Learning from Warren Buffet Series – Part 4

This time, I have combined the key takeaways from 3 letters. Because, while Warren Buffet writes these letters with a gap of one year, we are trying to bring up these articles every month. So we need to avoid being repetitive. But, most of the knowledge imparted by him is so timeless and relevant, that we are forced to write about them again and again.

Berkshire Hathway Shareholder letter – 1980-82

Key learning from the letters (in no particular order)

Learning 1

Buy right and sit tight – If your purchase price is sensible, some long-term market recognition of the accumulation of retained earnings almost certainly will occur. If you are confident about your investment, you need to wait patiently. Pascal’s observation seems apt: “It has struck me that all men’s misfortunes spring from the single cause that they are unable to stay quietly in one room.” If there is ever a chart which can speak, I believe the below chart of BSE Sensex would just say “shut up and remain invested”.

Sensex journey and growth

Learning 2

Forecasting folly – Forecasts are useless especially in stock markets. Investors need to avoid falling for forecasts at any costs.   “Forecasts”, said Sam Goldwyn, “are dangerous, particularly those about the future.” Read why here.

Learning 3

Invest when there is blood on street – Investors need to be patient and invest when there is fear in the market, because it is during these market corrections that you will get handsome opportunities.

Learning 4

Avoid business in industries producing un-differentiated products – Businesses in industries with both substantial over-capacity and a “commodity” product (undifferentiated in any customer-important way by factors such as performance, appearance, service support, etc.) are prime candidates for profit troubles. Investors need to be wary of businesses in industries where there is no difference in products like sugar, textile, paper etc.

PayPal founder, Peter Thiel in his ground breaking book “Zero to One” says “All failed companies are the same: they failed to escape competition.”, and it is very difficult to escape competition if the product you are producing is undifferentiated.

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

Part 1 | Part 2 | Part 3

Aditi’s Money Story: I Was Always Conditioned To Save First

Aditi's money story

Aditi is one of my earliest female clients. And the reason I chose to write about her money story today, is because she inspires me.

A couple of months back, a common friend gave me her contact and we decided to meet at her place. She was newly married and I had almost barged into one of her lazy, cozy weekend. She greeted me well and waited till Karan, her husband, joined us. The agenda was to discuss their finances.

After having a brief discussion about their respective backgrounds, she quickly told me how she had been investing in equity mutual funds since she first started working. And how Karan had been risk averse, so to say. Now that they were married, she wanted to make sure that they have the right asset allocation and hence adequate equity exposure. She wanted an early financial independence for the couple. Meanwhile, I could sense Karan’s limited participation – may be because he was uneasy about equity, I thought.

A couple of weeks back, when I decided to venture into the domain of helping women understand and manage their own finances better, I reached out to Aditi to get her views on the subject. Remembering her as someone who took the lead in discussing family finances, she was one of the very few names that came to my mind.

A transcript of our recent conversation is given below:

Me: How do you feel about the fact that you take decisions around your finances / family finances?

Aditi: Ever since I was a child, my father used to encourage me and my sister to save whatever little earning we used to have. So we have always been conditioned to think of savings as an important aspect. The fact that I started investing since my first job has really helped me continue the practice. And today when I think about it, I realize it is a great feeling to be self – dependent. The ability to take care of my own needs gives me a lot of confidence.

Me: What made you go against the conventional practice of letting the man of the family decide?

Aditi: When we were young, a mass prevailing notion was that women are first the father’s responsibility and then the husband’s. I often questioned myself, why is that? In fact, when I was a kid, I heard someone asking my mom to have a third child, otherwise who would take care of them when they grow older (we are two sisters). It kind of impacted me deeply. I have always wanted my parents to think of me as an asset and not as a liability. I knew for sure that I wanted to change the norm that daughters cannot take care of them when they grow older.

Also, Karan and I both have our respective strengths. Knowing that managing finances is my strength, Karan has proactively taken a step back and is happy to let me handle the key financial decisions. So, for me it was not about going against the conventional practice.

Me: That is a very interesting thing to note Aditi. Because in a lot of families (including the ones where the wife is a home-maker), I notice that the men consider it to be their fundamental duty to take all financial decisions. If only, every couple could mutually agree on the mechanics that works best for them, the family finances could be managed jointly and more amicably.

Aditi: Absolutely. I think I have been lucky in this respect. But a lot of women are not.

Me: And now I understand why Karan wasn’t an active participant when we first met. So tell me, what comes to your mind when you think about “Financial Independence”?

Aditi: Financial Independence is extremely important to me. It is my confidence to live my life my way. I want to go to work because I love my job and not because I have to pay the bills. I want to stay married because I am in love and want to grow old with him and not because I have to as I cannot support myself financially. I want to achieve financial independence to have the freedom to do things I love to do, to live life the way I want to. And when I say “I”, I mean “us”.

Me: What has been your experience with me and CAGRfunds on a whole?

Aditi: I got to know about you and CAGRfunds through a common friend and I am always inspired by people who choose passion over 9-5 jobs. So when my friend told me that some of his friends had started this financial planning company, I was quite kicked about meeting you. Despite the fact that I had already met a few other investment firms before I met you.

The first meeting that we had at my place was something that made me very comfortable with you. It was casual yet relevant. There was a certain structure to the discussion we had, and logic to whatever you said. We resonated in lot of ways and it was that warmth to which I got sold which was missing in the other older firms.

What I like best about working with you is that you are extremely reachable. I know that I can talk to you if I want to. And more importantly, I trust you with the guidance that you give to me. Your intent when you talk to clients is not to sell. It is to educate them. You bring so much credibility on the table that the sale eventually just happens!

Me: Wow Aditi. Thanks for so many kind words. As you know, I am venturing into this domain where I want to help women step into main stream financial planning. What do you think about this initiative?

Aditi: I think it is a brilliant initiative. I don’t see a lot of women who are as lucky as I have been. And one of the major reason is that they are not comfortable about disclosing their level of unawareness. I mean, a lot of women would rather not speak than be judged as stupid for not knowing what equity means. So the good thing about this initiative is that as a woman, you will understand them better, not be judgmental, and help them see things from a different perspective.

Me: Thanks Aditi. That’s the intent. And I really hope that I am able to make a tangible difference to a lot of women.

Aditi: Of course you will. It has been great working with you so far and I am sure others will feel the same. All the best!

CAGR-For-Her: It is an initiative to help women to get better control over their finances. It is about making women aware of the importance of being fully involved in financial decision making. It is an attempt to drive one more woman towards her financial independence.

For embarking on your journey of financial independence, write to me directly on shruti.agrawal@cagrfunds.com

How are the rich millennials planning for misery?

Last month I met a friend who was visiting Delhi for a mid – month break. Molly (name changed) was into sales of carbonated drinks and work brought her to Delhi on a Friday. So she stayed back and decided to spend some time off with her cousins and friends.

We went to this cosy little Italian place in GK 1 and promised each other to pen down 5 stars on Zomato for the heavy doses of heavenly pasta that we had. We quibbled a little on who should pay the bill and then we dropped both our cards on to the bill tray. Swipe. Up went an eye brow and five fine lines cuddled up into a frown on her forehead. I knew what was wrong. It was 20th of the month and her bank balance was into a low 4-digit number. No, credit card was not her solution. She was just unable to save what she wanted to save every month. And as result, she had been deferring her much coveted Euro trip for over a year now. Because she never had enough surplus to fund her desires, sorry – foreign vacation desires.

Molly was a quintessential corporate working girl. She was realistically ambitious, driven to deliver more than expected, eager to learn and extremely proactive. However, with over 3 years of work experience now, she was still far from financial independence.

That evening I went back and thought – why a good part of our generation (Read: Millennials) is so professionally accomplished yet financially poor. At this age, our parents were probably running a family of five. And we struggle to scrape through a month. A lot of this has a very deep connection to our habits and behaviours. Let me list down what comes to my mind.

We don’t want to grow up

No adulting

Credits: thevanguardusa.com

The spending priorities of our generation are extremely different from that of our parents. With the luxury to spend only on ourselves, we experience negligible levels of financial responsibility. And our inexperience at “adulting” reflects in how we manage our money.

We fail to delay gratification

Spend today, Save later

Credits: theawkwardyeti.com

Our generation is more here and now. We want quick replies to emails and hate to wait for the next sale in H&M. We also always want the latest in town. Since we don’t have much responsibilities (Refer the first point), we have this innate urge to gratify ourselves immediately. We believe in living now than living long. Even if that means possessing three credit cards.

Likewise, we want to get rich quick

Everyone wants to double their money within a year. Everyone also wants to step out richer from a casino. Neither of this happens to everyone and every time. If we want to stay rich for a long period of time, we need to deploy our money carefully, rationally and patiently. There are no shortcuts to securing a good life for one’s own self.

We misunderstand saving for our future

Bank deposits cannot beat inflation

Credits: Matt from the Daily Telegraph

We get a misplaced sense of security when we put a certain amount of surplus in our banks. We also feel proud of ourselves since we took a stab at “Saving”. But sadly, the world has move past the era when savings were enough for livelihood. Our ever increasing standard of living coupled with rising costs is a double whammy. And savings can do nothing but give us a false sense of security and sufficiency. Investing is the new saving.

About the author:

Shruti is a financial planning enthusiast and spends substantial amount of her free time in helping out her friends and relatives sorting out their finances. Currently working with Mahindra & Mahindra, she is one of our esteemed guest writers. She is an MBA from MDI Gurgaon and a CFA (CFA Institute, USA). 

About CAGRfunds:

We are a bunch of financial experts who help people manage and grow their wealth. We focus on making our clients financially independent by educating them and guiding them throughout their financial journey. If you think you need help with your money, reach out to us on +91 97693 56440.

Have you been taking hasty investment decisions?

Hasty investment decisions

Investing in equity is a little like marital courtships. The market rallies are like the butterflies in your tummy when you are courting your partner. Only till you realize that all is not hunky dory!

The recent market volatility has shaken up a lot many investors. Those who jumped on to the equity bandwagon are left wondering if they took the right bets. And those who didn’t are still contemplating if they really did miss the bus. Many amongst them are those who are convinced that they took hasty investment decisions which they now regret.

In this article, we break the myths which lead to these hasty investment decisions.

  1. If your insurance premiums are being returned to you, do the maths again.

Almost every family has those policies which promise to return back your insurance premiums. What a joy it is to get insurance cover and also get all your premiums back! Fact check – the actual premium that goes towards your insurance cost is probably just a small fraction of the total premium you pay. The rest of your premium gets invested and you are passed a small fraction of the returns generated (which actually may not even beat inflation). Basically, you get a small insurance coverage, pay a high premium and get meagre or no returns. Never mix insurance with investment!

  1. You cannot earn double digit returns in 2-3 years and that too consistently.

Over the past few years, investors have witnessed 20+ returns within a year or two of starting their investments. But that does not always happen. In some years equities will give you high double digit returns and in some years they will go negative. Volatility is common and a part of your wealth creation journey. Keep your expectations realistic.

  1. You don’t sell your house when property prices drop. Why do you panic sell equity?

This is one area where the liquidity of equity is used to its disadvantage. People tend to panic at the slightest of negative returns in their equity portfolio. The panic results in selling out and incurring a loss. And thus equity becomes the untouchable for generations thereafter! The only thing you need to ensure during negative returns is if you are invested in a good enough fund. Equities are meant for the long term and you have to survive through the noise about all the negative returns.

  1. Guaranteed returns will never help you grow your wealth.

We are inherently curious about our future. No wonder the Godmen have a whole industry to themselves. However, if someone is being able to guarantee you a return, it is natural that he will keep a margin of safety and guarantee only what he can certainly earn and accordingly pass on to you. The guarantee is almost always close to inflation or sometimes even lower than that. So your fixed and recurring deposits can at best help you protect your capital, not meet your future financial goals. You need to put your money to work with some calculated risks so that you can grow your wealth.

  1. Just because you want the highest returns, doesn’t mean you should put all your money on that one instrument.

We often get clients who want to invest in the “best” mutual fund and the “best” stock. The reality of life is that the experts can only have views around what could be the best. What turns out to be the best is a fact you get to know only in the hindsight. So the “best” strategy is to not put all your eggs in the same basket. Diversify adequately.

  1. Technology has enabled you to see your investment value on a daily basis. But that doesn’t mean you should.

When did you last check the current valuation of the house you purchased? For some of you the answer would be never. Exactly our point. Just like property needs time to appreciate, so does equity. If you feel too restless about watching your portfolio every day, you need to stop doing that right away.

At CAGRfunds, we strive to help you grow your wealth. And thus we ensure that we tell you the right thing at the right moment. If you are currently worried about your portfolio, we are just a call away! Feel free to reach out to us on +91 9769356440.

Is trading in stock markets your answer to create wealth?

Trading stock markets

I grew up watching the black screen with constantly changing green and blue tickers. For a little while, I even used to handle my father’s clients who used to call every 15 minutes with a new “Buy” or “Sell” order to be placed. I was a kid just out of school then, with very little idea of what stock markets were. But, it was thrilling! I remember telling my father – I want to make money like this for myself one day.

But as I got deeper into the industry of financial planning and wealth creation, I realized a lot of things about trading in stock markets. And all of these are applicable to almost all of the traders.

  1. Most of the stocks are bought to be sold on the same day
  2. Most of the buyers have no idea of what business the company is in
  3. All of those who are buying a stock believe (or hope) that the stock price will go up and vice versa
  4. Sometimes, such buyers think that they know why the stock will go up
  5. The quantum of buying on any particular day is equal to the quantum of selling (which means that while the buyers are convinced about the price going up, the sellers are of a diametrically opposite view)
  6. Every day at 9 o clock, analysts tell us the stocks which will be doing well for reasons X,Y and Z
  7. Every day at 6 o clock, no one really asks those analysts if they really did well.
  8. In most cases, the probability of the recommendations doing well or not well is pretty much the same as a tarot card reader’s prediction

So you get the drift of what I mean.

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. 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. But what they do know is that there is a bigger fool who will pay a price in anticipation of the price rising further.

And that is trading for you, my friend. It of course is one of the most thrilling activity to indulge in. But so is poker. Therefore, one of the economists, Paul Samuelson once said –

“Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.”

Long story cut short – Trading is a risky activity and is under no circumstances a medium of creating wealth. Yes, a lot of people have made money with trading. But will you be one amongst them is the question you need to ask yourself.

And for those who were thinking of taking that leap – Money is hard earned. Care for it the way you would care for your child.

Now get rich at less than the cost of one dinner every month!

Start investing in mutual funds with only Rs 500

As part of our Investor Education Initiatives at Corporates, we speak to a lot of employees. And one of the first questions that we ask is – How much money do you think you need to start investing every month?

And amusing as it may sound, the answer varies from a few thousands to a few lacs. Thanks to the TV commercials by AMFI on “Mutual Funds Sahi Hai”, some people now know the truth. All you need to start investing every month is Rs. 500. Yes, that is less than the cost of 1 dinner, 1 new dress or 2 movies!

Unlike big ticket investments like purchasing a house or gold, mutual funds are accessible to all kinds of investors. The initial investment amount for an SIP has been kept as low as Rs. 500 for a lot of funds just to democratize investing. So, it was never about the amount. A lot of us do not start investing only because either we are not aware or we tell ourselves – “Next week pakka!”

And just in case you want to know what the impact of starting to invest early is, read our other article here.

But now that you are aware of both the amount and benefits of early investing, visit us and drop in your details. We will reach out to you within 24 working hours to help you get started on your journey of getting rich!

Alternatively, feel free to reach out to us on +91 97693 56440 or email is on contact@cagrfunds.com to know how you can get started with your monthly SIPs.

Track Your Mutual Fund Investments Real Time

Till some time ago, every family had a relationship manager who would periodically come and meet our parents and discuss his mutual fund investments with him. And that was the only time our parents could get to know how their funds were doing. This is similar to those times when the only way to send money to someone was to visit a bank branch and deposit some cash/cheque.

With the onslaught of technology, everyone is seeking more convenience in everything that they do. So we don’t want to visit bank branches anymore and neither do we want to depend on our advisor to tell us how our money is doing. At CAGRfunds, we realized this urge for independence and therefore provided our clients with the convenience of tracking their investments on their own personal CAGR dashboard.

Once you register and start investing through the CAGR platform, you are assigned your own login details with which you get access to your own dashboard. Not only can you invest in mutual funds online but also track how your funds are performing.

But you do get a bunch of statements on your email, right? So what is there to track? Well, three reasons why our dashboard helps:

Comprehensive Data:

Some reports give you the value of how much your money has grown while others show you the list of transactions you have made. We give you everything relevant at one place. We show you how much you have invested, the current invested value, the absolute return and the annual return.Not only that, we show you the individual funds that you are invested in and what is the return you are making both at the fund and portfolio level. We also show you how your investments are split between asset classes and if it is in sync with your decided asset-allocation.

Simple Enough For Anyone To Get It:

The fine print and numbers overload on the statements you get on email makes it all the more complicated. Either you sift through all the information yourself or stay uninformed. We obviously don’t want that and hence our dashboard and reports are quite simple. Our clients told this to us! Don’t believe? Read here.

Any Time Visibility:

Reports generally come to you at the end of the month or when you transact. But with us, the next time you are discussing investments with your friend, just log in, check your current portfolio value and returns and have a more informed discussion!

We, therefore, ensure that you stay in complete control of your portfolio. So the next time you call us, it is only to discuss your portfolio, not to get data – because your dashboard gives you all the data you need!

If you have been facing trouble tracking your investments and want to switch to a truly delightful investing experience, do not hesitate to call / Whatsapp us on +91 97693 56440. You can also comment on this post or email us on contact@cagrfunds.com.

Women are increasingly leading investment decisions!

Financial Planning happened to be a male domain. But our experience at CAGRfunds has been different. If you look 20-25 years back, you would agree that homes had a very clear split of work. Women would be largely responsible for the house management while the males of the family would mostly be in charge of the money management. So all notices with respect to payment of school fees would naturally go to our dads. But if we think deeper, we cannot fail to notice how our mothers used to manage the domestic finances.

Times have been changing but not the traits. Women have been dealing with finances and managing them exceptionally well since forever. But what has changed is how evidently the skill is manifesting itself now. We realized this when we started meeting more and more female prospects at CAGRfunds.

Couple of interesting cases that we came across:

  • One of our female client was way more diligent and interested in getting investments started than her husband. She had been investing since before her marriage and discovered her husband to be restricted to bank deposits. That is when she decided to get a holistic financial planning exercise done and kick start both their investments. We not manage their siblings’ investments also.
  • In a few cases, we discovered that young women knew about mutual funds and investing whereas the rest of the family members were only aware of Fixed Deposits. Some such clients actually went back to their husbands and fathers to explain them the mechanics of mutual funds and NPS.
  • One of our client was extremely concerned about the fact that her brother was not saving anything. She chased us and her brother to start saving. She started by doing a con call with us and her brother to ensure that we rope him in. The duos are happy CAGR clients now!
  • A 22 year old client of ours had just started working. She was responsible for managing her family expenses and getting her younger siblings educated. Her expenses matched her income. Yet she wanted to start saving for the future. We cannot be more inspired!

As we recall our experiences with our female clients, we cannot express how inspired we feel to see that we have come a long way as a society. Husbands are increasingly becoming comfortable reposing trust in their wives and young girls are planning for retirement right in their first job.

This International Women’s Day, we appreciate and salute each of our female clients who decided to take control of their finances. We often wonder what financial independence means. But here we are, talking to hundreds of girls and women who desire to be financially independent in more than several ways. And what better way to celebrate women’s day than to contribute towards making more and more women financially independent!

To all the women out there – we are truly proud of you. And we wish you a very Happy International Women’s Day!

2 steps is all it takes to start investing

Remember those times when our parents used to invite an uncle over tea to discuss where they should be investing their money? And then they would sign a pile of documents and hand over a bunch of cheques? Well, believe it or not, a large proportion of investors still follow that route. But times are changing and changing for good.

When we talk to young people we meet, we realize that a lot of them have not started investing only because it requires so much of formalities and paperwork. We therefore knew one thing. The process of investing has to be made extremely convenient.

At CAGRfunds, our investors literally take less than 15 seconds to make a transaction. Since we first discuss the portfolio with our clients, we are able to create customized portfolios on each client’s dashboard which makes investing just a 2-click process for the client.

We launched this feature just 3 months back. And we received an extremely positive response from our users who were absolutely delighted with the little things we did to make the journey convenient for them.

If you don’t believe us, here it from one of our clients here.

Delivering convenience is an ongoing process and we are currently working on several things that will make the experience a lot more delightful in the days to come.

If you want to have a delightful investing experience, do not hesitate to call or Whatsapp us on +91 97693 56440. Alternatively, you can comment on this post or drop us an email on contact@cagrfunds.com. We promise we will get back to you in no time.

Learning from Warren Buffet Series – Part 2

warren buffet investing

Here is the second in our Warren Buffet Series. (Refer Part 1). This one is quite interesting and relevant.

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

Berkshire Hathaway Shareholder letter – 1978

Learning 1

Buffet warns investors against forecasting folly that prevails in the stock market. He clearly communicates to his shareholders his philosophy of investing for the long term. It helps him to align his shareholders expectation with his thinking.

“We make no attempt to predict how security markets will behave; successfully forecasting short term stock price movements are something we think neither we nor anyone else can do.  In the longer run, however, we feel that many of our major equity holdings are going to be worth considerably more money than we paid, and that investment gains will add significantly to the operating returns of the insurance group.”

Learning 2

Buffet highlights some of the characteristics of certain industries that need to be avoided by investors, by using his investment in Textile as an example. Again clearly admitting his mistakes head on.

  1. Slow capital turnover
  2. Low profit margins on sales
  3. Highly competitive landscape
  4. Capital intensive industry with low differentiation in goods

“The textile industry illustrates in textbook style how  producers of relatively undifferentiated goods in capital intensive businesses must earn inadequate returns except under conditions of tight supply or real shortage.  As long as excess productive capacity exists, prices tend to reflect direct operating costs rather than capital employed.  Such a supply-excess condition appears likely to prevail most of the time in the textile industry, and our expectations are for profits of relatively modest amounts in relation to capital.”

Learning 3

Buffet describes two facets of his highly successful investing style, which he feels is going to reap benefits for him and his shareholders over the years. Buffet and his partner Charlie Munger has been two of the best known proponents of this style of investing. i.e. Concentrated value investing. A concentrated value investor looks for a company where he can see more value than the market price and when he finds such an opportunity, he will invest a significant amount of his portfolio in that company.

My two cents

As investors in equity market or mutual funds, the 3 biggest learning from the letter are:

  1. Ignore the short term noise and focus on the long term. So markets will be volatile but as long term investors, all you need to know is that you are invested in the right funds and have some patience
  2. Avoid stocks or Mutual funds with portfolio of companies having bad quality businesses
  3. Invest only after making sure that there is margin of safety or to put it simply, invest at a price cheaper than its value and when you are convinced about the attractiveness, you need to invest a large percentage of your portfolio. For Mutual funds investors you can look for mutual fund managers playing by this style. Word of caution here, this is just one of the successful investing style and there are various other styles which have been highly successful.

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