Your personal finance checklist for 2020 - don't do dumb things!

It’s that time of the year when you make new year personal finance resolutions that you won’t keep. Look, by the time you get around reading this, a billion articles on personal finance would have already been written. But what I am about to suggest isn’t the same wishy-washy bullshit everybody else writes. Here are some things that should definitely do and if not you will end up regretting and big-time based my own personal experiences.

If you’ve been thinking about starting investing for a while but haven’t got around yet, here’s another new year. I don’t know what makes Jan 1st special as opposed to Dec 31, but hey whatever floats people’s boats.

If the thought of being broke and homeless doesn’t motivate you to start saving and investing nothing will. - Me

Think about it; retirement readiness is a massive problem not only in India but around the world. Education, healthcare costs are rising at a faster rate than the headline inflation number, and it will only continue to. And the chump change that is deducted from your salary as EPF won’t be enough, without a doubt. Then there is also your personal (lifestyle) inflation rate - meaning our tendency to spend higher amounts as opposed to saving. To summarise, if you don’t start saving enough for your retirement, you are in serious trouble.

Some simple pointers to start saving and investing

1. Just start!

This is the hardest thing to do. Just start saving, you can even start with a fixed deposit or a government bond to keep simple but start.

2. Mutual funds are awesome

Mutual funds are one of the best instruments to invest for the long term but they are seriously misunderstood and misused. Don’t pick a mutual fund randomly from some recommendations list. Picking a mutual fund is simple but not easy. There are various ways to pick a mutual fund but don’t blindly choose them based on platform recommendations, star ratings, or ET Money or Moneycontrol recommendations. Here’s a handy guide on picking a fund. Personally I believe picking a right actively managed fund is almost impossible.

Let me repeat: Don’t invest based on mutual fund recommendations on platforms. At best just use those funds in your shortlist.
Don’t invest based on star ratings - NEVER! Again, at best use star ratings as a way to shortlist funds.

Don’t invest based on mutual fund recommendations on blogs, websites, TV, magazines etc. NEVER!

Also listen to:

3. If you are a beginner

If you are investing for the first time, you can pick any Balanced Advantage Mutual Fund from the top 10 AMCs and you re good to go. A balanced fund invests in both equity and debt and the fund will do everything for you.

Or you can pick a Nifty 100 index fund and a debt fund from Liquid, Ultra-short, or Money market fund categories. To figure out a starting place for your equity and debt allocation use the old 100 minus your age rule of thumb. So if you are 20, put 80% of your money in equity and 20% in debt

This is a rule of thumb and not a rule! You can then learn more about personal finance, asset allocation and adjust your portfolio accordingly. But to just start, this rule of thumb works fine.

You can also pick an ELSS mutual fund. These funds give you a tax benefit and have a lock-in of 3 years. Look, we are humans, and we are flawed. If you are getting started with investing and assuming that there is a market crash, you may be scared. That’s perfectly fine, what is not okay is you reacting to the panic and selling your funds. Markets go up and go down; that’s their nature. Your job is stick to the duration of your goal and not react to them. Since an ELSS fund has a lock-in of 3 years, that will stop you from making dumb things to an extent.

Here’s another low-cost strategy that you implement quite easily:

https://www.capitalmindwealth.com/market/

Please don’t pick stocks directly, you can do that much later. If you still have to then smallcase is a better option. Don’t pick stocks based somebody’s recommendations, CNBC, ETF Now. SMS or anything else. Picking a stock is HARDDD! That chances of you losing money are infinitely higher than you making money.

4. Costs matter!!!

When it comes to investing, you cannot control the direction of the markets, the returns you get or when. All you can do is keep your costs low and your behaviour in check. Let’s take costs first

So, when you invest in a mutual fund, there are two plans - direct and regular. It’s the same fund, same fund manager but two plans.

Direct mutual funds have ZERO commissions and hence have lower commissions. Regular mutual funds are sold by distributors, banks etc. Now, they need to be paid to sell them and the AMC pays them a commission and hence regular mutual funds have a higher expense ratio. Here’s an example, look at the difference between regular and direct plans. 0.66% is what the AMC pays the distributors. Even though it seems like a small number, costs compound in the long run. The longer you invest the higher in commissions you pay. For example, if you had invested Rs 5000 PM for 25 years, you would have paid Rs 6 lakh in commissions. A tiny number like 0.66% make an insane difference.

So, do your research on a fund, and always pick the direct plan of a mutual fund. Zerodha Coin only offers direct mutual funds and for free.

Behaviour

The second important thing you can control is your behaviour. If you are investing for the long term it’s very important to have goals. And the second important thing is to stay invested no matter what. The Indian markets have historically gone up

Looks nice doesn’t it? Even though the long-term return looks beautiful, the markets do go down. For example, here are the 5 biggest crashes in Nifty 50 and Nifty Next 50

Nifty 50

From Trough To Depth Length To Trough Recovery
2008-01-09 2008-10-27 2010-10-01 -59.50% 672 198 474
2001-02-16 2001-09-21 2003-08-27 -38.94% 631 150 481
2004-01-15 2004-05-17 2004-11-30 -29.75% 221 83 138
2006-05-11 2006-06-14 2006-10-16 -29.72% 112 25 87
2010-11-08 2011-12-20 2013-05-15 -27.20% 629 277 352

Nifty Next 50

From Trough To Depth Length To Trough Recovery
2008-01-07 2009-03-09 2010-09-20 -72.13% 665 287 378
2010-11-10 2011-12-20 2014-03-27 -38.11% 845 275 570
2006-05-11 2006-06-14 2006-12-04 -37.12% 146 25 121
2004-04-27 2004-05-17 2004-11-23 -29.99% 149 15 134
2015-08-07 2016-02-25 2016-07-12 -20.97% 228 137 91

60% to 70% but the subsequent recoveries have been quite sharp. To get the sweet return, you have bear some excruciating pain in the short run. Now, look, it is not easy to sit quietly while you fund falls 50% but that’s how the markets work. If you have to get the returns over and above a safe Fixed Deposit, you will have to take the risk. The most important thing to do during these periods is not to do stupid things like selling our funds. Markets falls give you an opportunity to accumulate mutual fund units at lower prices. If the markets always went up, you are continuously buying units at just higher and higher prices.

Don’t neglect insurance

If you ever come across any person who asks you to invest/buy any insurance policy other than a term insurance policy, run away from that person as if he has a bad disease. Never mix insurance and investments. Don’t buy/invest in ULIPs, endowment policies, traditional investment policies, or annuities. These are all high-commission products. In most instances the guy selling you get up to 60% of your premiums as commissions. They also have a lot of hidden charges and costs that will come back to bite you.

Terms insurance is pure insurance, just like your bike insurance. Your nominees will get paid if you die - simple isn’t it?

Have an emergency savings fund

There’s plenty of research to show that people don’t have enough cash on hand to meet emergency expense even as little as Rs 5000. How much should you have? There’s no easy answer but some people do recommend 6 months of your living expenses. You can park this money in a liquid fund. Here’s a handy post:

If you can’t do it yourself, hire an advisor

If you don’t have the time, ability, or patience to do all these things, you are better off hiring an advisor. And by an advisor, I mean a fee-only Registered Investment Advisor (RIA). Stay away from mutual fund distributors, bank employees, relationship managers, and LIC agents etc.

A fee-only advisor is a fiduciary - meaning he has to put your best interest first. He doesn’t get any commissions from the manufacturer of the product. He only gets paid a fee by you. That way your interests and his interests are aligned.

No shortcuts, it takes work

If you across a get rich scheme, please stay away. There are NO get rich schemes. No trading webinar, seminar, or course can teach you to get rich quick. These are all scams designed to make the guy selling it rich. There is no substitute for reading the foundational concepts and learning by experimenting. If you fall for screenshots showing unrealistic profits, STAY AWAY!

There is no better place to start learning than Varsity - be it investing, trading, or personal finance.

https://zerodha.com/varsity/module/personalfinance/

You can also check out LearnApp courses
https://learnapp.co/

And these podcasts

Happy new year and please start saving and investing!

16 Likes

If you ask me don’t invest in Mutual Funds especially in the current situation, you are abdicating your personal responsibility in favor of a dumbass fundmanager with prodigious marketing skills.

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Before I answer this. Instead of mutual funds, what?

In light of low industrial output, lack of jobs, crumbling exports, declining fmcg and piling debt I would say don’t put your faith in the Indian markets just yet but instead try the safe haven assets like precious metals, fixed deposits or if you can afford then go with immovable asset class.

We all know that how bad stocks are performing (other than Nifty50). They are giving negative returns annually. now we don’t know on which stocks our money is put into ( in mutual funds). every month we have to pay and even if the time is not right to invest…the money gets invested. it all depends on the fund manager. these factors aren’t letting me invest in mutual funds.

these fund managers do not understand the macroeconomics, they are just salesmen working for a sales company. There are things to learn beyond the jargon of it.

For the New Year:

I recommend this book by Ha-Joon Chang, its a very simple and easy to understand book on economics: https://www.amazon.in/Economics-Users-Guide-Pelican-Introduction-ebook/dp/B00I9PVKIY

Economics by Ray Dalio: https://www.youtube.com/watch?v=PHe0bXAIuk0

Edit: no reason for this post to be flagged.

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Ok, here are the biggest drawdowns of Nifty 500 total returns index from 2000. Which covers all the cycles.

Drawdowns: NIFTY 500 TR(B)

From Trough To Depth Length To Trough Recovery
2000-02-22 2001-09-21 2004-01-01 -67.02% 969 398 571
2008-01-07 2008-10-27 2014-03-27 -63.71% 1546 200 1346
2006-05-11 2006-06-14 2006-11-10 -32.42% 130 25 105
2004-01-09 2004-05-17 2004-11-17 -29.11% 217 87 130
2015-03-04 2016-02-25 2016-07-22 -20.06% 343 244 99
2018-09-03 2018-10-26 2019-11-28 -15.64% 302 36 266
2007-02-08 2007-03-05 2007-05-17 -15.32% 66 17 49
2005-10-05 2005-10-28 2005-11-28 -13.10% 36 17 19
2016-09-09 2016-12-26 2017-02-06 -11.87% 102 73 29
2007-07-24 2007-08-21 2007-09-19 -11.68% 41 20 21

Look economy and by extension markets are cyclical. They go up and they go down. Timing markets based on macro factors has traditionally been one of the hardest thing to. So, if your rationale is all the average investors should not invest in equities because the economy isn’t doing well then, it doesn’t compute.

If you know what you are doing based on what you said, good for you. But if you think an average lay investor can time the markets based on disparate economic numbers, then you have more faith in the ability if investors than I.

As for your comments about the ability of fund managers. Most Indian funds are closet indexers. If you look closely 60%+ of the returns will be from beta. So, even if you randomly pick a fund, you’ll still be in and around the benchmark. Having said that, I don’t believe in the ability of fund managers and I purely invest in index funds. For the sake of the post, I didn’t want to make it complicated.

3 Likes

Then don’t bet on a fund manager. Just invest in index funds.

See, that’s the common misconception. That theory does not apply to developing economies, in developing countries there is a still a lot of things that are unclear, the nations political and economic policies are prone to change which makes investors worried. What you call as cyclical downturn should not in theory occur in a country like India with a strong positive growth but it appears to be the case which means that problem could only be a structural one. This is not Wall St where a matured investor takes a calculated risk without paying heed to policy changes, this is an avg nifty investor we are talking about - the level of risk that people are taking in the midst of economic uncertainty is humongous and your market cycle theory will take a homerun if something crashes tomorrow.

1 Like

Whatever works for :slight_smile:

I dont like invest in Mutual fund , but i like to invest in AMC stock , i am doing sip in ETF , but i dont like to do sip in Mutual fund ,anyway @RahulKhanna great article posted i like it

ETF is a MF which trades on the exchange :slight_smile: If you don’t want to take fund manager risk, just buy the whole market (index funds).

1 Like

I read a lot about people recommending moving to ETFs, and now to Index funds - I can understand why, but whenever I go through SIP return calcs for various funds, good actively managed so far give clearly more returns.

Now I know most sip calcs don’t take into account the varying expenses etc - but even then the difference in xirr is quite noticeable.

The only reason I can think of right now to move to Index funds is if someone just wants to start a sip and leave it (lazy portfolio basically). Or am I missing something and messing up my basic analysis.

I knew this question would come up but for the sake of simplicity, I didn’t write it. In hindsight things are easy. If you pick any of the top performing you looked at today, there is no guarantee that the fund is going to deliver similar performance. Mean reversion is the truth in the markets. What has done well historically has to do worse.

Even historically over 50% of mutual funds across categories have failed to beat the respective benchmark indices.S&P publishes a periodic report called SPIVA which analyses this.

Picking a good performing fund in advance is hard. But in the large-cap space it is pointless to pick a large-cap fund. Large-cap funds charge up to 2%, but you can get Nifty 50 exposure for 0.09%, and NIFTYBEES ETF fro 0.05%. In the mid-cap space, there is a case to be made for picking active funds but the dispersion in performance there is reducing, meaning all funds on average will pretty much do the same. Motilal has lunched the first Mid-cap index fund, which makes indexing easirer.

Small-caps are hard to but but Motilal has a fund for that too. But I don’t even know why people invest in small-caps, they are useless.

Now coming back to the original question, why are funds finding it difficult to beat benchmarks?

  1. Strict categorization guidelines. Earlier, funds had the relative freedom to do what they want. Even if a fund was from the large-cap category it used to hold mid-caps to juice returns. This is no longer possible. SEBI has strictly defined the category and stocks to invest. Large-cap fund can only invest in the top 100 stocks. If all the 40 AMCs can only do that, where will the outperformance come from?

  2. Mandatory benchmarking to total return indices
    What is total Return Index index and how is it calculated?

  3. High costs. Indian funds even by global standard charge too much.

Thanks for the detailed info - and I agree, for the future, and maybe the long-term Index funds are better. But right now, and probably for the next few years wouldn’t you say it’s better to stick to good actively managed funds in each category (i.e. Large Cap only a few funds have outperformed, but they have done so consistently - and continue to do so).

i.e. axis bluechip (exp 0.64%) vs hdfc sensex (exp 0.1%) - is the expense difference big enough to say the index fund is better, even though sip calcs show the active fund having much higher xirr? What’s the recommended comparison tool which takes into account expenses (if that’s even possible) or do they already do so.

I’m not disagreeing with you, but am I not right in saying that for now sticking with those actively managed funds is better than index funds?

Not in my view. The evidence is clear and the jury is out. Let me put it this way, take any large-cap fund, the average expense ratio is 2%, these funds can only invest in the top 100 stocks. The Axis Nifty 100 Fund costs 0.16%. So, just to match the index fund returns, an active fund has to deliver 1.84% extra return and on top of that deliver more to beat the index and other funds in the category.

What are the charges if I do monthly SIP of 10000 in index funds ETFs or Bees through Zerodha? @RahulKhanna

Index funds, no charges.

ETFs, brokerage is zero but the statutory charges will be applicable - https://zerodha.com/brokerage-calculator

If you get a time machine I would request you to go back late 90’s or early 2000’s, and see what were the situation of the economy.

If you get a time-machine I would request you to go into the future and comeback with a bit of commonsense.

https://www.bloomberg.com/news/articles/2019-09-04/michael-burry-explains-why-index-funds-are-like-subprime-cdos