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Author: Mayank Mehta

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2023: End of a golden era of tax-free investment products

One of the most important criteria while deciding the feasibility of an investment is its tax impact. In a country of 140 crore population, 70% own a mobile phone, 40% are employed but only 5.7% pay taxes on income. Further, a small subsection of Indians (specially the salaried class) pays a large portion of all personal income tax. In contrast, in the U.S., about 45 per cent of the population pays taxes.


Without any doubt, the 8-crore tax paying Indian community always preferred to invest their savings in tax free investment products. However, the things have changed in the last decade – the government has introduced a host of tax laws to tax/ withdraw tax exemption from most of the tax-free products that were available in the Indian financial market:


  1. Dividends:

    Before 01/04/2020, dividends from shares, mutual funds and ULIPs were tax free in the hands of recipients. However, dividends received during the financial year 2020-21 and onwards are taxable in the hands of the recipients as per normal slab rate.

  2. Employees provident fund:

    Effective 01/04/2022, any interest on an employee’s contribution to EPF/VPF upto INR 2.5 lakhs per year is tax-free and any interest earned on a contribution over and above INR 2.5 lakhs is taxable in the hands of the employees under ‘income from other sources’ at normal slab rates.

  3. Equity/Equity mutual funds:
    Section 112A of the Income Tax Act was introduced in order to levy long term capital gains tax on equity share transfer, equity-oriented funds and business trust units. The tax rate of 10% is applicable on investments in aforesaid products w.e.f. 01/04/2018 subject to a tax-free limit of INR 1 lakh.

  4. Real estate:

    Budget 2023 has put a limit on tax deduction on capital gains through reinvestment in residential house property at Rs 10 cr. Limit on the roll over benefit claimed under section 54 and section 54F of the Income Tax Act will adversely impact the HNIs.

  5. Debt/Gold/International mutual funds:

    In another major move by the government, w.e.f. 01/04/2023, investments in debt mutual funds (<35% equity), gold ETFs/ mutual funds, and mutual funds investing in international securities will be chargeable to tax at normal rate without the benefit of indexation. As of now, they enjoy the benefit of indexation and lower tax rate of 20%.

    How it is going to impact a common man?

    Suppose an investor buys a debt mutual fund for INR 100 and sells for INR 120 after 3 years. If invested before 31/03/2023, indexed cost would have been INR 115 and tax would have been payable on INR 5, that too, 20%. Only, INR 1 went to the government in tax. After 01/04/23, the whole gain of INR 20 will be taxable at slab rate (30%+ in most cases) and therefore, INR 6 will go to the government in tax.

    Corporates and HNIs will be adversely impacted by the change in this law.

  6. Insurance:


    Unit Linked Insurance Plan:     Budget 2021 had proposed to remove the tax-exempt status on the proceeds of ULIPs if the annual premium exceeded INR 2.5 lakh.

    Traditional policies: Budget 2023, in another significant move, proposed to remove the tax-exempt status on the proceeds of traditional insurance plans if the annual premium exceeded INR 5 lakh. However, the change in provision is applicable w.e.f. 01/04/2023 and is not going to impact the policies issued before 01/04/2023.

  7. Cryptocurrencies:

    Profits from sale, swap or spend of any crypto assets are taxed at a rate of 30%. Also, Section 115BBH prohibits offsetting crypto losses against crypto gains, or any other gains or income for that matter.

  8. Market Linked Debentures:

    In a major blow to HNIs, the budget 2023 announced taxation changes to market-linked debentures (MLDs), eliminating the tax advantage enjoyed by these investments. Previously, MLDs were a popular investment choice among high net-worth investors due to the favorable tax treatment of only 10% if held for over 12 months. Now, the tax will be based on investors income tax bracket, which can be as high as 35%.

    Going forward, the investors have limited options that will be totally tax free:

    1. Public Provident Fund: The tenure of PPF is 15 years. But the maximum annual contribution is restricted to INR 1.5 lakh.

    2. Sukanya Samriddhi Yojana: The Sukanya Samriddhi Yojana is a government savings scheme created with the intention to benefit girl child under the initiative called “Beti Bachao – Beti Padhao”

      The maximum tenure of the scheme is 21 years and maximum annual contribution is INR 1.5 lakh.

    3. Tax Free Bonds: NHAI, PFC, REC, IRFC, HUDCO and NABARD bonds are traded in open market but the yields are sub-par (5-6%) viz-a-viz 7.5% on a 10-year government bond.

We strongly believe that India is still an underpenetrated financial market. Complicated as well as unfavorable tax laws will hamper the growth of financial sector in India.

Further, the debt market, which was majorly dependent on debt mutual funds and insurance/pensions funds for market operations will find a tough time in the near future.

Retail investors (directly and through mutual fund investments) have played a significant role in protecting the stock market from aggressive FII selling in the last three years. If not compensated, their interests should have been considered while changing the tax laws.

What may be on cards?

  1. Gold declaration scheme: Gold, along with crude and electronics, is one of the major reasons for forex outflow. Electronics are being manufactured locally through the PLI scheme. India is now a net exporter of mobile phones. To curb high crude imports, EV and hydrogen-based infrastructure is being set up. Another INR 30,000 crore was set aside in Budget for energy transition. To promote digital gold investments, government introduced Sovereign Gold Bonds.

  2. Exit tax on Indians surrendering their citizenship on the lines of the US exit tax: India has lost close to $233B because of 9.3 lac Indians surrendering their citizenship between 2017-21.

  3. ULIP inter scheme switches

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Inflation vs. Growth – Biggest challenge faced by global central banks

Sixteenth largest bank in the United States of America, Silicon Valley Bank, collapsed last week. It catered to technology startups and venture capital community.

 

The primary reason for the failure can be attributed to the poor risk management policies of the company. The bank suffered a loss of $15billion by holding a portfolio of bonds yielding 1.6% (current yield 5%).

 

We are living in times when the global economies are doing well but the central banks around the world are raising interest rates at a record pace to control the inflation.

 

Why is inflation so important for central banks that they are willing to trade off the growth? Before proceeding further, two universally important relationship needs to be recalled:

Demand/supply and inflation

As evident from the graph above, prices of any product increases when the demand increases or/and the supply falls (& vice versa).

Interest rates and bond value

Market price of a bond reduces when there is an increase in the interest yields by the government (& vice versa). However, face value and interest payout of the bond remain the same throughout the tenure of the bond.

2001-2008: How it all started

 

Post dot com burst, interest rates (federal rates) in the United States went down from 6% to 1%. Everyone started borrowing heavily and a large chunk of low interest loans went towards sub prime mortgages (home loans to low credit score borrowers).

 

As inflation started to move upward, Central Bank of the United States raised interest rates, which went as high as 5% in 2008. Many borrowers could not afford to repay home loan EMIs and therefore, defaulted. As a result of a high number of defaults, 465 banks, including Lehman Brothers and Merrill Lynch failed, starting the Global Financial Crisis.

 

To save the economy, the Central Bank acted swiftly and reduced interest rates to a record low of <1% within a few months.

 

2009-2020: Cheap $

 

Interest rates in United States were kept below 1% for the next 12 years. As a result, the national debt in US increased from $10trillion in 2008 to $31trillion in 2020 (68% of GDP in 2008 to 123% of GDP in 2022). This low cost money was invested across the world, in real estate, startups, shares, bonds etc. Low interest rates have following effects:

 

  1. Businesses are willing to take more risks triggering expansion. Profitability increases because of low cost of loans;

  2. Accelerates growth of the economy – Government prints money at low interest;

  3. Consumers prefer to buy on credit;

  4. Increases asset values (discounting future cash flows at lower rates)

 

2021-Present: The new normal?

 

During COVID, the United States provided $1.9trillion in financial aid to Americans. This accelerated the demand for products when the global supply chain was disrupted resulting in record high inflation (prices of goods rise when demand increases or/and supply falls).

 

However, in late 2021, the US government was of the view that inflation is transitory (Inflation that moves above a steady rate for a short period and then reverts back to normal).

 

Russia-Ukraine war reduced the supply of oil, grain and gas to developed nations- further accelerating the prices. As a result, Inflation in US touched a 40 year high of >9%. The stance of the government changed suddenly and it carried out steepest rate hikes in the history of America. [Interest rate hikes curb the demand for goods/loans which in turn controls the prices (inflation)].

 

However, labour market in US is very strong as extremely aggressive subsidy regime has made America attractive again for manufacturing. Unemployment rate is at 50 year low and only 3.5% of Americans, willing to work, are unemployed. This makes situation even more difficult for the central bank as demand for goods does not fall as per expectation.

 

Indian markets:

 

As interest rates are hiked in United States, the dollar appreciates with respect to other currencies (INR fell from 74 to 84 in last one year).

 

  1. To protect INR from sliding further, the Reserve Bank of India also hiked the interest rates in India (Interest rate parity theory);

  2. Foreign investors withdrew money from emerging markets as investing became costly because of higher interest rates & falling currencies (However, there was no major impact on Indian equities as huge inflows from mutual funds, LIC and Employees provident fund provided cushion).

 

As I write this memo, foreign investors are sitting on $400B of cash, which will be eventually invested across geographies (Just to give you an idea – foreign investors just withdrew $5B from Indian equities – a lot of money will be moving back once the global situation stabilises).

Way ahead: No one knows with certainty

 

Scenario 1: Fed hikes interest rates by another 1-1.5% -> inflation cools down -> fed starts rate cuts later this year/early next year

 

Everyone is expecting as well as wanting this as no one wants to bear the consequences of high interest rates. Even if Fed gives an idea about rate cuts, a bull rally in equities may not be ruled out.

 

Scenario 2: Fed aggresively hikes interest rates going forward:

 

Recession can not be avoided. Money will move from equities to short term bonds. However, Fed will step in (like they did in 2008) and cut interest rates to normalise the situation. But this will take some more time.

 

Either ways, rate cuts are bound to happen.

Portfolio strategy:

 

Debt, as an asset class, has become attractive again. Indian 10 year bond is yielding around 7.4%. It is prudent to lockin the interest rates before they slide.

 

Equity: As valuations moderate, we continue to remain bullish on the Indian equities, considering the fact that India is the fastest growing major economy in the world. Historically, equities have always rewarded the patient.

 

Gold: Allocation should be increased considering the recent price correction.

 

Real estate: as an investment should be avoided considering the fact that interest rates are high. There will be slowdown in demand.

 

However, your personal portfolio should be aligned as per your goals and risk appetite. Please get in touch with your wealth manager in case of any query.

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Monthly market update & outlook – February’23

India – Coming of age – A report by Government of India’s Invest India:

  • India received $950 billion FDI since 1947, of which $532 billion FDI came in the last 90 months,

  • India added a unicorn every 9 days in 2022,

  • From the start of 2015, India’s GDP rank jumped from 10th to 5th,

  • 2/3th of India’s GDP is driven only by domestic demand,

  • 2nd largest working population of 522 million with median age of 29 years,

  • Services GDP to grow 13X to $20 trillion by 2047,

  • Manufacturing GDP to grow 15X to $6.2 trillion by 2047,

  • Per capita income to grow 10X to $20,000 by 2047,

 

9,000 days from now, India will celebrate the 100th year of independence & India’s per capita GDP will be $20,040 (BCG report). Now multiply that by 1.6 billion Indians. $32 Trillion economy – Deepak Bagla, MD & CEO – Invest India. Watch the full video here:

From the industry leaders:

When investing in equities, always remember:

Indian macro dataflow moderated but remained strong:

  • Manufacturing PMI: Manufacturing PMI moderated to 55.3 in Feb from 55.4 in Jan but remained in expansion zone (>50 points) for the 20th straight month;

  • Services PMI: Reached a 12-year high of 59.4 in Feb (from 57.2 in Jan);

  • GST Collection: Collections of Rs. 1.49 Tn in Feb’23;

  • Credit growth: Credit growth remained elevated in Feb at 16.1% viz-a-viz 10.2% growth in deposits implying high liquidity crunch;

  • Inflation: CPI accelerated to 6.52% YoY in Jan after touching twelve month low in Dec. CPI is above RBI’s tolerance level of 6%;

  • Forex: India’s foreign exchange reserves stood at $562 billion as of March 10;

  • GDP: grew 4.4% YoY for the quarter ended Dec’22;

  • Trade Deficit: narrowed in Jan to USD 17.7 Bn as compared to USD 23.8 Bn in Dec.

     

Key indicators remains robust:

Equities:

  • Domestic equity markets fell for the third straight month as persisting concerns over higher interest rates weighed on the market;

  • FPIs sold Rs. 5,294 cr. of Indian equities in the month of Feb;

  • Mutual Funds SIP inflows remain elevated at Rs. 13,600 cr. for the month of Feb. Net investments in equity through mutual funds surged 25% to Rs. 15,685 cr. as domestic investors remain optimistic about the Indian market;

  • The Indian equities have witnessed a time correction in the last one year (Increase in corporate profits leading to fall in valuations without any major fall in prices). A few percentage fall may make equities attractive for lumpsum investments.

Fixed income:

  • RBI MPC hiked rates by 25bps to 6.5% on February 8, 2023;

  • The 10Y G-Sec traded in a band of 7.28%-7.46% and closed at 7.46% in Feb as compared to 7.34% in Jan;

  • The current curve remains very flat with everything in corporate bonds beyond 1 year up to 15 years is available @7.5-7.65% range.

Outlook:

  • We are likely to face volatile markets for the next 3-6 months as equity markets grapple with central banks focus on calibrating interest rates in the context of slowing demand scenario in 2023;

  • However, we remain constructive on equity markets from a 3 years perspective;

  • India’s growth story is a long term one and will face some volatility from time to time. We remain convinced that the best is yet to come, and advise investors to stay the course and build their portfolio in a disciplined manner.

Disclaimer: The views expressed herein constitute only the opinions/ facts and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. This information is meant for general reading purposes only and is not meant to serve as a professional guide for the readers.

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Ten key takeaways from the annual letter of the greatest investor in history

Warren Buffet is the chairman & CEO of Berkshire Hathaway. He turned an ailing textile mill into a financial conglomerate.

 

Also known as the Oracle of Omaha, his networth is $108 billion making him the fifth wealthiest person on this planet.

 

 

Since 1965 he has generated an absolute return of 37,87,464% (viz-a-viz 24,708% for S&P500) – outperforming the index by 10% on an annual basis. Today one share of Berkshire Hathaway trades around $ 4,61,705 (a whopping Rs. 4 crore) – up from $19 in 1965.

 

In 11 out of 58 years (19%), stock of Berkshire Hathaway has given negative returns. Still it has managed to generate an annual return of 19.8% in the last 58 years. Every equity investor should accept the fact that volatility will be a part of journey.

Buffet published his annual letter to shareholders on February 25, 2023. Here are the key takeaways from the letter:

 

1. Buy businesses not stocks

 

Our goal in both forms of ownership is to make meaningful investments in businesses with both long-lasting favorable economic characteristics and trustworthy managers. Please note particularly that we own publicly-traded stocks based on our expectations about their long-term business performance, not because we view them as vehicles for adroit purchases and sales. That point is crucial: Charlie and I are not stock-pickers; we are business-pickers.

 

2. Be an investor in world of gamblers

 

The world is full of foolish gamblers, and they will not do as well as the patient investor.

 

3. Ignore short term forecasts

 

Charlie and I plead ignorance and firmly believe that near-term economic and market forecasts are worse than useless.

 

4. Markets are not efficient

 

“Efficient” markets exist only in textbooks. In truth, marketable stocks and bonds are baffling, their behavior usually understandable only in retrospect.

 

5. Think long term

 

The cash dividend we received from Coke in 1994 was $75 million. By 2022, the dividend had increased to $704 million. Berkshire’s purchases of Amex were essentially completed in 1995 and, coincidentally, also cost $1.3 billion. Annual dividends received from this investment have grown from $41 million to $302 million.

 

Don’t focus on the froth of the market. We seek out good long-term investments & stubbornly hold them for a long time!

 

6. Invest in equities for wealth creation

 

Assume, for a moment, I had made a similarly-sized investment mistake in the 1990s, one that flat-lined and simply retained its $1.3 billion value in 2022. (An example would be a high-grade 30-year bond.) That disappointing investment would now represent an insignificant 0.3% of Berkshire’s net worth and would be delivering to us an unchanged $80 million or so of annual income.

 

<Buffet compared 30-year bond returns with the investments in Coke and Amex>:

7. Be ready to accept failures:

 

Over the years, I have made many mistakes…… Along the way, other businesses in which I have invested have died, their products unwanted by the public. The lesson for investors: The weeds wither away in significance as the flowers bloom.

 

Over time, it takes just a few winners to work wonders.

 

8. Avoid leverage

 

There is no such thing as a 100% sure thing when investing. Thus, the use of leverage is dangerous.

 

9. Importance of diversification

 

As for the future, Berkshire will always hold a boatload of cash and U.S. Treasury bills along with a wide array of businesses.

 

10. Be grateful

 

We owe the country no less: America’s dynamism has made a huge contribution to whatever success Berkshire has achieved – a contribution Berkshire will always need. We count on the American Tailwind and, though it has been becalmed from time to time, its propelling force has always returned.

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Fifteen timeless principles of investing

1. Stock prices are a slave of earnings: In the long run, valuation of a stock is nothing but the price that one pays for the future stream of the expected earnings and the dividends.

2. Volatility is your friend rather than your enemy. There’s a difference between risk and volatility: Risk is permanent loss of capital whereas volatility is unpredicted fluctuation in the stock market. Volatility is an inherent feature of the stock market and results in better returns for a disciplined investor.

Despite the short term volatilities, equity markets have created huge wealth for investors. Lumpsum investments in nifty has yielded an annual return of 12% whereas SIP has yielded around 14% since the year 2000.

3. The greatest long-term risk is not ‘loss of principal’ but ‘erosion of purchasing power’ as inflation tends to erode purchasing power of money over time.

4. A stock is an ownership stake in a business: A stock is seen by many as a cryptic piece of paper whose prices wiggles around continuously.
That’s one way to look at stocks. A far better way, suggested by Benjamin Graham, is to think of them as an ownership stake in an existing business. For eg- One of the reasons to invest in McDonalds stock is to have ownership in 40,000 real estate properties globally as McDonalds owns all the outlets run by its franchises on which it earns rent as well as royalty. The stock has appreciated from $2 in 1983 to $262 in 2023 – a yearly return of 18% excluding dividends.

5. Time in the market beats timing the market: Only two people know the top and bottom of the market: God & a liar. Therefore, it is a futile exercise to time the market (unless there is a black swan event taking the valuations to an extremely low level).

6. Odds of making money in the stock market increases as the time period increases.

7. Earlier the better – the power of compounding: Compounding even at modest rates, when done over a long period of time, produces truly spectacular outcomes

Achieving a CAGR of 100% for a few years is commendable, but achieving a CAGR of 20% for six decades is what makes a Warren Buffett. He played the game for the longest time and became the biggest winner.

8. Markets can remain irrational longer than you can remain solvent: It’s impossible to know when an overheated market will turn down, or when a downturn will cease and appreciation will take its place. 

Isaac Newton was one of the early investors in South Sea Company. In 1720, the company bagged a deal to manage British government debt. As soon as the news spread, the price of the South Sea stock started soaring. Newton wisely chose to book profits in April and pocketed a handsome gain of about £20,000.As the euphoria around the stock kept on inching higher with every passing day, Newton could not resist the temptation of buying the hottest stock in town once again and invested nearly all his money in June that year and By October, the stock was worth less than a quarter of the price paid by Newton. 

9. Great investing requires both generating returns and controlling risk. The risk reduces by 90% when the time period increases from 1 year to 10 years (in mutual funds):

10. Emotional Quotient is more important that Intelligent Quotients: It requires not only intelligence but also the emotional strength to be a good investor. Few know that Albert Einstein invested much of his 1921 Nobel Prize money in stock markets. However, he lost most of it in the 1929 stock market collapse.

Another classic example is the fall of Long-Term Capital Management – a hedge fund managing $126 billion in 1998. It was run by a team of Nobel Prize-winning economists and renowned Wall Street traders.

11. Don’t use leverage:

Whenever a really bright person who has a lot of money goes broke, it’s because of leverage. —Warren Buffett 

Story of Rick Guerin – third partner at Berkshire:

“Charlie and I always knew that we would become incredibly wealthy. We were not in a hurry to get wealthy; we knew it would happen. Rick was just as smart as us, but he was in a hurry.” What happened was that in the 1973–1974 downturn, Rick was levered with margin loans. And the stock market went down almost 70% in those two years, so he got margin calls. He sold his Berkshire stock to Warren—Warren actually said “I bought Rick’s Berkshire stock”—at under $40 a piece”

Rick was forced to sell because he was levered. Today, one stock of Berkshire is around $ 4,72,000 (INR 4 cr.)

12. Another principle—simple, but easy to overlook—is that building wealth has little to do with your income or investment returns, and lots to do with your savings rate.

13. Don’t try to control what you can’t

14. Market works in cycles

Economies and markets cycle up and down. Whichever direction they’re going at the moment, most people come to behave that they’ll go that way forever. To buy when others are despondently selling and to sell when others are euphorically buying takes the greatest courage, but provides the greatest profit. Always remember “The market’s not a very accommodating machine; it won’t provide high returns just because you need them.”

Over the period we have observed that investing is all about having the patience to hold on to your convictions. When you are unable to delay gratification, your greed is strong and it gets you in trouble in the financial markets.

15. Tune out the noise

We found a frontpage of a business daily, Mint published in May 2012 wherein all the negative headlines were published– High inflation, dollar depreciation & downgrade of Reliance stock (a situation similar to today) but here we are, in 2023, the Sensex has increased from 16,000 to 63,000 (4X jump), Reliance has increased from 345 to 2856 (8X jump) in the last 10 years.

Last but not the least, delegate the details: Financial professionals may help you create a customized portfolio strategy that’s built around your unique goals. Though no one can control markets, we can help you use them to pursue your long-term financial goals.

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Planning an early retirement

We have always been saving/investing for our future goals. Investors regularly squirrel out money from their limited incomes for their big future objectives, for their house, first car, kids’ education, weddings, medical needs, emergencies, retirement, etc. However, people’s needs and preferences are changing and hence the goals have evolved. Buying the first car has overtaken the first house in many investors’ priority lists. Little luxuries like watches, purses, frequent vacations, dining in top hotels, etc., have found love for them among Indian consumers. A lot of young students as well as professionals are also inclined to pursue their passions like trekking, yoga, learning foreign languages, etc.

Another change that is increasingly being witnessed among millennials is the desire to retire early. The retirement target age for many has remarkably gone down from 60 to 50, some even want to retire as early as 45 or 40. While it’s a good idea to retire early and pursue your passions and travel the world, while you are relatively young and healthy, can you afford it?

Financially, retiring a decade earlier means 10 fewer years of regular income, translating into 10 fewer years of saving for retirement, and 10 extra years of only outflow. At the age of 35, with not much saving and investment, no proceeds from the inherited property coming your way, not many valuable assets, thinking to retire in the next 10 years may not make much sense. But is it possible? We would say only if the required time and planning are in place.

Before one retires, he/she must have provided for the following:

  • Discharged major financial obligations, like having a home, having kids’ education and marriage expenses covered, etc.
  • Have adequate insurance in place to take care of any uncertainties.
  •  No outstanding loans or debt.
  • Adequate retirement corpus to support you for a long duration.
  • Early retirement may sound challenging, but achievable if approached right. Here are some points which can help you accomplish the above, and let you dream of early retirement.

1. Make a proper plan and keep your finances in place. Look for a knowledgeable and trustworthy financial advisor and convey your intentions of retiring early along with your other goals, your exact financial standing, assets, and liabilities, etc., to the advisor. With the help of your advisor, devise a comprehensive financial plan, which will be a step-by-step action plan to reach your ultimate destination, your early retirement, while providing for all your goals that come on way.

2. Start investing for your Retirement as soon as you start earning. Take up the last goal first, and start saving and investing for your Retirement from the day you start earning, the sooner you start, you are simply buying yourself time for being better equipped for D-Day. You can start with a small SIP and increase gradually as you age and your income increases. While starting soon is important and will give you an edge, it’s not the end, the journey is demanding.

A blend of the following practiced over your working life should help you save enough for your goal:

-> Spend wisely
-> Save aggressively
-> Invest generously

3. Choose the right asset class. Apart from disciplined investing, one thing that can make a lot of difference and contribute immensely to your retirement kitty is the return on your investment. An 8% RD versus an Equity SIP with an average return of 12%, of R 10,000 per month will fetch you R 91.5 lacs and R 1.7 Crore respectively, in 25 years. A difference of just 4% in return almost doubled the corpus over the same period. You have a huge investment horizon in hand, complemented by the ability to take the risks because of the time, invest in products with good growth potential and make the most of compounding.

4. Ensure a debt-free life at the earliest. A prerequisite to retiring early is being Debt Free. So, start paying off your loans, start with high-cost debt like credit cards and personal loans, and gradually move to the car and home loans. Also, about loans, don’t unnecessarily burden yourself with them. When you have prioritized your needs, and an early retirement occupies the top position, let’s strive to achieve it, don’t go for a 3 Bhk house when a 2 Bhk meets your requirements. Or why go for an expensive SUV for a nuclear family, when a mid-segment hatchback or sedan does the job?

5. You can still make money after retirement. Fortunately, for many who wish to retire early, retirement doesn’t mean putting a full stop to earning. Many would be planning to work freelance, as consultants, and trainers, or run things like blogs, Youtube channels, etc. These things can be clubbed with a retired life long with pursuing your passions. Many would also like to build a secondary income source, say rent from additional property, the share of profits from some business as a passive investor, and so on. These things would likely bring in some cash flow which can be great for your retirement plans. The point is to be well-planned and prepared before taking the plunge.

6. Invest your retirement corpus wisely. Investment management is a never-ending process and it will continue even after your retirement. Your retirement corpus should provide you with regular income, if needed, to meet your routine expenses. There are various asset class options like real estate, fixed interest-bearing instruments, small saving schemes, etc., which can give you a regular income. However, the investing factors like risk appetite, income needs, liquidity needs, longevity needs, etc. Thus, debt mutual funds and balanced funds with SWP (Systematic Withdrawal Plan) option, can be looked at for your post-retirement investment planning. While a debt fund will give steady, relatively risk-free returns, a balanced fund will also allow making the corpus to grow and thus last longer, albeit with a bit more risk.

To conclude, pursuing an early retirement is, you are bargaining for an extended period of life to let you experience the beauty of this planet, from your heart and soul. However, retiring early, as attractive as it sounds, needs unadulterated devotion and commitment on your part. Once you have made up your mind that you want to retire early, infidelity with retirement planning can wreck your aspirations.

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Decoding Financial Freedom


What does financial freedom mean? If you ask this question to yourself and ten other people it won’t be surprising to find different answers from all. Even authors, financial gurus, and top advisors have talked about financial freedom in different tones. 

For some, it means never having to work again or having huge wealth while for others it may be financial stability or simply being free from financial troubles. Financial freedom is a term that is vastly and liberally used but is very subjective. Even having huge wealth is very subjective as there is no end to how much is enough while life needs can be satisfactorily met with much less than you may imagine. 

For one it may mean living a lavish life in a grand bungalow but for another, it may mean selling a Mumbai flat and settling in a village, with the proceeds lasting him a peaceful lifetime.

FINANCIAL FREEDOM: THE THREE CHECK-POINTS

Financial freedom is much more than having money. It’s the freedom to be who you are and do what you want in life. Financial freedom has different implications for different individuals though. And if we are aiming for financial freedom, we are aiming for something beyond the three checkpoints which have to be ticked. Only then could we say that we are financially free in a real sense.

It means having the freedom to maintain your lifestyle after a certain point of time, without having to work for it. Time can be your retirement period, it can be the happening of an unfortunate event, like an accident or failure of a business or it can be that one day when you simply quit your job and start exploring the beauty of this world without worrying about the ‘how to earn?’ part of the money.

And secondly, all your responsibilities and life goals should be satisfactorily met. Having financial freedom also means that not only you can maintain your lifestyle and meet daily needs but also are in a position to fulfill your life responsibilities like child education, marriage, arranging for a residential home, charity, and all other goals you may have.

Lastly, you should be able to sustain yourself for a very long period – a few decades maybe on the loss of income or your entire life or your post-retirement life until you become an old hag. This sustainability means that you should be prepared for and able to withstand any unfortunate event in your life, including ailments and accidents.

FINANCIAL FREEDOM: REALLY?

Financial Freedom, for most people, is the ultimate Goal. But to be realistic, NO ONE chooses to ‘stop’ working or live a life of a wanderer or a lazy person even if there was no need to work. Even the richest person on the planet works very hard but for a different reason. Once the question of making a living is solved, one progresses to the non-material aspects of living. It then becomes a question of your passion, beliefs, and basically what you enjoy doing in life. If it is your work or business, nothing like it.

So what we mean by financial freedom is not something vague or subjective. Financial freedom = freedom from fear. Freedom from the uncertainty of how you will live or do things you need to do tomorrow, irrespective of anything that happens. It is about being ready for freedom from financial worries & equipping yourself with enough investments and insurance for protecting your future needs. When considered in this context, financial freedom looks more like financial well-being for all of us and that looks very feasible and practical and an ‘X’ figure for the same can easily arrive mathematically. We will not talk about that now though. What we are interested in is really how quickly can we attain that freedom of mind & ensure its sustainability. We will now discuss the important steps which can help you gradually ‘attain’ and also ‘sustain’ financial well-being. So here we go:

ENSURING FINANCIAL WELL-BEING

(A) Passive Income: To get rich, you have to be making money while you sleep! A crucial step in financial well-being is not just protecting your income stream, but also creating a second or multiple sources of passive income. This can be in the form rental income, income from investments, side business, etc. Passive income is a must, especially when your primary income seems insufficient or seems at risk or when you plan to dump it in future. In simplistic terms, financial freedom could be closer if – Passive Income > All Expenses. If this can be ensured a predictable future, with a bit of margin, you are in a safe zone!

(B) Good Debt & Bad Debt: There is a distinction between good debt and bad debt and one should understand both and try to be free from the latter. Debt helps you achieve a lot of things in life that are impossible otherwise. You take loans for education, for buying your house, or your car or a businessman takes a loan for filling the working capital gap. In terms of the loan, this equation is necessary to be checked (i) asset is created or some basic /important need is fulfilled (ii) if an asset is created, the minimum return from the asset > interest rate of the loan, without the need for any speculation or leveraging. Using debt to finance short-term, non-important desires like vacations, gadget purchases, etc. is not welcome. Credit card loans & personal loans are the worst because of the high-interest rates they carry. Being debt free is surely a very healthy status to have and is necessary for long-term financial well-being. The thought ‘freedom from debt is financial freedom’ is not entirely misplaced. If you are using debt to own appreciating assets like homes, businesses, etc., make sure that you wind it up soon before thinking of financial freedom.

(C) Risk protection: Protect the downside with Insurance. Secure yourself and your family by taking adequate Medical Insurance, Term Insurance, Accidental Insurance, and Property Insurance. The insurance premium is often considered a burden, but it is the biggest shield you are creating for yourself in your fight for financial well-being. In case of an unfortunate event, your insurance will take care of the extra financial burden in the form of hospital bills, medical bills, and loss of income. Your investments working for your goals will be intact, thus ensuring continued financial well-being, devoid of any shocks.

(D) Staying within your means: Do not go overboard if you enjoy a good income and have created decent assets. Whether any expense is necessary at present and what potential wealth it can create in the future if invested? is a question one should keep asking oneself. Doing this will help us attain financial well-being sooner than we can expect. After that, sustaining your financial well-being will be a challenge. Sustainability is all about continuing to enjoy the lifestyle you deserve not the extravagant lifestyle you see in the movies. It is about staying within your means and within the acceptable boundaries you have planned for yourself.

(E) Don’t Be Stupid: There are many cases of millionaires and billionaires have gone bankrupt. So having money does not mean being rich always. Do not commit stupid mistakes when it comes to money. Many people with the desire to make more money quickly, take wrong investing decisions, which can hamper their finances for a very long period, can even stymie their goal of achieving financial well-being. Beware of ‘Ponzi’ schemes, equity market speculations, or investing in risky products – these things can cost you big in the long run. The better idea is to seek professional guidance and do the basic things right like starting early, saving, investing in the right asset class, being patient, and investing for the long term, etc. Remember you can attain and sustain financial well-being, provided you do not make big mistakes in life.

CONCLUSION

Financial freedom is a mental, emotional, educational, and behavioral process. If we consider it as our goal, it would require us to be and do much more than today. It would require discipline, focus, and to become more successful & stronger in every aspect of our lives. Having money is and will never be enough. How to use that money for our good is what matters. And how to live a life in the end, makes the most difference. The above steps are just a few things that will help you to take control of your situation and start your journey toward financial well-being & freedom.

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Behavioral biases in investment decision making

  1. 1. Anchoring

    Anchoring is quite a common cognitive bias witnessed among investors, which means basing investment decisions on an initial piece of information. This initial information serves as the starting point, which we adjust, to arrive at investment conclusions. Say, for instance, you bought a stock of XYZ co., in January at Rs. 100, at the end of May the stock went up to Rs. 130, then the top management changed, and by October the stock came trotting down to Rs. 90. Now, you are holding on to the stock hoping it will again rise to Rs. 130, then only you will sell to book the profits.

    In this case, you may be clinging onto the anchor. Buy, sell or hold decisions must be on the back of fundamentals, and not on previous highs or lows. Don’t let perceptions or experiences, good or bad, clout your judgment ability, a past bad experience with equity doesn’t direct the future, it’s the rudiments of the product that matter in the long term.

    2. Confirmation bias

    Another product of extending our beliefs and preconceived notions to our decision-making process is Confirmation Bias. For instance, you are looking forward to the launch of the new Honda Civic for your next car upgrade, you have read good reviews about the car, the Sunday car shows are talking about the Civic, and all the blogs you read people have written good things about the car, etc.

    All the information seems to be in the affirmative, so now you firmly believe that you have made the right decision. But have you ever thought that it is only because you are reading selective reviews and blogs? Probably you have subconsciously ignored contradictory views and negative reviews or skipped reading good things about other cars in the segment. In short, we are all ears to information that supports our beliefs, while filtering out everything that does not fit into our comfort zone. And when this tendency is extended to finances, it dilutes the investment decision-making process.

    You may be looking at only that information that is in alignment with your notions while ignoring the rest. Try to look at contradictory viewpoints, and consult your financial advisor, he/she will show you the right path.

    3. Loss aversion bias

    The most common one, we fear the possibility of loss, and we are just not prepared to let go of our money, under any circumstance. We hold on to the poor performers because we do not want to book losses we purchase more of the same infertile stock/mutual fund to average out the cost and cover up the losses that we have made. You have to accept the fact that a bad decision was made, book losses, and move on. Our strength is tested in volatile times when we see our investments falling. It’s up to us, we can either fall prey to the bias, and sell our investment to avoid losses; or we can do what we ought to do, that avoid the noise, and hold the investment for it is for our long-term goals.

    4. Mental accounting bias

    Mental Accounting Bias is the tendency to mentally categorize money into different mental accounts based on their source or the basis of its intended use, and then treat the money in different categories differently. For Example, you had set aside Rs 500 note last month for buying yourself a book, but then today when you open your cupboard, you find that you have lost the note. You are sad and decide you’ll not buy the book. Normally, had you ‘not’ dedicated this note to the book, and would have lost Rs. 500 in the usual course, the book purchase might not have been affected. This is a simple case of Mental Accounting Bias. Similarly, people take investment decisions based on the mental accounts they have created. For instance, in case of a sudden inflow of money like a bonus or inheritance received, people tend to be irrational in their decisions compared to when the source is their monthly salary. Or say you have kept an FD for your vacation and at the same time you are paying massive interest on your credit card bill outstanding. Logically you should break the FD to pay the loan since you are getting 7% and paying 25%, but you don’t do so, since you have created a mental account for that money in your mind. We must understand here that money is fungible, and the value is the same irrespective of the source or the outlay. Hence, you must be careful of such mental accounts and the impact they may have on your investing decisions.

    5. Familiarity bias

    At times our investment decisions are based on our connection or comfort with the product we are investing in. People working in banks often purchase their employer’s stocks or banking sector stocks, we invest in stocks or sectors because we have researched a lot on this stock/sector and believe in it, and the like. Because of this bent towards our familiar options, we are restricting our investment horizon. There is a universe of investment products available out there, and we must choose the best from the lot.

    6. Bandwagon

    As the name suggests, we have this uncontrollable urge to order what the people at the other table are eating. We often extend the urge to our investing decisions also, we feel other people are making money because they made better choices, and we feel we are missing out on some information that they may have, it’s a typical case of FOMO (Fear of Missing Out), and it can have disastrous repercussions. Every individual is unique in terms of his/her financial standing, goals, needs, priorities, and risk appetite, so how can the investing process or products be similar? Hence, you must always be mindful that investing is not about making more money by following your neighbor, rather it’s about gratifying your unique goals and needs.

    To conclude, a large number of times, we follow our emotions, and inclinations tend to influence our day-to-day decisions. Without realizing it, you might have fallen prey to biases, while in investment decision-making. They say “The one who has mastered his emotions is mightier than one who conquers a city”, it is inordinately applicable to investing, and we must always stick to the fundamentals and follow our master plan religiously. And your financial advisor is there to help you overcome these cognitive biases and to show you the mirror whenever your decisions are clouded by your emotions.

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Financial mistakes in various life stages

To Err is Human & at times it might take ages for us to make up for the errs. When it comes to finances too, sometimes small mistakes can have serious consequences. Most of us commit financial blunders unknowingly & end up paying a big price for them which we don’t even realize. 

These mistakes can be both by commission i.e., by doing something, or by omission i.e., by not doing anything. This article concentrates on making investors familiar with the potential mistakes they can commit. To make it easier for you to correlate, we have separated the mistakes across the life stages of a person.

  1. The Exciting 20s, 20s is the time when we all are enthused, energetic, and excited. However, it is also a time when people make the most mistakes in life. Many of us start the investment process early well before turning 25. But while the time may be on our hands, wisdom often isn’t. And hence investors in their 20s are highly prone to committing some common financial mistakes like

    Overspending, no savings:

    With your own money now in your hands, you feel empowered and deserving to spend it. We now wish to fulfill all our college dreams, and savings is the last thing on our minds. While you may be well deserved to spend as per needs, splurging extravagantly isn’t desired. We often splurge on things like watches, cars, entertainment, clothes, and especially gadgets like mobiles, changing them to buy the latest edition. But remember that every rupee saved and invested at this time has the potential to create the maximum compounded wealth over time. Time is the biggest resource you have during these years. Starting a SIP at age 25 can help you create enough wealth to help in the purchase of a house or say starting your own business later by age 35/40.

    Not learning about investments:

    Lack of financial literacy is often witnessed among young investors. Somehow, the inclination towards savings, investing and management of finances are just not there. There are big dreams but the path to be followed to actualize them is often missing. This is the time when you can experiment and learn and still have time to recover from any hiccups in the process. It would be a waste of valuable time if we do not get out of our 20’s without enough knowledge and some experience in investments.

  2. The Settling 30’s

    30s is the time when we would be settling into our jobs, home, relationships, and also as a person. This is the stage when the investor has attained some degree of maturity in all aspects of his life, including finances. This is a crucial period as you would be expected to make critical financial decisions that will have life long impact on your finances. The common investing mistakes that a 30’s investor should be careful of are:

    Towering EMI burden: The most prevalent financial problem among the 30’s investors is they overburden themselves with EMIs. EMIs for homes, cars, and other sophisticated electronics, all running at the same time. The reason probably is the easy availability of loans, however, an investor should not be taking loans more than he can afford to repay. As a simple rule, your EMIs should not exceed 50% of your net monthly cash inflow. EMIs on depreciating assets (like a car, or electronics) are worse than appreciating assets like property. There should be a substantial gap between a person’s income and the sum of his EMI. Excessive EMIs leave the investor with little or no room for saving and investing for other important life goals like kids

    No planning for long-term goals: 30s is the time when an investor must have a financial plan for the rest of his life prepared. This is the apt time when the initial steps towards long-term goals like kids’ education, marriage, and retirement should be taken. But for some, long-term goals are nowhere on the list, their life is revolving around near-term goals like home, car, vacations, etc., and what they don’t realize is, the time to realize it is now or else it’ll be too late. Proper planning not done now will force one to compromise later in life.

    Inadequate insurance: Another major problem in a 30’s investor financial plan is inadequate insurance. People often treat insurance as an expense and try to keep the premium payments as low as possible. While insurance is an asset that is going to protect you and your family during difficult times, therefore you need to be adequately covered at all times. If your parents are dependent on you, it is critical that you start health insurance for them too as early as possible before it is too late as they may be nearing old age. If not done, health emergencies in your family can potentially sabotage your financial worth at any point in time.

  3. Responsible 40’s

    This decade puts many financial responsibilities on your shoulders. You are in the middle of your career, you have to take care of your kids’ education, your loans, and your parents’ expenses, and at the same time, you and your spouse may want to live your dreams, as you are still in the young category. This is a very crucial time for managing your finances right and some common mistakes that a 40’s investor often commits are:

    Preferring traditional products: The biggest blunder of 40’s investors is their bias towards fixed-income investments or traditional products like PPF, gold, property, etc. There are many reasons for this, like a lack of awareness about non-traditional products, bad experiences, unwillingness to learn and change, and so on. While no traditional product is negative per se, an investor has to holistically look at his entire portfolio and make the right asset allocation decision. Often we see that investors lose track of their asset allocation during these times.

    Losing track of financial goals: Another lapse in our finances as we progress is, we sway away from our financial plans and goals. This may be due to a lack of regular revisions in your financial plans or losing touch with your financial advisor. This is perhaps the last phase when you can still invest in equities for goals that are yet far away. The risk you then carry is falling short of your goals and compromising on them or diluting your financial net worth. Retirement should now become a critical goal for you to plan and if you haven’t yet started, it must be at the top of your list.

  4. The Maturing 50s

    50s is the time when you would see a lot of events and changes taking place in your personal life. This stage is the last decagon of our working life, not to be underestimated as you have the highest earning capacity. Some of the common money mistakes of a 50’s investor are:

    Compromising on your Retirement Kitty: The greatest financial mistake you may be forced to do is to compromise on your retirement by withdrawing from its corpus to fulfill your other responsibilities towards your children like marriage, education, business support, etc. Lack of adequate planning in earlier life stages has got you in this position today and all the efforts directed towards living a financially independent and peaceful life post-retirement take a big hit. The 50’s investor should remember that retirement years are approaching, there will be no inflow of money soon, but there will be outflows, and he/she should take due care and have enough money to fill in the blank. Retirement planning should be the top focus here and you should do all that is possible to reach adequate numbers.

    Lack of Estate Planning: While many investors may still be in the pink of their health, the 50s does bring in some uncertainty in our lives on the health front.

    It is a stage when you have adequate wealth accumulated and invested in various avenues, including property. Be it you or your spouse, it is also the time that you start thinking about estate planning or at least creating a proper will for wealth distribution. Estate planning would be crucial if you still have someone close to you who would need special care & attention in your absence. Keeping all documents in one place and getting proper estate planning / will writing done, will save a lot of hassles and confusion on part of your children in your absence while also ensuring that your spouse is not left at the mercy of others.

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Smart habits of a successful investors

HAVE A LONG-TERM VISION

The achievers are where they are today because they are different in their ways. Their achievements can be traced back to a lot of hard work, discipline, patience and a long term vision. The former will lose their essence if the latter is not strong and clear, in fact the vision is tailgated by the other attributes of the successful investor.

If you want to cook a dish for dinner tonight, you must know what’s the recipe, what is it that you are going to cook; you’ll not start putting in random vegetables and masalas and expect a delicacy on the table. Similarly all your efforts in life are put with the view to reach a destination, these efforts when extended over a very long period of time need a vision. A clear vision is something most of us lack when we invest. We invest in random instruments at random times, and expect a rewarding conclusion on the table.

Your investment habits, patterns, plans should all conform to and follow your short and long term goals at all times.

To be successful, to realize the fruits of your investments, you need a long term vision and clearly defined goals. “Chase your vision, not money, the money will end up following you.”.

HAVE AN INVESTMENT STRATEGY / APPROACH TO FOLLOW

A disciplined investment strategy elevates the investing experience of the smart investor. An investment strategy imparts clarity and discipline into the investing process. It acts as a guide when the investor considers different investment options for his investment portfolio. 

However, you must understand that there is no universal investment strategy, and each should be customized according to your needs. It should fit within your long term plan and should work towards your short term goals. Your financial advisor will help you in devising a strategy which will guide you in taking sound investing decisions. 

GET YOUR BASICS RIGHT

“Action without knowledge is dangerous”. Smart investors know what they are investing in and why are they are investing in it. This is one space where many of us fall behind. Sometimes we don’t even know what is the underlying asset class of the product we have invested in. Unawareness mostly results in unpleasant surprises at the end. Whereas familiarity with the investment’s characteristics help us take informed decisions as well as set realistic expectations. 

Awareness enables you invest in products which can help you achieve your goals. For eg. You have inherited Rs 10 Lakh from the sale of a family property, now you are looking to invest this amount to fund your kids’ higher education expenses 10 years hence. As per your Dad’s advice you invest this money in PPF only to know that after 10 years, the value of your investment is nearly sufficient to fulfill your goal, but cannot be withdrawn since PPF has a lock-in of 15 years. To avoid such disappointment in future it’s best to educate yourself with the basics of the product.

SPEND TIME TO DEVELOP MULTIPLE SOURCES OF REVENUE

You don’t know what’s coming next, the best you can do is prepare yourself for the worst. Smart investors have a longer vision and they prepare themselves for any unforeseen exigencies by working on to get a second source of income. Having multiple sources of income is in fact one of the biggest reasons for success for many people. This can also mean diversification of your business so as to not be fully dependent on only one business in which case, you are exposed to risks like government policies, competition, market dynamics and most importantly, technology. 

The second income will barge in to take care of your expenses and will give you the necessary stability to keep you going even when you are suffering from a down-turn in your primary source of income. During your highs, try to develop more sources of income, like a rental income, a part time business, a passive income from an investment, etc. and gift yourself some peace of mind.

KEEP LEARNING

There is nothing more valuable in this knowledge age than knowledge itself. Those who wish to be successful tomorrow are investing their time and energy to learn things today. Learning can be in any aspect – be it professional education or business learning or learning more about investments. The trick here is focus and depth of learning any particular thing which you believe is important for your success. Identification of what to learn is thus more important than learning anything. 

Successful people spend a lot of time in learning, not just from books and experience, but also from the wisdom of the company they keep. Staying with friends those who are wise, experienced and learned is a sure way of life long learnings.

LIVING LIFE TO THE FULLEST

At the end of it, we come to a trait which is in fact the starting point of being successful, Attitude. Rarely would you come across any highly successful person who does not have a positive and purposeful attitude to everything that he does. Whether it is fun, networking, doing business or investing, there is clearly a no-nonsense approach and clarity as what is to be done. Often we find that even in family matters, these people have learned to strike a balance and keep relationships healthy. Taking good family breaks, enjoying life, etc. are visible displays of living life to the fullest. If you are doing it, better give it your best shot.

Being a smart Investor is simple but not easy. The above traits of a successful investor when adopted and practiced regularly, can put your financial life in right shape and can greatly enhance not just your investing experience but also your overall experience of life.

Onesta Capital Ventures is a Multi Family Office based out of Gurugram (India). We aim to provide tailored independent wealth management and other family governance solutions to individuals and corporates.

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