Category: Investment Education

Wealth Building and Retirement – the Four Bucket Approach

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Summary:

The transition from your Working Life and Career to Retirement can be quite demanding. The challenges in this phase extend from psychological to financial and social. In this note, we focus on the financial challenges. The Equity Investor can use the Four Bucket Approach detailed here to think though the changes and plan for Retirement.

Introduction

Retirement is an important goal of work life, for the equity investor. The image of a relaxed day schedule, no monetary pressures and more time for your favorite hobbies, seems so attractive. In early career, it seems so far away, time wise, that planning for Retirement seems like a waste of time. However as we hurtle through our ever busier careers, it comes closer, and planning for it becomes more important. The suggestion I make is that Retirement should be incorporated in your financial plan from an early stage in your career. To do this, we present the Four Buckets Approach to Retirement as it offers a simple yet powerful framework to plan your financials. Do take advantage of this in your planning.

Wealth Management for Mid-Career: The 3-Buckets Strategy

In the age bracket of 30-55, mid-career working professionals and businesspersons need to convert savings into wealth. They need to plan for the rainy day, as well as fight inflation, to meet financial goals.

For them, the bridge between today’s pay check and tomorrow’s financial freedom is built on two pillars: growth and safeguards. The most effective way to manage this is through a “Buckets Strategy,” which classifies your money according to when and what you need it for. By splitting your investment portfolio into three separate buckets, you can allocate funds and leverage the power of compounding as well as plan for shorter term needs, under various market scenarios. See – Fig 1 – Three Essential Buckets.

Bucket 1: The Emergency Fund (EF)

Time Horizon: Present to 6 months. Purpose: To cover 6 months of normal living expenses, which acts as a financial safety cushion, so that any emergencies like job loss, sudden expenses or medical issues are planned for, so we get time to react and recover from these.

Where to Invest:

  • Savings Accounts: The ultimate tool for instant access. It keeps your money safe and ready for withdrawal at any ATM, branch or online banking.
  • Liquid Mutual Funds: low-risk option that offers better returns than savings accounts with easy access to funds.
  • Short-Term FDs: Ideal for guaranteed, predictable growth. They give fixed returns with a locked interest rate over a fixed time. Tax impact is more compared to liquid MFs.

Allocation Ratios: Here the household and personal expenses for 6 months will be the EF budget.

Bucket 3: Retirement Focused Investments

Time Horizon: Period till Retirement. Purpose: To build an asset that matures by retirement, beats inflation (high-growth investments plus compounding), and includes retirement tax-saving features.

Where to Invest:

  • EPF / PPF: These are government-backed schemes with guaranteed, tax-free returns.
  • National Pension System (NPS) and other Pension schemes: Pension policies and NPS provide a low-cost retirement plan with asset growth. These may have equity and debt options. There are tax benefits on investment as well as on maturity.
  • Safe Direct Equity and Equity Mutual Funds: Generally targeting Blue Chip firms, these provide safety and growth. Assets must be spread in a number of companies. These help capture long-term market growth. Nifty and Sensex ETFs is also a good option.
  • Life Insurance (Endowment) Policies: They offer life insurance along with disciplined, regular long-term savings for future needs.

Allocation Ratios:

  • A common, actionable rule of thumb for retirement is a target corpus of 15 times your annual gross income by the time you retire. This can be reviewed every 5 years, so that the retirement target stays aligned with career growth.

Bucket 2: Intermediate Wealth Assets  

Time Horizon: 6 months – 20 years /period till retirement. Purpose: To fund medium to long term goals as well as general wealth building. Goals can include buying a home, car, or planning for major family events, etc. This balances growth with capital protection through a mix of assets.

Where to Invest:

  • Debt Mutual Funds: These focus on fixed-income securities to provide stable and predictable growth with better post-tax returns than FDs. These provide steady returns with relative stability.
  • Long-Term Equity: Direct Investing in listed companies help you benefit from business growth. Investments can be aligned with risk profile. Aggressive equity investments are possible here. Also investment can be in Equity Mutual Funds, where professional managers handle your assets.
  • Top of Form
  • Bottom of Form
  • Gold & Silver: Act as a safety asset to protect from geopolitics, inflation or currency weakness.

Allocation Ratio Options:

  1. All savings available after EF and Retirement allocations should be used for Intermediate Wealth Asset building.
  2. A 60:40 ratio: Thetraditional allocation has been 60% equity and 40% debt. This has to be periodically rebalanced.
  3. With the rise of Gold and Silver, we suggest a 10% allocation to them. The ratio can be 60:30:10%.
  4. A dynamic allocation approach: With(100 – Age) allocated to equity, rest to Debt and Gold/silver.
    • Age 30 → 70% equity, 30% to debt + G/S
    • Age 50 → 50% equity, 50% debt + G/S
    • Age 40 → 60% equity, 40% debt + G/S

Wealth Management in Retirement: The 4-Bucket Strategy

Lifespans have increased. Life expectancy in India has shown significant rise, reaching 70–72.5 years in 2022–23, up from 49 years in the 1970s. So we have to plan for a longer retirement period, even as inflation and healthcare costs rise.

After you progress from a working career to Retirement, the focus changes from primarily asset growth to primarily capital protection and encashing your assets for retirement income. The goal is to ensure your retirement funds support you and your family for your lifespans, even as markets go up and down.

Retirement:

The salary or business income disappears and has to be replaced with cash income from available assets.

Your Retirement Focused Investments are encashable on retirement and may also convert into annuity funds. The investor’s other Intermediate Wealth Assets also need to be repurposed post Retirement.

The 4-Bucket Approach helps to protect your assets while still allowing some growth to beat inflation during a long retirement. See Fig 2 – The Four Bucket Retirement Approach.

Bucket 1: The Emergency Fund

Time Horizon: 2 Years. Purpose: The Emergency Fund needs increase as it should provide for around 2 years of expenses. This provides better safety and peace of mind.

Where to Invest:

  • Savings Accounts: For instant access to money when needed.
  • FDs: Stable investments that provide predictable cash flow with low risk.
  • Liquid / Debt Mutual Funds: Low-risk option with slightly better returns and easy withdrawal.

Allocation Ratios: Here the household and personal expenses for 2 years will be the EF budget.

Bucket 2: Cash Generating Assets

Time Horizon: 2–10 Years. Purpose: On retirement, many assets built till now need to be closed, encashed or converted into Cash Generating Assets. These assets helps meet regular monthly expenses and lifestyle costs during early retirement by providing steady income with low risk.

Where to Invest:

  • Pension Annuity: LIC, insurance plans and PF can convert into pension annuities.
  • Dividend – Equity: Blue-chip stocks and MFs that provide regular dividend income; REITs and INVITs.
  • Dividend Debt Funds: Offer steady income with lower risk than equity.
  • Equity assets and debt MFs: A Systematic Withdrawal Plan (SWP) on existing equity assets and debt MFs helps encash these assets. Even as the core portfolio grows, one can generate monthly income.
  • Real Estate Rental Property: Generates regular monthly rental income and adds stability.

Allocation Ratio:

  • The allocation starting point has to be the monthly cash requirements in retirement.
  • Working backwards from this, the Cash Generating Assets need to fulfil this requirement.
  • Pension annuities, dividend paying assets and rental property can be accurately predicted.
  • The SWP can be increased to meet any gaps. In case of surplus, the cash may be reinvested in Dividend-Paying Equity and Debt assets.

Bucket 3: Intermediate Growth Assets

Time Horizon: 2–20 Years. Purpose: Assets need to grow and fund the retirement period, protect from inflation and refill Buckets 1 and 2 over time while keeping risk moderate. Non rental Real Estate may be sold and proceeds reinvested in rental property or equity / MF assets.

Where to Invest:

  • Balanced Advantage Funds: Balance equity and debt MFs based on market conditions.
  • Large-Cap Direct Equity and MFs: Stable companies for steady growth.
  • Real Estate Appreciation Asset: Land or Commercial property can be considered these assets can be considered for liquidation in order to generate capital and cash.

Allocation Ratio: Here the allocation can be similar to Mid-Career Bucket 2: Intermediate Wealth Assets 

Bucket 4: Retirement Home, Will and Assets Planning for the Family

Time Horizon: 2-20 Years Purpose: The career home and location may change to a retirement home in a new location. The Will and Assets Planning are required to bring clarity and certainty to the process.

Activities:

  • Invest in, buy or rent a Retirement Home: Post retirement or in old age, there may be a plan to shift home to near the children, to the native place or to a retirement home
  • Sale of Real estate – some assets may need to be liquidated as per the plan
  • Update your wills, discuss with family – about assets and businesses: it’s time to prepare or update your will so that your assets will be inherited by your family as per your plan. Both husband and wife need to have their own wills. Businesses too need to have a succession plan
  • Endowments for social causes: If possible, you may decide on a few endowments for social causes like education, NGOs or religious trusts

Allocation: All your assets must be accounted for in your will. Beneficiaries should be broadly aligned with the laws, to avoid disputes later. Further discussing this with family at the time of making a will helps to handle friction and disagreements at this stage.   

Conclusion

Disclaimers and Disclosures

This document has been prepared by JMI, and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of JM. This report should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, JMI has not independently verified the accuracy or completeness of the same. Neither JMI nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Investment in the securities market are subject to market risks. Read all the related documents carefully before investing. The suitability or otherwise of any investments will depend upon the recipient’s particular circumstances and, in case of doubt, advice should be sought from a RIA Registered Investment Advisor or lawyer. Registration granted by SEBI to JMI, and certification from NISM in no way guarantee the performance of the Research Analyst or provide any assurance of returns to investors.

JMI has been an equity investment adviser commercially since Nov 2012, and a SEBI certified and registered since 2016, under SEBI (Research Analysts) Regulations. Any questions should be directed to punit.jain@jainmatrix.com. Name of the RA as registered with SEBI – Punit Jain, SEBI Registration No. INH200002747. Logo/brand names –

Should you Invest or Prepay your Home loan? – Jan 2025

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Introduction

Last month, my conversation with an investor went like this –

Rahul (not his real name): I have a home loan of ₹ 75 lakhs, of 20 years duration, and am paying an EMI every month. Right now I have cash available with me of ₹ 10 Lakhs. I have already been an investor in Equity markets for 10 years. Should I use this amount to repay my Home loan, or should I add it to my investments in the markets?

The rest of the conversation, I share below in a formal manner:

Approach – Review Rahul’s Profile:

Deciding whether to use cash savings to pay off the home loan or invest in equity depends on several factors, including Rahul’s financial goals, loan terms, risk profile and the potential returns on investment. Here’s how to think through this:

1. Consider his Home Loan Details

  • Interest Rate: Is Rahul’s home loan interest rate high (above 10-11%)? For Rahul it was 10%.
  • Loan Tenure Remaining: If he is in the early years of the home loan, paying off part of the principal can save more in interest, than in the latter half of the repayment period.
  • Tax Benefits: If he is availing tax deductions on interest (Section 24(b)) and principal repayment (Section 80C in India), consider how much benefit he is getting. The real post tax cost of Home loan may be lower, so from a 10% Home Loan rate, he may be actually paying about 6-7%.

2. Evaluate his Market Investment Details

  • Equity Returns: Historically, equity markets have offered average returns of 12-13% over the long term per the Sensex. However, the returns can vary depending upon Rahul’s actual market instruments – Equity Mutual Funds, Direct Equity Portfolio or ETFs. For Rahul it was 15% compounded on average over the last 7 years.
  • Rahul’s Risk Tolerance: Is he comfortable with short-term investment fluctuations? Equity investments certainly face market risks and volatility.
  • Time Horizon: Equity Investments generally perform better over a longer horizon (3+ years). If Rahul has a shorter time horizon for his equity investments, adding to these may not be a good idea.

3. Assess his Financial Situation

  • Emergency Fund: Rahul must ensure he has 6-12 months of expenses saved in a liquid emergency fund before considering his options.
  • Other Debts: High-interest debts (e.g., credit cards, personal loans) should be prioritized for repayment before addressing the home loan.
  • Working years: Are Rahul’s working years before retirement more than the Home Loan Tenure?
  • Retirement Goal: Is he on track for retirement savings? Equity investing might help achieve these if the Time Horizon is larger.

Calculate Two Data Points for Rahul

  • Tax adjusted cost of Home Loan: let’s assume that for Rahul from (1) that it is 7%.
  • Rahul’s expected Equity market returns: The past is apparent, while the future is unpredictable. However we can be conservative and project lesser returns in future than in the past. As noted in (2) Rahul got 15% returns compounded from his mix of Equity MFs and Direct equity. Let’s project future returns from these instruments at a lower 12%. Tax here is difficult to project but if fair tax planning is happening, capital gains can be within annual zero tax limits.

With the above data points it becomes obvious that for Rahul, Equity gives higher returns of 12% than the cost of Home Loan (7%).

Conclusion

  • The immediate conclusion would be that Rahul should use the 10 L funds in Equity investments and continue to repay the Home Loan as per the original plan. Here Rahul should be able to grow his incremental savings of ₹10 L by (12 – 7) = 5% annual average over the duration of the Home Loan.  

However several caveats and conditions can color or even change this conclusion:

  • The Home Loan repayment is an almost fixed commitment of monthly payments. There can, of course, be some interest rate resets, but otherwise, EMI and tenure are fixed. On the other hand, the Equity market returns can be volatile and unpredictable in the short term. So Rahul has to be comfortable with taking on these uncertainties and both commitments together.
  • If the Home Loan tenure is longer than expected working years of Rahul, it may be wiser to repay the Home Loan partly with the Rs 10 L, reduce the tenure, and plan for an EMI-free retirement
  • If the returns that Rahul projects to get from Equity markets are on average 9% or less, then the benefit is lower, and it may be better to repay the Home Loan than to invest in equity.
  • If Rahul’s job or business future cash flows are uncertain or constrained, early repayment of Home Loan again might be the prudent choice.

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Disclaimers

  • Investors new to our Research Analyst service can look at our OFFERINGS, and sign up using the PRICING AND PAYMENT OPTIONS link, to grow their Direct Equity investment portfolios.
  • This note has been prepared by JMI, and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of JMI. This report should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, JMI has not independently verified the accuracy or completeness of the same. Neither JMI nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein.
  • Investments in the securities market are subject to market risks. Read all the related documents carefully before investing. The suitability or otherwise of any investments will depend upon the recipient’s particular circumstances and, in case of doubt, advice should be sought from a financial planner or RIA Registered Investment Advisor.
  • JMI has been an equity investment adviser commercially since Nov 2012, and a SEBI certified and registered Research Analyst since 2016, under SEBI (Research Analysts) Regulations. Registration granted by SEBI, and certification from NISM in no way guarantee the performance of the Research Analyst or provide any assurance of returns to investors.
  • Any questions should be directed to punit.jain@jainmatrix.com. Name of the RA as registered with SEBI – Punit Jain, SEBI Registration No. INH200002747. Logos / brand name –

Become a Master of Finance

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I came across this superb interview today of Harvard Professor Mihir Desai (with Lewis Howes). I understand him well as he has Indian origins. And he is sharing awesome lessons from his long career as a Finance professor. Here you go.

Happy investing,

Punit Jain

Lessons from 10 years, and Pitfalls in Investing

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Dear Investor,

At JainMatrix Investments, I am happy to announce we have completed 10 years as a Research Analyst company. (we did get the RA certification in 2016, when the norms kicked in, but were practicing from earlier).

On this occasion, the best thing I can share with you, dear investor, are my learnings from the profession. Just like any equity investor in India, over the last decade we have seen upcycles and downcycles. The USA real estate crash of 2008 and the 2014 euphoria of Indian elections. Demonetization of 2016. The covid collapse of 2020 and the IT sector excitement of 2021. Add to this company and industry specific up and down cycles.

Survival and even success through these periods has been based on learnings of what to do, and also not do on our investment portfolio. The latter can be called as Pitfalls.

In this campaign, we will share with you the Pitfalls you must avoid in order to succeed as an investor. These are the rules I thought of, realized were required, experimented with and against, and finally established as a Gold Standard Rule. I would recommend every single individual investor to follow these, to get a better chance of success.

In wealth management as well as in Direct Equity investments, these Rules must be followed.

Pitfalls and Lessons

Rule #1 – Overinvesting in a single stock.

Rule #2 – Long Term Equity Investments must not be funded by loans

Rule #3 Investing timeframes

Rule #4 – To Win Big in Investing, you have to Deal with Losses

Rule #5 Pitfalls – Do you have too many stocks in your equity Portfolio?

Rule #6 Pitfalls – To be a good investor, do things differently

Rule#7 Pitfalls – If you want to invest in Indian markets, start NOW

Here’s to your profitable investing.

Regards, Punit Jain

DISCLAIMER

This document has been prepared by JainMatrix Investments Bangalore (JM), and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of JM. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, JM has not independently verified the accuracy or completeness of the same. This is a marketing collateral, and there is no stock mentioned here, no price target here, or even a recommendation of BUY / HOLD / SELL. Neither JM nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient’s particular circumstances and, in case of doubt, advice should be sought from an Investment Advisor. Investment in securities market are subject to market risks. Read all the related documents carefully before investing. Punit Jain is a registered Research Analyst under SEBI (Research Analysts) Regulations, 2014. Registration granted by SEBI, and certification from NISM in no way guarantee performance of the RA or provide any assurance of returns to investors. JM has been publishing equity research reports since Nov 2012. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com. Name of the RA as registered with SEBI – Punit Jain, SEBI Registration No. INH200002747.

25 Lessons – Great Investing Wisdom

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First published by me on May 11, 2018

Here is a brilliant tweet from @jposhaughnessy. I have added to it some of my commentary. In the note, he touches upon the classic challenges – uncertainty, fear, under-performance, the big new industries, standing out, biases and luck. It is great investing wisdom. 

Jim O Shaughnessy / My Thoughts

I’ve added a few of my thoughts, and an Indian angle.

jainmatrix investments
jainmatrix investments
jainmatrix investments
jainmatrix investments
jainmatrix investments
jainmatrix investments

Here are the links that Jim had referred to in case you are interested

Hope you liked this. Do comment below.

Punit Jain

DISCLAIMER:

This document has been prepared by JainMatrix Investments Bangalore (JM), and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of JM. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, JM has not independently verified the accuracy or completeness of the same. Neither JM nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient’s particular circumstances and, in case of doubt, advice should be sought from an Investment Advisor. Punit Jain is a registered Research Analyst under SEBI (Research Analysts) Regulations, 2014. JM has been publishing equity research reports since Nov 2012. Any questions should be directed to the director of JM at punit.jain@jainmatrix.com.

When to make a stock SELL decision

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First published July 8, 2014

With the Indian markets pushing to new highs over the last 6 months, its time to ask a loaded, important, yet difficult question.

When should you SELL your stock?

I assume here that you are a long term investor. You are growing your equity portfolio from a minimum 3 year perspective and want to see it meet your big life goals.

Of late you would have looked at your nest egg with a glad eye. In the last 6 months, chances are you have been surprised at the excellent performance of these stocks. It is in these very happy times that you should note the importance of a Sell decision. After all it is very difficult to Time the Market. In stocks it is important to think contrarian. It makes more sense to decide for yourself on your sell decision, execute on it and be satisfied with it.

On a personal note, my favorite holding period for a stock is forever. This is a wisdom gained from the greats of investing. However there are some practical and real situations that we can face. The Indian market is more volatile than the ones the greats live in. These are the situations where you need to think of the Sell decision, and take a call. Here they are:

1. You need the Cash urgently 

The best of well laid out plans can get interrupted. It could be a medical condition. Or education admissions time. Or it could be a desired asset that has become available. Go ahead, and sell. You have earned the luxury of encashing your Demat balance.

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2. Maintain your asset allocation 

Asset classes are varied such as Direct Equity, equity mutual funds, debt/ bond mutual funds, Gold ETFs, real estate, fixed deposits, insurance and cash. You may in consultation with your ‘Investment Adviser’ have agreed to maintain your asset classes in a certain proportion. So when the time comes to re-allocate, its possible that selling of Equity is the call by the agreed formula. This is good, and can help you align your portfolio risk with your personal risk appetite and objectives.

3. Switch to a stronger share 

For a long term investment portfolio, your objective should be to enter into investments with a chosen set of stocks. Read up and track them. And always be on the lookout for a better investment idea. If one comes by and you are convinced, make a switch from a weaker stock to a stronger one. It could be from the same industry. Or even an industry change. You now have a stronger stock portfolio.

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4. Tax considerations 

In India any listed stock investment when sold at a profit after holding for one year constitutes a Long Term Capital Gain, which is not taxed. The one year period should be noted & considered before deciding to Sell.

Sophisticated investors may also consider the converse situation. A Short Term Capital (STC) Loss can be declared in case a loss is booked in an equity investment for a period less than one year. This can then be set off against a STC Gain, in the same year or (by carry forward) in the next few tax years. Speak to your Chartered Accountant before using this strategy.

5. Exceptional gains from a stock 

If you are invested for the long term in a number of stocks, you may be witness to a lot of stock specific activity that can be quite interesting. If your stock has recorded massive recent gains, which are difficult to justify on the basis of fundamentals, it may be time to book partial or even full gains in the stock. Things happen. Shares can appreciate suddenly and unexpectedly. This is a good problem to have. Greed may stop you from doing this. This is where good advice from your Equity Service can be useful.

(JainMatrix Investments is an Equity Service that tracks 3 portfolios for its subscribers, the Large Cap Portfolio 2014, the Mid Cap Portfolio 2014 and the Post Elections Investment Seven)

6. Business has deteriorated (but does not reflect yet in the price) 

You got some good equity research, assessed an opportunity and the risk, and decided that XYZ stock was a great investment. Six months later, something unexpected happened. Maybe one of your investment assumptions went wrong, or an industry specific regulation change, or such. And the future doesn’t look so good for XYZ now. Review the situation with inputs from your Equity Service. Bite the bullet. If justified, take the Sell call. Don’t get married to your stocks. You have to be solid yet nimble in your long term investment decisions. Get out quickly to minimize your losses.

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7. The share price has fallen sharply 

Markets, and shares, by nature are volatile. If the share you hold has seen a sharp fall in price recently, this needs to be analysed. If the fall is due to temporary reasons, like some bad publicity over a minor issue, a temporary technical correction or such reason, then it can be ignored. It may even be a good point to accumulate more shares. But if the reason for the fall is found to be due to a ‘fundamental’ deterioration, then again it may be time to exit.

8. The market changes direction for the worse 

Sometimes the market reaches an inflection point and changes direction. If it is positive like the recent elections schedule announcement then its good for your portfolio. But if it is negative then it may be time to exit, at least partially. This is a tough call to predict. Here again, you can review the situation with inputs from your Equity Service.

Having said all this, it is in the nature of stocks to see long periods of both under and over performance. The market is very very inefficient, and this gives good value and growth investors in India lots of opportunities.

The Converse, a few reasons why you should NOT Sell your stocks in these times:

  1. You can get 10 baggers only if you leave your high potential appreciating stocks alone and let them fly.
  2. If the Modi government delivers on their potential, promise and visibly bold approach, the party for Indian investors has just begun.
  3. For a long term investor, a short term correction of say 10% is not something to worry about. Markets move in a ripple or zig-zag fashion in the short term, but pan to the multi year view, and the Indian indices haven’t looked so bullish since 2004-05.
  4. Valuations for the Indian indicies are just above the average. If the investment cycle is kick starting again, aided by a Modi government, earnings will accelerate and valuations may stay just above average even if the Indices forge ahead sharply.
  5. Indian Retail, hurt by the dull period of 2008-12 and big damaging overpriced IPOs, is just about starting to join this market rally, if MF numbers are anything to go by. Picture abhi baki hai mere dost.

Overall Opinion

  • Stay positive.
  • Book partial gains in some stocks.
  • Temper future expectations from Indian Indices after the recent run up.
  • Watch for cues from the budget.

But as usual there are no easy answers.

Happy Investing,

Punit Jain, JainMatrix Investments

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Disclaimer

This document has been prepared by JainMatrix Investments Bangalore (JM), and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of JM. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, JM has not independently verified the accuracy or completeness of the same. Neither JM nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient’s particular circumstances and, in case of doubt, advice should be sought from an independent Financial Expert/Advisor. Either JM or its affiliates or its directors or its employees or its representatives or its clients or their relatives may have position(s), make market, act as principal or engage in transactions of securities of companies referred to in this report and they may have used the research material prior to publication. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com

Equity Portfolio Thoughts – Control, Wealth and your Reflection

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Date 28/01/2022, first published 23rd March 2015  

Summary

  • An Indian investor is free to invest in any of 5000+ stocks listed on the exchanges.
  • He may have a range of needs in his equity portfolio, which we have captured in a hierarchy.
  • He may like to progress on this range and exercise his choices in a calibrated fashion

Introduction

I was speaking to an investor a few weeks ago. A busy executive, he had a medium size equity portfolio by value. But I was astonished to see that he had almost a hundred shares in his Demat account. And he looked at me and asked, “So what should I do with my portfolio?” I was of course on a tight time schedule, and ran through my 4-5 step standard template for portfolio discussions.

A little later, on reflecting on the above question, I realized that the answer to the above question can be very nuanced. And really there can be multiple approaches and answers to this question.

Let’s step back to the very basics of the question, what does a person need from his equity portfolio?

An Equity Portfolio – A Hierarchy of Needs

To answer this question, we need to draw parallels from the Maslow’s hierarchy of needs, and it is summarized below. Expressed simply, every human can have a number of needs, but at different times in his life, and in different situations, the needs change. Generally speaking, the needs follow a hierarchy.

Portfolio hierarchy, JainMatrix Investments

An Equity Portfolio – A Hierarchy of Needs. Source: JainMatrix Investments. Click to enlarge.

In a similar way as Maslow’s needs hierarchy, a person’s equity portfolio reflects different needs in investing and his ability to focus efforts and achieve his personal needs and objectives. Here are the levels that I am able to present:

  1. Gain Control: I have seen many equity portfolios that are nothing more than a legacy of 15 years of sporadic investment enthusiasm. With funds available and a pep talk by anyone, individual investors may make a series of purchases. This may be followed by 6 months of watching the results unravel, followed by 4.5 years of inaction. All of which may be repeated again. As a result the shares may be an uncoordinated mass of choices from the past. Selling is more difficult than buying.
    • It may seem that ‘Do nothing’ is an option here. After all these stocks can sit in your portfolio for another 5 years, and your carrying cost is as less as Rs 1000/year. Wrong. If you are not in the right stocks for a ‘long only’ portfolio, chances are that over time your portfolio will decay in value rather than strengthen.
    • The task of the Investor (along with his portfolio adviser) would be to try and gain control of this portfolio. The basic issues here are –
      • 1. What’s the objective and primary need of this portfolio?
      • 2. How many shares are we comfortable with?
      • 3. Whats the risk appetite and profile of the investor?
      • 4. How do we achieve these 1, 2 & 3, and in what time frame?
    • Also essential to Gain Control, is the need to identify and exit the low potential stocks.
    • In my opinion even stable long term (example – avg. holding of 10 years) investment portfolios should be reviewed once a year to align with macro/ sector events and to evaluate opportunities.
  2. Absolute Returns and Profits: Typically equity trading has a very clear objective, of maximizing returns from any trade. Similarly we obviously invest money with the plan of gaining profits and building wealth. The question here is, over what time span? One hour? One week? One year? A decade? New investors are typically looking for a simple quick absolute return.
    • For an investor, the portfolio strategy here is to simply find the shares that have a high confidence rating of highest upside potential. To find such shares is an ongoing exercise. Many successful finds for example may achieve their potential and may not be investment worthy any longer. Others may continue appreciating for decades. However this exercise is also fraught with risks. Many highly rated shares may fail. Or a sector may be affected by an unexpected event.
    • Its critical here to not just understand a target investment firm for its financials, management and business assets, but also the sector and macro context of this firm.
  3. Safety and Stability: Very soon a trader/ investor may realize that just desire for profits and available funds is not enough. One has to approach investing with a safety plan, and temper high profit expectations with realistic back up plans and a safety net. Am I taking too high a risk, with the possibility of a big loss? What’s my worst case scenario? What risk am I comfortable with? And for how much of my portfolio? With some experience, an investor is able to balance the profit expectation with an understanding of risk, and build his checks and balances.
    • For some thoughts on Risk v/s asset classes see LINK.
    • Every asset class has an associated risk. And a good fundamental researcher can assess and understand this risk well. So for a long term equity investor to have a 100% returns per annum expectation is asking for too much. He may actually get it but only once or twice in a decade. And this may soon be followed by a hurtful loss, equally unexpected.
    • A good equity Portfolio should be able to limit equity holdings within individual firms and within a sector, and also align the market cap focus with risk profile such as Safety – large caps, Higher risk – mid caps and Aggressive – small caps.
    • Embed from Getty Images
  4. Belonging: Community, Region, Profession, etc: At another level of the investment hierarchy, a wealthy investor may start thinking of his investments not just as a means to grow wealth, but as an expression of his place in society. This means the person is focusing a part of his funds towards the things that are important to him, an extension of his personality.
    • This could perhaps mean that for a Bangalore based person like me, I could invest in firms like Titan, Brittania Industries, BF Utilities, Mindtree, etc. which are local firms. I may get a feeling of pride to see these firms doing well, and even though a small shareholder, would be sharing a part of a big success.
    • Similarly as a former software executive, I may like to invest in a few software small caps that I not just understand well but also hope that my ownership in a small way can contribute to its success. It’s more about encouragement and support than just returns.
    • In terms of an exclusion list, a lot of people may be uncomfortable about investing in sectors such as cigarettes and liquor/alcohol. Its really upto the investor to be comfortable with his investments, right?
  5. Self Actualization: A wealthy investor may actually decide to focus his funds towards doing real good, or addressing problems of society. In the past the only way one could do this was in making donations to NGOs, and Education or Religious Trusts. In today’s economy there are several listed corporates that address the needs of the weaker sections of society, or of the environment, and still have an objective of making profits for shareholders. I see no essential compromise in achieving both these objectives. There is, possibly, “A Fortune at the bottom of the Pyramid”.
    • I believe firms in sectors like education, environment, renewable energy and some NBFC’s in housing finance and micro-finance may be addressing and solving large problems of society.
    • Readers are invited to revert to me with their ideas or suggestions of such firms that they have come across.

In Conclusion

Different investors may have vastly different needs in their equity portfolio, and we have mapped these in the form of a simple hierarchy. Many of us could be frozen in inaction at Stage 1 of this hierarchy. Others may have progressed along the stages and gained control and solid wealth from it. Some may actually have a portfolio that expresses their hopes and dreams for their society. Its essential for an Investor to reflect objectively about his own portfolio and think about improvements.

So where are you in this hierarchy? Drop me an email to see if I can help you with aligning your Equity Portfolio to your own needs. See Portfolio Review for a short description of our services.

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This document has been prepared by JainMatrix Investments Bangalore (JM), and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of JM. Many firms are mentioned in this report, and it should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, JM has not independently verified the accuracy or completeness of the same. Neither JM nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient’s particular circumstances and, in case of doubt, advice should be sought from an independent expert/advisor. Either JM or its affiliates or its directors or its employees or its representatives or its clients or their relatives may have position(s), make market, act as principal or engage in transactions of securities of companies referred to in this report and they may have used the research material prior to publication. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com