergencies. With high inflation and increasing life expectancy, one can not afford to keep 10-20% of their wealth idle. At your age you will need every cent and penny to work as hard as it can.

How to manage liquidity?

If you have parked a large sum in your bank account, the reason has  less to do with emergencies and more to do with liquidity. With most of your money parked in illiquid assets like bonds, fixed deposits or real estate how do you get your money if a need arises. Liquid debt mutual funds are a perfect option since they provide both higher returns and offer liquidity. Liquid funds can generate a return of up to 6.5% and are highly liquid as the name suggests. You can redeem your units from a liquid any time and encash your money. You will receive your money in your bank account the next day.

Strategy 4: Plan your cash flow to avoid wealth depletion during your lifetime

With the advancement in medical sciences the average life expectancy in India has risen to be around 85 years. There is also a risk that both you and your spouse might outlive your life expectancy and live longer than what you had accounted for. This poses a threat to your financial independence as there is a possibility of your wealth getting depleted while you both are still alive. It therefore becomes important to invest your money in such a way that your portfolio can provide a steady cash flow not just for you but for your surviving spouse too and a little over your assumed life expectancy.

How to make this strategy work without compromising on your dreams?

As a retired person wealth preservation is of utmost importance however, if inflation and longevity poses a threat to your wealth and goals then you have to go beyond your comfort zone and add more growth assets in your portfolio. However, if there is a gap between the income that your portfolio can generate and your needs, then instead of taking excess equity exposure it is advisable to taper your expenses instead.

An expert financial planner will be able to execute and implement this strategy for you by creating a realistic portfolio which meets your income expectation and risk profile. A combination of debt and equity mutual funds should do the magic.

The secret to a successful retirement is a little bit of planning which can go a long way to turn your retirement into a happy vacation.

 

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Investor Biases you should Avoid!

It is a well known fact that human cognitive abilities and emotions both have a huge say on how one goes about investing, both negative and positive. However it is the negative side of such aspects that come to front more often that not. Such obstacles are usually termed as “biases”.

This article looks to highlight and explain some of the common “biases” which tends to prove a hindrance to an investor from achieving his or her’s investment objective. As fundamental part of human nature, these biases can affect all types of investors. Therefore understanding them may help you to avoid such pitfalls.

1. Overconfidence: It is common for people from all walks of life to see their abilities to be superior than the rest. But by definition of average, 50% of individuals would be lesser than average. Hence not everyone can be better off than others every single time. Whilst this high level of confidence can help in overcoming loss sooner, it also quite often leads to poor decision making. Examples: Taking too much risk in your strategies; Trading more often than what is required; Confusing luck for skill

2. Anchoring Bias: This occurs when an investor is basing his decision to either buy or sell on arbitrary price levels. Example: An investor has bought a stock ‘X’ at Rs. 100 and has risen to Rs 140. However the stock price starts declining backed by deteriorating fundamentals. Here the investor holds on to the stock nonetheless in the belief that the stock will return to its previous price point of Rs 140, even though data may not back the case.

3. Endowment Bias: Sometimes an investor adds an irrational premium to as asset that he/she is holding which would be higher than the amount they are willing to pay for that same asset if they had to acquire it. This usually happens for reasons such as familiarity/family value of the asset or simply to avoid transaction/tax cost. Example: Real estate owners often set the selling price of the property higher than the maximum prices they themselves would be willing to pay for it

4. Problem of Inertia: The failure of a person to act on items, even those he has agreed on, is called Inertia. Inertia often acts as a barrier to effective investment and financial planning. This is usually caused from uncertainty on how to proceed forward and results in an individual taking the path of least resistance i.e. wait and watch approach. One way to bypass this is “Automation”. Putting your monthly investments on autopilot i.e. SIPs in case of mutual funds is a popular way of removing inertia and adding discipline to your investments

5. Confirmation Bias: It is human nature for an individual to seek out views and information that support their own choices and thought process; and ignore those which do not. The same is often viewed amongst investors in their decisions.  While doing research, investors often find all sorts of positives while glossing over the red flags in trying to “confirm” the return potential of the investment.  As a result, this bias results in a poor, one-sided decision making process.

Whilst there are potentially more such biases that are identified, the above mentioned ones are the more common and frequent ones that should be actively avoided as far as possible. Human nature is such that there is no “remedy” for it. However by greater awareness and through taking professional advice from advisors, you could stand a higher chance of effectively navigating these hurdles.

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Is the D’mart IPO worth it ?

Issue Detail:
Issue Open: Mar 8, 2017 – Mar 10, 2017
Issue Type: Book Built Issue IPO
Issue Size: 62,393,631 Equity Shares of Rs 10 aggregating up to Rs 1,865.57 Cr
Face Value: Rs 10 Per Equity Share
Issue Price: Rs. 295 – Rs. 299 Per Equity Share
Market Lot: 50 Shares
Minimum Order Quantity: 50 Shares
Listing At: BSE, NSE

D’mart (Avenues Supermarket), which is in the retail business with 118 stores, selling products such as food and groceries (55 per cent of revenues), home and personal care products (20 per cent of revenues) and general merchandise, such as crockery, furniture, garments, footwear, and home appliances (25 per cent of revenues), has clearly come at a time where the global view on equities has turned positive, and volatility in equities is at record lows. IPOs like Snapchat in the US have created significant short term gains for investors, and Indian investors are seeking a repeat.  The fact that D’mart is associated with Radhakrishan Damani, believed to be one of the sharpest long term investors in India, has only added to the frenzy. The penetration and development of retail businesses in India have been a much discussed opportunity over the last decade, and the shift from unorganised to organised, and from offline to online, continue to be much talked about.

Whilst there is no doubt that this shift has begun and is only likely to increase significantly going forward,  as individuals and families gain more and more comfort with these formats and decide which one works best for themselves, one needs to keep in mind that margins in most retail businesses tend to be very slim, and thus investors will need to be very patient with these businesses, as they scale and maintain/try to grow margins simultaneously, in spite of significant competition. Customer loyalty across these formats will also be tested , as consumers do tend to be very price sensitive in most retail segments.

Whilst revenue and earnings growth for the business have been very decent at 35 – 40% CAGR  over the last few years, and the profit margins and other numbers are better than competition, with further scope to possibly expand through the use of private labels, one will need to remember that businesses of this type will create wealth for investors if they are truly thinking very long term. At a P/E of 36 times, even though cheaper than other players in the retail space, and with a model that is very efficient with use of capital, real estate and its supply chain, this IPO is  not cheap.

With expectations of significant listing gains pushing investors to try to get a share of the pie, and the issue size being only about Rs 1870 crores, most investors in the retail segment are not likely to get any shares at all, or even if they do, the net impact on their portfolio is likely to be minimal due to the small holding that they will get. For high net worth investors taking leveraged positions, a very high over subscription rate could essentially mean that their interest costs are also likely to be very significant.

With an uncertain global environment on the back of a possible US rate hike coming up, this issue is appropriate only for investors with a high risk appetite, or investors taking a very long term view of their portfolio in our view.

Just like Retail is all about detail, stock investing is all about earnings so keep your eyes focussed there and see how retail businesses continue to grow their earnings going forward, and deal with significant competition pressures.

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Financial Resolutions for New Fiscal – Article by Vishal Dhawan in TOI

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Do SIPs in Equity Mutual Funds help in goal based investing?

Some days back, in a discussion with a friend of mine, we once again ended up discussing whether mutual funds and in specific whether Equity mutual funds, play any role in goal based investing. Can an investor gather any sizeable corpus by systematic investing?

After a lot of discussion and arguements both for and against from her side and mine, I presented to my friend the below example.

Suppose you were to invest Rs. 1000 in a SIP in a equity mutual fund from January 1995 till 30 Sep 2013, and invest regularly each month. Simultaneously one could also invest in the Sensex a similar SIP of Rs. 1000 for the same time duration. Once could argue that the returns would depend on the type of mutual fund scheme chosen. So as to avoid being partial to any particular style or scheme, we took the SIP and simulated it over many different types of schemes such as a large cap scheme, a mid cap scheme, a value category scheme and a hybrid equity oriented (balanced) scheme and the Sensex.

When we tried to map the values of these SIP investments, the results were as you can see in the graph below.

Scheme	Type	Value  of Rs 2.25 Lakhs	Returns (xirr)
A	Equity Large Cap Scheme	Rs. 24.3 Lakhs	21.7%
B	Equity Flexi Cap Scheme	Rs. 23.5 Lakhs	21.5%
C	Equity Mid Cap Scheme	Rs. 22.4 Lakhs	21.1%
D	Hybrid Equity Oriented Scheme	Rs. 20.1 Lakhs	20.2%
E	S&P BSE Sensex	Rs. 7.7 Lakhs	11.9%
F	NSE CNX Nifty	Rs. 7.6 Lakhs	11.7%

In the simple example above, we figure that an investor by investing Rs. 2.25 Lakhs over a time period of about 19 years, has been able to grow his money from a small Rs. 2.25 Lakhs to a sizeable corpus of Rs. 24 lakhs (in case of scheme A). She has been able to get phenomenal returns in the range of 20-21% each year, depending on the scheme selected (A to D).

Even if the investor had invested in either the BSE Sensex or the CNX Nifty (Scheme E or F), she would have made returns in the range of 11% each year.

This brings us back to the moot question. Can we use SIPs for goal based investing. The answer as we can gather from the above analysis is a big Yes.

For all of us who are looking at investing simple small amounts each month, without burdening ourselves with huge commitments, can look at this example as an easy solution to garnering corpuses for long term goals. Of course, there are a few caveats:-

– this example assumes systematic investing of Rs 1000 each month, without fail for the last approx. 19 years, which means riding through both bullish and bearish phases of equities and giving equity investments the time they deserve

– this example also assumes no redemptions have been made from each SIP investment, especially important during bearish phases where most of us contemplate stopping our SIPs

– past performance is not indicative of the future, but history does teach us some important lessons.

So keep investing towards your goals and keep the faith !

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Are you your own doctor ?

A few days ago, I had this terrible headache. My first reaction was to take a pain relieving pill thinking it must be a normal headache but my friend gently castigated me saying ,”Don’t take self-prescribed medicine. From the outside, it can look like a mere headache but you don’t know what’s within. There are myriad ailments with common symptoms. Your job is to go to the doctor and let him decide on the cause and remedy, so that you can go back to your job at the earliest.”

Let’s relate this example to our finances. We often think we know everything about finances. We have chosen star rated mutual funds, fundamentally good large company stocks, we are well informed traders, etc. Of course, we know that the medicine is good, but the key question is – are we taking the right medicine?

When it comes to our savings, we are saving in a disciplined manner. But do we know, what’s the optimum level of saving for ourselves and our family -are we saving less or more than we require? We are often under an impression that if we save a certain portion of our earnings, thats good enough. However, we still aren’t sure about the level of saving and types of investments that suit our age, goals, expenses, etc. As far as investment products are concerned we may be excited by some product which is apparently very attractive but, are we sure it’s really good? Or even if its good, is it suitable for our requirement?

If we admit that we need a specialist to handle our health, we need a specialist to manage the health of our finances as well. The specialist who will guide us through all our important transitions and be with us as a ‘FPG’ (Friend, Philosopher and Guide) for all our financial decisions.

Like a doctor who will first focus on your problem and not on the medicine to be sold, your planner will always be interested in you, your financial goals, needs, abilities, etc. and not on a product. Is it not time you stopped being your own doctor?

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History- Don’t forget the learnings from the past.

 

RBI has , last night, once again introduced measures to tighten liquidity, so that the fall of the rupee can be controlled by removing liquidity for possible speculation on the rupee. Whilst this may seem like a localized response to many and unique to India, it is important to note that similar measures have been announced in Turkey, Brazil, Indonesia and China in different forms. Bond markets in India have reacted sharply to these tightening measures and are likely to do so every time these measures are announced. However, it is important to look at this from a historical perspective as the widely held view is that these measures are temporary in nature. If one looks at past measures of currency defence by the RBI, and the resultant measures and periods that it takes to reverse such measures, it provides some interesting insights. Four periods have been considered here:

1. 2011-12, when the rupee depreciated after the emergence of the Euro crisis and the US debt downgrade.

2. 2008, during the period of high oil prices and the global financial crisis.

3. 2000, post the tech bubble bursting

4. 1998, in the aftermath of the Asian financial crisis

PERIOD	DATE OF MEASURE	RBI’s ACTION	BOND YIELD IMPACT	REVERSAL DATE	PERIOD RUN
1998: Asian Financial Crisis	Jan 1998	· Increase in bank rate by 200 bps· Increase in CRR by 50 bps	· Immediate increase in yields· But within 1 month yields decreased though it took a few months to fully normalize	Mar 1998	· Policy: Approx. 2-3 months· Bond Market: 1 month
2000: Tech Bubble	July-Aug 2000	· Increase in bank rate by 100 bps· Increase in CRR by 50 bps, 25 bps immediately reversed	· Immediate rise in yields· Yields peaked by Nov 2000 · But reached a new low within 6 months	Feb-Mar 2001	· Policy: Approx. 6 months· Bond Market: 2-3 months
2008: Global Financial Crisis	Jun-July 2008	· Increase in repo rate by 125 bps· Increase in CRR by 75 bps	· Immediate rise in yields, however rates peaked before the last rate hike· Yields set a new low within 2 months of rate hike	Oct 2008	· Policy & Bond Market:Approx. 1-2 months
2011-12: Aftermath of the US Debt downgrade	Sep-Dec 2011	· Increase in FCNR & NRE rates· Increase in repo rate by 100 bps	· Yields peaked in Nov 2011bu reversed all losses by end Dec 2011· But reversed all losses by end of Dec 2011	· CRR cut in Jan 2012· Repo rate cut in April 2012	· Policy : Approx. 6 months· Bond Market: 2-3 months

Source: Bloomber,RBI, Axis Mutual Fund

As you will see from the data above, whilst bond markets sold off in response to RBI measures, bond yields typically peaked very soon after the policy actions and resumed the downward trend soon after. The total period of the bond market stress was 1-3 months, whilst RBI itself reversed the measures within 2-6 months. Thus, all these measures were temporary and were reversed when it became apparent that the impact on the domestic economy was worse than the marginal impact on the exchange rate.

Therefore, from an investor perspective, it is important to view your holdings in bonds and bond funds keeping this perspective in mind ie if you have a short term holding period, you need to be concerned about the volatility, but if you have a long term horizon, and are using bonds and bond funds as a part of your overall asset allocation strategy, you should look at these opportunities to buy into this volatility over the next few months.

Of course we should not forget what Warren Buffet once remarked “If past history was all there was to the game, the richest people would be librarians.”

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Are we closing our eyes to an opportunity of getting wealthy?

Over the last few months, India has been in the news for a lot of reasons that have not exactly been flattering – corruption scandals, high deficit numbers, a sharp fall in its currency, a decadal low in terms of GDP growth, etc. All of this negative newsflow had made investors wary of investing in India and Indian equities, with most investors getting comfort by being in fixed income, real estate or gold. In spite of the sharp correction in gold prices, a large number of investors are viewing this sharp correction as an opportunity to add gold, rather than looking at it as a possible indication of the end of a decade of supernormal returns from gold.

We strongly believe that it is time for investors to start looking outside this comfort zone , that is, look at equities for four reasons:

Number 1, Low valuations – With forward earnings in the region of 1.3 to 14 times currently, we think that there is great merit in investors looking at what has happened in the past, when markets have been in these valuation zones. Investors buying into these valuation levels have in the past been rewarded with significant returns over the next 3-5 years. Whilst it is very common to hear that investors in the last 3-5 years have not made money in equities, we need to remember that valuations 5 years ago were closer to 20 times forward earnings, and therefore the advantage of investing in a low Price to Earnings environment did not exist at that stage.

Number 2, Sharp fall in gold prices and other commodities – A significant portion of the deterioration on the current account deficit has been on account of higher gold imports. With 1 year returns on gold now being negative and 2 years returns being in line or lower than bank deposits, we believe that it is only a question of time before investors start to question the future prospects of gold. We believe this is very common as most investors tend to look at returns from a rear view perspective, and just as they are uncomfortable with buying equities, because of its poor performance in the last few years, this is likely to start showing up with their gold purchases slowing down as well. Lower demand for gold should be good news for India’s current account deficit and currency.

Number 3, Low correlation between election years and stock market returns – Data from the past election years or the year before election years, do not seem to show any evidence of a strong correlation with equity market returns. In fact, if anything, equities have tended to do very well in these periods. Thus, we believe that the fear of uncertainty around elections is already priced significantly into markets currently, and investors with a 3-5 year view should be focusing more on low valuations and less on guessing the outcome of the election, especially if data from the past indicates that election outcomes do not have a high correlation with equity market returns.

Number 4, Majority views do not work with investment portfolios – Investor portfolios tend to get polarized towards particular asset classes due to high returns in that particular asset class. For example, most portfolios we see today are significantly overweight gold and real estate. Fund flow data ie where the majority is investing, has tended to show that the majority normally gets it wrong, and strong outflows from a particular asset actually make it a good time to buy. The significant outflows from equities over the last many months and years, and the low level of conviction, in our view are strongly indicating that there is every chance that the majority are going to get it wrong again and wealth is going to get created for those who open their eyes to equity today and build it to add up to a meaningful part of their wealth over the next six months to one year.

The biggest risks to this outlook come from high oil prices, so if I was an investor wishing to get wealthy today, I would keep my eyes wide open to see what is happening to oil globally. High oil prices are therefore your biggest risk to getting rich.

I urge everyone who does not have a meaningful exposure to equities to open their eyes to this opportunity to get wealthy, that seems to be available for those who wish to take it for the next 3-5 years.

The windshield of a car is many times larger than the size of its rear view mirror, so that the driver can focus more on the road ahead, with the rear view mirror being used sparingly. Unfortunately, in an investment portfolio, the rear view mirror gains more importance than the windshield, which can be very dangerous for the driver. Look at equities through a windshield, and not through the rear view mirror.

I cannot help but quote Sir John Templeton here – The time of maximum pessimism is the best time to buy.

 

Disclaimer : This communication is for informational, financial literacy and educational purposes only. This communication should not be construed as financial advice.

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Manage Cash Flows Well

Meeting deadlines, adding value, juggling priorities, wearing different hats are a part and parcel of every entrepreneur’s life. Whilst there is a certain high that comes with all of this, it is also crucial for an entrepreneur to critically manage money, both for the business and himself/herself and dependents. Whilst efficient use of capital is one of the most crucial elements along the entire entrepreneurial journey, we believe there are two phases where managing money is absolutely critical. Money management during these two phases can go a long way in ensuring that the business can reach a stage where it is robust enough to survive, grow and flourish over longer periods.

Phase 1: Whilst you are planning to set up

Phase 2: In the first 18 -24 months of the business

Money management during both these phases can be fairly similar. Entrepreneurs still need to lead their personal lives, even as they go about building the blueprint for the business that is closest to their heart. With a significant number of entrepreneurs today quitting jobs to find their true calling, planning the capital requirements for their business, as well as to sustain their personal lives whilst positive cash flows from the businesses are yet, to happen are crucial. We would recommend that entrepreneurs focus differently on their personal and business finances.

Personal finances

1  Create a large contingency fund – Have 12 to 18 months of personal expenses ( including personal EMIs ) in financial instruments, wherein they can be accessed immediately, as well as have no significant risks of capital loss. Instruments like PPF and EPF accounts are not great friends of early entrepreneurs as access to funds in these accounts tend to be rather difficult and time consuming. Instruments like bank deposits and debt mutual funds without a lock-in are superior options during this phase. You may need to start drawing a small compensation during the latter part of this phase, so seek tax efficiency as well.

 2  Ensure that you are covered against risks in your personal life – Have adequate life insurance (buy term insurance as it is the most cost efficient) so that debts and living expenses of your family are adequately covered. Ensure that you have health insurance cover for your family and dependents in place for an adequate amount.

Business finances

1  Avoid risky investments with your business finances – Remember, the best returns over a period tend to come from your business so avoid other risky investments in this stage with funds which are needed for your business. For example, do not temporarily park funds into equity markets or real estate. At the same time, optimize your returns depending on your cash flow requirements, by building a tiered investment strategy. In case you cannot do this yourself, use the services of a financial planner. Liquid and debt funds can be very useful tools to consider.

 2  Focus on good costs, eliminate the bad costs -With a large number of businesses, getting started without external funding and needing to sustain using internally generated cashflows, it is crucial to keep costs under control. Look at costs as good costs and bad costs. Good costs are those that have a high probability of a success outcome, whereas bad costs are those with a low or no probability. This definition may vary from business to business, for example a swanky office may be a good cost in a consumer business, and a bad cost in a B2B model.

3  Use technology tools to the maximum – Through the use of mobile technology and the internet, it is now possible to manage your cash flows efficiently, with minimal commitment of your most precious resource during this phase i.e. entrepreneur’s time. Understand how you can use technology to manage cash flows and get superior returns on your temporarily idle cash in this phase.

Remember, whilst all rupees are equal, but some are more equal than others. More so, when you are a new entrepreneur.

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