2018 returns Nifty mid cap small cap

How is 2018 treating your investments?

Last few weeks haven’t been easy.

And unless you are a perfect timer, chances are that your portfolio would be down.

By how much? The cut would be less for those who decided to leave the party early and comparatively bigger for those who either came in late or were being way too adventurous.

In times like these when the equity markets are volatile and surprise you daily, you will come across conflicting views. Optimists will try and influence you to buy more as prices drop. Pessimists will, as usual, ask you to take away what you can and run. But it’s not that easy to take either side. We are common people who are realists and lie between the optimists and the pessimists. We use the money to achieve our financial goals and not just worry about beating or not beating the markets.

Volatility in markets is painful. No doubt.

But Markets aren’t Fixed Deposits and hence, rise and fall all the time. It’s normal.

The year 2017 was a great one for most of us.

The journey was smooth and straight and almost one-way, i.e. Up. It made successful investing look extremely easy.

Just one look at the YTD returns in 2017 for large caps, mid caps and small caps in below graph and you will agree that there was very little chance that someone would have not made money:

2017 returns Nifty mid cap small cap

In fact, if I remember correctly, it was one of the least volatile years in recent memory.

But 2018 came and… things changed.

And we have just completed three quarters of this year.

The story has changed and how…

2018 returns Nifty mid cap small cap

At the time of writing (early Oct-2018), the large-cap index Nifty50 has given up all its returns for the year and is mostly flat. In fact, it is down -2% for the year.

But the real price correction has happened in mid- and small-cap indices. One look at the red and blue line in the graph above and you will realize. These are year-to-date figures. Cuts are bad, if not horrible.

And this is just about the indices. Individual companies have fallen much more. Many big names have come down by more than 40-50% and I am not taking any names here.

The divergence between large and non-large caps is quite large and as of date, there has been a massive outperformance of large-cap indices against the non-large cap space.

A couple of months back, I came across an interesting data point that supports this conclusion. Sourced from Stalwart website (link), here is an eye-popping data about the 1584 stocks listed on BSE with a market cap >= INR 100 crore (as on 25th June 2018):

  • Fall of 60% or more from 52-week highs – 106 stocks
  • Fall of 50 to 59% from 52w highs – 175 stocks
  • Fall of 40 to 49% from 52w highs – 289 stocks
  • Fall of 30 to 39% from 52w highs – 359 stocks
  • Fall of 20 to 29% from 52w highs – 336 stocks

The dataset is slightly old (June-end) but I am sure the numbers have deteriorated further. Clearly, the large-cap indices of Nifty50 and Sensex are not reflecting the reality of on-going deep correction in the broader markets.

Even if you were to analyze Mutual Fund Portfolios, the divergence between the returns delivered in the last few months by large-cap funds and non-large cap funds would be clearly evident.

Sadly, the investors who believed that the stellar performance of Mid & Small caps during last year will be repeated this year have been disappointed.

Trees don’t grow to the sky. And neither does the market.

If investors continue to disregard the risk in order to enhance returns, sooner or later they will be caught off guard. In a way, this is exactly what is happening right now.

Mean reversion is a law of markets and cannot be avoided. It happens every now and then. And past experience tells that it can be ferocious in the short term. Many who were small-cap heavy in last 2-3 months would agree with that now.

If you already know me, you will agree that high valuations make me uncomfortable. 🙂 I am not a Growth-At-Any-Price kind of investor. Rather, I am a valuation conscious common man who gives cognizance to the real risks.

Since last year or so, there was absolutely no doubt that valuations were stretched (check this and this). And if mean reversion does work (and I believe it does), then sooner or later this kind of correction was expected.

I know we cannot perfectly time the markets. But valuations do act as a guide. And we need to respect it.

Please don’t think that I am trying to portray myself as someone who got the timing of this correction right. Using the State of Markets Tracker, I have been highlighting the risk of the on-going increase in valuations for some time now. So to be fair, this road bump in returns was bound to come sooner or later.

Nevertheless… what next?

I don’t know.

Even after the recent fall in small/mid-cap space, the valuations are still not cheap. Large caps still seem to be overvalued from a historical perspective. But not as overvalued as they were maybe at the start of the year. But having said that, it must also be acknowledged that there are several moving parts right now – like the mood of the population as elections approach, crude oil, geopolitical stuff, sector-specific issues, valuation itself, etc. I am not trying to paint a bleak picture here and I don’t think that this is the repeat of 2008 crisis. But the reality is that no one knows how the current situation will further evolve. And if the panic does take over due to any reason whatsoever, then the stress will increase across the board.

Although as long-term investors, we should not react to the short-term movements in the market, we nevertheless need to remain awake and have adequate situational awareness and link it to historical trends.

If you believe in goal-based investing and are investing for your long-term goals, then you should remain focused. You are already investing in line with your suggested asset allocation and hence, you should stick to it. If you are a SIP investor in mutual funds and your goals are still several years away, you should continue your regular investments as the strategy is good enough and works only if you continue to invest in falling markets too. Unfortunately, if your financial goal is more immediate and you were still heavily in equity, then you had it coming. Your allocation was wrong to begin with as for short-term goals, large % of equity should be avoided for most investors.

If you already hold a large-ish portfolio, then you should respect your strategic asset allocation (assuming you were wise enough to have thought about it earlier) and act accordingly. Ideally, rebalancing should have begun much earlier. Now it’s the market that is rebalancing the portfolios by force.

If you have surplus money to invest, don’t be too excited and try to do anything adventurous. You are excited and we all know that. Let the dust settle a bit more. Being in cash is also a decision. And cash has immense power in such markets.

Every now and then when high valuations and other factors line up in some combination, the markets will have their corrections. In theory, everyone knows how they should react to market falls. But in reality, we can’t be very sure of our actions as our real tolerance for market falls may not be what we think it is.

But corrections are normal and healthy and we should pray for them.

In fact, panic weeks and months are common if you increase the time scale under consideration. And once you do that, the earlier corrections or even the ongoing correction will seem like a blip in the returns that disciplined long-term investors eventually reap. So do not be afraid of this one. Even this will pass away.

It would still not be a bad idea to remain cautious for some more time. It is easy to be carried away by the panic selling. There is a time to be bold and there is also a time to not be bold. Depending on who you are and what goals you are saving for, you need to decide what you will be doing.

 

State of Indian Stock Markets – September 2018

This is the September 2018 update for the State of Indian Stock Markets and includes historical analysis and Heat Maps of Nifty50 as well as Nifty500‘s key ratios, namely P/E, P/BV ratios and Dividend Yield.

Please remember that these numbers are averages of P/E, P/BV and Dividend Yield in each month. Neither Nifty50 heat maps nor Nifty500 heat maps show the maximum or the minimum values for each month. Also, note that NSE publishes PE ratios based on standalone numbers and not consolidated numbers (Read why this may matter too).

Caution – Never make any investment decision based on just one or two ‘average’ indicators (Why?) At most, treat these heat maps as broad indicators of market sentiments and a reference of market’s historical mood swings.

So here are the Nifty 50 Heat Maps…

Historical P/E Ratios – Nifty 50 (Monthly Average)

Historical Nifty PE 2018 September

P/E Ratio (on last day of September 2018): 26.44
P/E Ratio (on last day of August 2018): 28.40

The 12-month trend of P/E has been as follows:

 

Nifty 12 Month PE Trend September 2018

And here are the average figures of Nifty50’s PE for some recent periods:

Nifty Average PE Trends September 2018

Historical P/BV Ratios – Nifty 50

Historical Nifty Book Value 2018 September

P/BV Ratio (on last day of September 2018): 3.47
P/BV Ratio (on last day of August 2018): 3.76

Historical Dividend Yield – Nifty 50

Historical Nifty Dividend Yield 2018 September

Dividend Yield (on last day of September 2018): 1.23%
Dividend Yield (on last day of August 2018): 1.15%

Now, to the historical analysis of Nifty500 companies…

As the name suggests, Nifty500 is made up of top 500 companies which represent about 95% of the free float market capitalization of the stocks listed on NSE (March 2017).

Nifty50 on other hand is an index of 50 of the largest and most frequently traded stocks on NSE. These represent about 63% of the free float market capitalization of the NSE listed stocks (March 2017).

So obviously, Nifty500 is comparatively a much broader index than Nifty50.

Historical P/E Ratios – Nifty 500

Historical Nifty 500 PE 2018 September

P/E Ratio (on last day of September 2018): 30.2
P/E Ratio (on last day of August 2018): 34.5

Historical P/BV Ratios – Nifty 500

Historical Nifty 500 Book Value 2018 September

P/BV Ratio (on last day of September 2018): 3.24
P/BV Ratio (on last day of August 2018): 3.52

Historical Dividend Yield – Nifty 500

Historical Nifty 500 Dividend Yield 2018 September

Dividend Yield (on last day of September 2018): 1.15%
Dividend Yield (on last day of August 2018): 1.04%

You can read the previous update here. The State of Markets section has also been updated with new Nifty heat maps (link).

For a detailed analysis of how much returns you can expect depending on when the investments have been made (at various P/E, P/BV and Dividend Yield levels), please have a look at these 3 posts:

Don't take Advice from Banks

Why shouldn’t You ask Banks for Investment Advice?

Don't take Advice from Banks

The banks in India mis-sell financial products.

Intentionally or unintentionally, they do it. And there is no other (softer) way to say it. Even the regulator RBI now accepts it.

And if you want to experience mis selling by Indian banks first hand, it is very easy.

Just walk into your bank’s branch and tell them that you have ‘more’ money and want to open a fixed deposit. They will surround you like vultures and try to push some product or the other, irrespective of whether you need it or not.

I don’t want to sound rude to our bankers but this is what really happens. That’s how most Indian banks are structuring their businesses – to maximize their incomes from non-banking activities even if it leads to mis selling of financial products.

What exactly is Mis-Selling of Financial products?

Mis-selling means any sale of financial products by any person (directly or indirectly) by:

  • Making a misleading or false statement, or/and
  • Not taking reasonable care to ensure suitability of the product to the buyer, or/and
  • Concealing or omitting material facts about the product, or/and
  • Concealing the associated risk factors of the product

Now mis-selling can be deliberate or unknowingly. But the end result is that the mis-sold products are either unsuitable for customer’s needs, are misrepresented or are too complex to be understood by the customer.

The problem of misselling is systematic and unfortunately, deeply embedded in the Indian banking system. And everyone is involved – from top to bottom level employees of the branches.

Banks already have a huge readymade database of their clients’ personal details and financial situations. This data is used by branches to systematically mis-sell life insurance products and to unnecessarily churn mutual fund portfolios. Most importantly, this is done without truly recognizing the customer’s need or risk profile.

And frankly, this kind of misselling is hard to catch because products are sold through verbal sales pitches. Customers, trusting banks as the protector-of-their-interests buy into the sales pitch and then, you already know what happens – customers end up with a lot of unnecessary and unprofitable financial products in their personal portfolios which doesn’t help clients achieve their real financial goals.

Just a couple of days back, I read about how a well-known private bank’s relationship manager duped senior citizens for lacs of rupees.

My blood boiled after reading about it. Senior Citizens are very easy targets for mis-selling. And that is just one example of mis-selling. Just try searching for mis selling of insurance policies in India and mis selling by banks in India and you will find out other horror stories.

What do Indian Banks Mis-Sell?

There has to be a good reason for banks to do this. Isn’t it?

  1. Cross-selling products like insurances, ULIPs and mutual funds to existing bank customers help banks earn commission income. And banks want to maximize this commission income. So they just sell anything and everything as if there is no tomorrow.
  2. Bank employees are put under a lot of pressure due to the steep sales and incentive-linked targets for selling such third-party products. And they have to secure their jobs and hence, try to push these products down everyone’s throat.
  3. For all practical reasons, banks are unaccountable for doing this. There are RBI-issued checks and controls. But we all know how much such check & controls matter to the employees on the ground (who have sales targets to meet or else they will lose their jobs)
  4. Lack of adequate training and expertise of bank staff is often quoted as one of the major reasons. And this is true to an extent. Most relationship managers know s*** about what they are selling. But I don’t think that just giving proper training will help curb mis-selling. They will still do it if the sales targets are steep and incentivize them to do so.

It is common sense that the investment advice should be based on your financial goals. That’s goal-based financial advisory. But when banks are selling you something, it’s their own goals (commission maximization, sales target achievement, etc.) that they are trying to meet, not yours. 🙂

Data on How Banks mis-sell Mutual Funds

Mis selling of financial products by banks in India is very common. Till very recently, RBI was in a denial mode due to lack of proof. But things are changing and so is the regulator RBI’s stance on mis selling of financial products in India.

Banks have been selling insurance policies for years by acting as the Bancassurance channel for Insurance companies. Since banks reach is huge, this has no doubt increased the penetration of insurance in India.

In recent times, banks are doing the same with mutual funds. They are actively selling mutual funds to their existing customers. And you all know that MutualFundSahiHai 🙂 Here is a success story of mutual fund SIP.

Since I talk a lot about mutual funds and mutual fund SIPs, I thought I will share some data that will prove that how taking mutual fund advice from your banks is wrong.

Many mutual funds come from the same business house as the bank. There are several. And most of these bank-sponsored mutual funds are dependent on their sponsor for sales of their schemes.

Have a look at the below table which I have taken from Outlook Asia’s Manoj Nagpal’s tweet. It shows which AMC pays the largest share of commissions to each of the large MF distributors (in this case, banks):

Banks Mutual fund commission 2017

It is very clear that most banks, try and sell the schemes of their own fund houses.

Or lets put it this way – for each bank, the best mutual fund schemes to invest for their customers is none other than the schemes belonging to their own group! 🙂

That’s laughable!!

And there is a clear conflict of interest here!

Customers of the bank, unfortunately, don’t know this and tend to trust their bankers blindly.

The above table is based on data up to March 2017. Another detailed analysis (though of earlier years) can be found here and here. But the story remains the same.

Note – Please don’t think that here, I am trying to say that bank-backed AMCs are not good fund houses. I am not saying that.

But you really need to think about this – when you buy mutual funds through your bank, is the bank really advising you on what is right for you OR just acting as a seller who wants to get the maximum commission from whatever they can sell to you?

I think by now, you should know the answer.

What are the best mutual funds to invest in?

There are several ways to find this out. But one of the worst ways is to ask your bank or bank’s relationship manager. 🙂

And add the fact that banks only sell you the regular plans of mutual fund schemes and not the direct plans, it is quite evident that investing in mutual funds through banks is a bad choice.

Tip – If your bank tells you that you are their ‘preferred customer’ or ‘inner circle customer’ or gives you some similar classification, just run away! 🙂 A cross-selling bullet has your name written on it and will hit you soon. 😉

What should You do?

There is one thing that I should not miss saying here…

To be fair, it is not just about mis-selling of financial products by the Indian banks. It is also about mis-buying from the customers. It is their hard earned money and hence it’s their responsibility to find out what is right for them and what isn’t.

I agree that a subset of bank customers will still be unable to decipher what is good for their personal finances. But others need to wake up and acknowledge that the financial world is based on selfish interests of everyone. You need to look out for your own self.

As for the banks, they are still doing a fine job of providing ever-so-necessary banking services. But as of now, they are not suited for sale of other financial products. Due to their structure, they are geared to maximize sales and their commission income from financial products – and this leads to hard cross-selling of products which results in lots of mis-selling. Mis-selling by banks is very difficult to prevent unless radical structural changes are made.

So you should be wary of the advice you receive from your bank.

And banks may seem like doling out free advice in good faith. But free advice is very dangerous. And technically, it’s not even free. There is a commission hidden somewhere where you can’t see it.

For most people, banks are just good to do banking and nothing else. For real financial advice, you must understand that if it is good, then it won’t be free (just like legal and medical advice).

Before deciding the financial products you want to purchase, spend some time and find out your financial goals (download this free financial goal planning excel sheet), assess how much risk you can really take and then pick the correct financial products.

If you can’t do this on your own or need a second opinion, do not hesitate in seeking out investment advisors. Those advisors who are compensated only by you sit on the same side of the table as you and can work in line with your interests and help you make a solid financial plan.

Mis selling by banks in India is a reality. So now you know why you shouldn’t ask your Bank for Investment Advice or financial advice?

Google Search Double Money

Double your money & Rule of 72 – Save Yourself

I was recently talking to a friend and he casually asked me ‘How can I double my money?’

I asked him – ‘How much time do you have to double your money?’

He said that he would want it to happen as soon as possible. Maybe in a year if not earlier. 🙂

I was happy he didn’t say months or even days – as many investors aim for.

There is something remarkably attractive and glamorous about the concept of doubling your money. I am no psychologist but honestly, these 3 words ‘double your money’ – do give a high.

Try searching for doubling money on Google and it will gladly give you further suggestions (based on what people have already been searching for):

Google Search Double Money

Wow!

  • how to double money in one month
  • how to double money in a day
  • how to double money in 6 months
  • how to double money in 1 year
  • how to double money in bank
  • how to double your money in India in 30 days
  • how to double your money in a week
  • how to double my money today
  • 10 quick ways to double your money
  • 5 quick ways to double your money
  • and what not!

People indeed are in a real hurry to double their money! 🙂

But this post is not about how I can double money in a few years or months or even days. Rather it’s about sharing a simple rule to help you estimate how much time it takes to double your money.

And many of you already know it.

This is the Rule of 72.

And apart from telling money doubling time period or the rate at which investments need to grow to double, it can help you avoid being cheated! Yes. It can protect you from various people (agents selling various financial products) who can take you for a ride if you are not quick with basic maths.

So please pay attention.

Rule of 72

The following is a simple depiction of the rule, which can be used to answer your money doubling questions:

Time in Years x Annual Returns = 72

This might not seem logical to purists but this works in most simple cases.

And it can answer two questions that we all are interested in:

  • How long will it take to Double your Investment?
  • What is the required Rate of Return to Double your Investment?

So let’s see…

 

Q.1 – How long will it take to Double your Investment?

In order to calculate the number of years to double your investment, simply Divide 72 by the Rate of Return (or Interest).

No. of Years to double your Money = 72 / (Rate of Return or Interest)

For example, if you invest in a financial product that gives a fixed return of 8%, then your money will double in 9 years i.e. 72 divided by 8. So you now know that the popular debt instrument PPF (that gives around 8%), can double your money in 8 to 10 years (approx. as actual PPF rate changes frequently now).

Let’s take another example.

What if you are investing in an asset that gives you 15% returns? The answer to the ‘number of years required to double your money’ is 4.8 years.

But remember that this happens when returns are fixed at 15%. Equity can give average 15% returns in the long run. But the equity returns are uneven and not in a straight line.

Here is how money doubles at different rates of returns:

Use this rule of 72 for answering basic questions of financial planning.

Ok done.

Suppose you estimate that for your new-born child’s marriage at age 24, you will need about Rs 40 lac (in future).

Now you have some surplus money that you want to keep aside for this goal. But you want to know whether this surplus money is enough or not.

So the rule of 72 can help you here.

Assuming you earn 9% assured return on your investment, you need 8 years to double your money (72/9 = 8). For the second doubling, you need another 8 years. And another 8 years for third doubling. In total, your money will double thrice in 24 years (8+8+8 years). Therefore, if you have an investible surplus of Rs 5 lac today (that can be invested at 9%), then you will get your Rs 40 lac in 24 years time without any new investment.

Current Surplus – Rs 5 lac

After 8 years – Rs 10 lac (Rs 5 lac doubles @ 9% in 8 years)

After 16 years – Rs 20 lac (Rs 10 lac doubles @ 9% in another 8 years)

After 24 years – Rs 40 lac (Rs 20 lac doubles @ 9% in another 8 years)

But if you don’t have Rs 5 lac to park away for 24 years or there are no assets to give you that kind of assured return, then you might have to invest more systematically for your financial goal.

So as you see, the Rule of 72 does give some basic idea here.

Now let’s take the next question

 

Q.2 – What is the required Rate of Return to Double your Investment?

This question can be answered using the same rule differently.

Suppose you want to double your investment of Rs 5 lac in 5 years. What is the rate of return you need?

The answer is 14.4%, i.e. 72/5.

What if you wanted to double this Rs 5 lac in 10 years?

The answer is 7.2%, i.e. 72/10.

If you observe carefully, your required rate of return tells you one very important thing. And that is, where to invest?

If you need 14.4% returns, equity is the best option. For 7.2%, even the debt instruments will be sufficient.

Your required rate of return will help you identify the right asset class to invest in and the proper asset allocation that you should follow. You cannot expect 15% returns if you are investing in bank FDs. You only get returns that are in line with the average returns associated with the chosen asset class.

The attraction of doubling money can pull people towards various options which are not suitable for common savers and investors. Two common examples are currency trading (or currency derivatives trading) and cryptocurrencies.

The Indian Rupee has been sliding against the US dollar in recent times and many people have this perception that maybe, entering into currency trading might be a good way to generate some good returns.

But in spite of the potential to do very well in these markets (and I know a few people who have actually done it), the fact is that it’s not as easy as most people think it is. It requires effort and skill to learn currency trading in India before you can actually do it profitably. And please do not go blindly by the alluring forex trading advertisements that are plastered all over the internet. Remember that forex or derivative trading is not a get-rich-quick method as the online advertisements make it out to be. That doesn’t happen. It’s a skill and takes time to learn and profit from.

Another recent phenomenon (which has lost a lot of its charm now) was the easy-money perception of crypto-currencies.

Here again, the people believed that this is a way to get rich overnight and so hoards of investors started joining the party. But the crash that happened eventually has left most people with a bad taste for crypto-investments.

I know the magnetic attraction of doubling money can pull people towards ‘get rich quick’ schemes. But you need to protect yourself from making such mistakes.

How to use Rule of 72 to save yourself from being Fooled?

Doing calculations related to Rule of 72 are fairly simple. You can easily do it on your mobile phone’s calculator if not in the head.

So if some insurance or mutual fund agent tells you that he can help you double your money in 3 years, you can easily calculate that he is talking about 24% annual returns (=72/3).

This is not easy to achieve and you know it. He is fooling you. Just walk out from there. Remember this:

https://twitter.com/StableInvestor/status/885012265463894016

The rule of 72 can be used very effectively to avoid being cheated. It sends out a clear message to the person trying to fool you that you know enough maths to not be fooled. 🙂

So now you are armed with a small tool – the Rule of 72 – which will tell you in a matter of seconds, how long will it take to double your money. As for the question of how to Double Your Money, the answer is not as simple as this thumb rule of 72.

Note – The Rule of 72 is not 100% accurate and should be used with caution and only for rough estimates. It is at best an approximation tool. When doing calculations for your actual financial goals, you need to do more extensive and realistic calculations.

Remember that for most people, the way to wealth is typically on the slow lane. Keep your expenses down, invest wisely and regularly, have a long-term orientation and let compounding help you. You will surely see multiple doubling of your investments in years to come.

Difference between Financial Independence Vs Early Retirement Vs Financial Freedom

Financial Independence Early Retirement Financial Freedom

The words like Financial Independence, Early Retirement and Financial Freedom are slowly but surely finding a way into the thoughts and vocabulary of us Indians.

Their numbers are still very small but surely, there are people who are not just asking ‘How much is enough to retire in India?’ – Instead, they are asking ‘How much is enough to Retire Early in India?’

The interest is definitely there as I myself got some coverage in leading Indian newspapers for aiming for financial independence (here and here).

Regular retirement vs Early retirement – some people are considering the latter. 🙂 And to be honest, it’s not hard to understand the appeal of early retirement or financial independence. Just ask this question a little loudly – How much money is enough to never work again in India? It sounds nice and liberating. Isn’t it?

I regularly receive questions like these on mail from readers – How much money is enough to retire at 40 in India? How much money is enough to retire at 45 in India? How much money is enough to retire at 50 in India?

So the interest is really there. But I have already written a lot about this topic earlier in FIRE – Financial Independence and Retiring Early.

In this post, I wanted to address the difference between Financial Independence, Early Retirement and Financial freedom as I see it. People use these terms interchangeably. But there are some differences.

I must also tell you that there are no perfect definitions here. So you can interpret these words as you like – as long as it helps you achieve what you are aiming for.

Difference between Financial Independence Vs Early Retirement

Financial independence and Early Retirement are 2 different things, but which are linked to each other in a way.

So let me try to explain it simply.

Financial Independence means having enough assets (or/and income generating assets) that you do not have to work for money again. Now here is the important part – you may still decide to continue doing what you are doing even after achieving Financial Independence.

Early Retirement, on the other hand, means actually retiring (and doing almost no income-generating work) because you have achieved Financial Independence.

For obvious reasons, if you plan to retire early and never work again, then you will need a much larger corpus than if you were to be simply financially independent.

Together, both FI (Financial Independence) and Early Retirement (RE) are referred to as F.I.R.E. but remember that there is a subtle difference between financial independence and early retirement.

That brings me to another aspect of FIRE.

Different Types of FIRE (Financial Independence Early Retirement)

One of the main questions when it comes to FIRE is ‘How much do I need to retire early?

As you might have guessed, the answer is different for different people.

People’s lifestyles, their spending habits, financial situations, their real ability to take risks and several other factors influence their perception of how much might be enough for retirement. And therefore, the amount needed to achieve FIRE is different for everyone. But still, there are two major types of FIRE that people use as references:

  • LEAN Fire – This is a low-cost approach to FIRE. The idea is to reduce your expenses to the bare minimum (become ultra frugal) and achieve FIRE as soon as possible. It’s about having a life rich on time but short on luxuries. Lower the expenses, lower will be the FIRE corpus needed and sooner one can achieve it. That’s the logic here. For people targeting LEAN Fire, achieving the freedom at the earliest possible age is the most important factor.
  • FAT Fire – This is at the opposite end to LEAN Fire on the spectrum of FIRE. The goal is to retire early but not at the cost of quality. People who aim for FAT Fire also want to achieve it in a way so as to have enough for a better lifestyle. The corpus required for this is higher than LEAN Fire.

Both of these approaches are at the opposite ends. And it’s a matter of personal choice as to which one is better suited for whom.

In fact, there are no strict definitions. You can even label the levels in between as FIRE Level 1, FIRE Level 2, FIRE Level 3, etc. and take an aim at what you think is more suited for you.

And if you do an online search, you will find blogs for various levels – early retirement blogs, early retirement extreme blogs, frugal FIRE blog and what not.

So after having discussed Early Retirement and Financial Independence (both Lean and Fat FIREs), let’s tackle something related…

What is Financial Freedom?

I must warn again that there are no perfect definitions here. But I will try to say what I feel.

With Financial Independence (assuming something between LEAN and FAT), you are more or less locked into your chosen lifestyle. So if you chose LEAN FIRE and call it a day, then you really need to live frugally all your life because your corpus is smaller. On the other hand, if you chose FAT FIRE and took early retirement, then you can live a better lifestyle.

Now comes the difficult part to explain. 🙂

Financial Freedom I feel means that you live a much better life than what was possible in LEAN-Fire but also have the ‘real freedom’ to do few unplanned things (and spend on them) which you may not consider doing if you had a frugal lifestyle. In a way, it’s like having a FAT-Fire but with more flexibility.

Let me try with a mathematical example:

Suppose you are planning to achieve FIRE and have the following expenses:

  • Basic Expenses (Frugal Living) – Rs 40,000 per month
  • Discretionary Expenses (Better Living) – Rs 20,000 per month

Now if you are going for the LEAN-Fire, then you are mathematically allowed to spend Rs 40,000 a month. So that’s Rs 4.8 lac per year.

If you are going for FAT-Fire, then it allows you to live a life of Rs 60,000 per month kind of lifestyle (Rs 40K basic + Rs 20K discretionary expenses). That’s about Rs 7.2 lac per year.

Remember, having a FIRE corpus means that these kinds of expenses should be possible for you (with increasing inflation) for the rest of your life. And for early retirees, this means several decades!

Now comes Financial Freedom…

If I have the financial freedom, then mathematically, I should be comfortably able to spend annually:

  • Basic Expenses – Rs 40,000 x 12 months = Rs 4.8 lac, plus
  • Discretionary Expense – Rs 20,000 x 12 months = Rs 2.4 lac, plus
  • Another level of (optional) discretionary expenses = Rs 20,000 x 12 months = Rs 2.4 lac
  • Some unplanned luxuries (or unexpected expenses buffer) on an annual basis – Another lac or so

That’s real financial freedom! You can spend extra on few things here and there without having to spend sleepless nights thinking whether your corpus will run out before you run out of years or not. It also provides you with the buffer to spend in case of emergencies.

Achieving financial freedom also gives you the freedom from worry about money. And that’s the real freedom I guess.

So if I have to summarize, the timeline for corpus achievement goes like this:

LEAN F.I.   —>   FAT F.I.   —>   Financial Freedom

Early Retirement is up to the individual as to when he wishes to quit in between these levels. You can even look at these 3 levels as follows:

  • How much do I need to retire early?
  • How much do I need to retire early comfortably?
  • How much money do I need to retire early and never work again? 🙂

More Thoughts

I know a lot of people feel that FIRE is just about cutting your expenses and saving more. But that is not rightly completely. I would say that its also about simplifying and redesigning your life, which obviously gives you more time to focus on other things.

Aiming for FIRE helps you test your relationship with money. And it’s like asking yourself as to ‘What would you do if you didn’t have to work for money ever again?’ It also helps you decouple the idea of happiness from owning material things. It’s amazing when you actually realize it.

And one more thing. Achieving early retirement (and not just financial independence) not just requires cutting back on expenses. It also requires you to have a decent income from which you can save a lot.

If you are serious about achieving financial independence, then you should begin early. There are various thumb rules for financial independence and early retirement (FIRE). One such rule is that depending on when you wish to retire, you should have about 20-30x your annual expenses in your FIRE corpus. But let me tell you that thumb rules are good to begin with. Once you start your journey and are making progress, you need to ask more serious questions like:

  • How much money (Corpus) do I require for financial independence and early retirement (FIRE)?
  • How long will my corpus last?
  • How much can I draw from the corpus each year?
  • Can I draw more than what I answered in the above question, atleast in some years?
  • What will the inflation be in my retirement years?
  • What are my expected returns?
  • What will be the impact on your corpus if markets enter a bear phase just at the start?
  • What if I need to spend some money on unplanned and unexpected emergencies?
  • How will my other financial goals be tackled?
  • Have I saved enough for these other non-retirement financial goals?
  • And several other questions

Early retirement is an alluring goal or dream. No doubt about that. But to be brutally honest, very few aim for it. And even fewer can really achieve it. Most people are generally too late to begin with.

And apart from money, what does it take to retire early? …It takes a lot of focus and determination and a thick skin. And that’s because if you discuss these things with other people, you are sure to find many who will ridicule you. But if you are serious about it, then it means you will be going against the crowd and you will have to give a f*** to societal norms. If you don’t, then be ready for a regular retirement. That’s good and traditional too. 🙂 And there is ofcourse more to life than just money.

People feel that early retirement is a sort of hack to sort out their life! But I feel that retired life has too many other important aspects than just money. You really need to find out what you will do with all those years?? 🙂

If you are asking or searching for answers to questions like ‘How to plan for early retirement?’, then please beware of all the self-confessed best early retirement blogs, financial independence retire early blog, online resources, early retirement calculators, retirement corpus calculator India, financial independence number calculator, etc. Everyone has a different need and hence, the Financial Independence number and the Financial Freedom Plan will be different for everyone.

Time to end this article now.

In the debate of Financial Independence Vs. Regular Retirement, I would say that I prefer the FI. …But that’s my choice. If you feel that even the regular retirement is fine for you, then obviously that’s right for you and you should stick to regular retirement planning. You should never be forced to take a side because of the undue influence of others. Your life, your choice.

How to retire early at 40? How to retire early at 45? How to retire early at 50? What year can I retire? – Before you begin asking these questions, just stop and think for a moment as to is this really what you want? Or you are running away from something?

As for me, my aim is Financial Independence (and Financial Freedom). As for Early Retirement, I am too much in love with what I do (Investment Advisory and Goal-based Financial Planning) to currently think about retirement. 🙂 And that is the reason I focus on Financial Independence over Early Retirement.

But do not be disheartened if some of what I say seems too difficult to achieve. If you are willing to do what is necessary to achieve financial freedom, then let me tell you one thing – IT CAN BE DONE. I repeat. IT CAN BE DONE.

Dev Ashish Retire at 40

Featured in Mumbai Mirror (for How to Retire at 40)

My wife and I got some coverage in Mumbai Mirror a few days back.

The coverage was about people in India are working towards their Financial Independence (or Early Retirement) and trying to answer the question 🙂 How to Retire at 40?

Dev Ashish Retire at 40

Here is the article:

Dev Ashish Mumbai Mirror Early Retirement India

And here is the online link to the article.

Some time back, we got featured in Times of India about a similar topic of ‘Early Retirement in India’. Here is the link to that article.

Most readers know that financial independence is one of my major financial goals. I plan to do it by 40. Fingers crossed! 🙂 But let me clarify one thing here… as many people get it wrong.

Becoming financial independent or achieving early retirement doesn’t mean that I would not be doing anything after I turn 40. It only means that I would have accumulated enough money to take care of my expenses for the rest of my life.

I will without a doubt continue to do what I am doing right now – investment advisory.

Here once again, I must thank my wife Aditi who is my partner in crime in working towards this goal. Without her support, I could not have imagined aiming for such a goal. 🙂

If you are new to this idea of Financial Freedom or FIRE (Financial Independence & Retiring Early), then I have already written about it a few times:

Will try to write more about various aspects of Financial Freedom in near future – as I can clearly see that there are many people out there who wish to make Early Retirement as their biggest financial goal.

Thanks

Credit Cards – What you should Know and Do?

Credit Cards India Comprehensive Guide

Credit cards have their haters. I am not one of them.

In fact, they are quite useful if you know what to do with them. And to be fair, there is nothing right or wrong about using a credit card. It’s how you use them that decides whether you will have positive or negative or even catastrophic repercussions. 🙂

Now before you start searching for the best credit cards in India or begin comparing credit cards in India, more important is to understand what this animal is and how to tame it. You should first really understand how to use credit card smartly in India.

I have already written about why Credit Cards are Not Evil. I thought that I would write a little bit more about the topic.

Personally, I use credit cards myself. Don’t ask me for all the reasons. It’s very convenient and I always clear off the full dues before time. So I don’t pay any interest. So it works for me.

Now if you were to ask me about Debit Card vs Credit Card, I would prefer credit cards as I am a little apprehensive about the fact that debit cards are linked to our bank accounts and if somebody were to get access to our bank details via debit card, they may do some serious damage to us. 😉 Ofcourse there is no right answer to when to choose a debit card vs a credit card. It all boils down to your situation, preference and more importantly, whether you understand the pros and cons of both.

If you already are a credit card user, you will already know many of the things mentioned in this post.

But if you have questions like ‘how to use a credit card for the first time?’ in your mind, then I hope this post will be useful for you. So let’s move on.

Benefits of using Credit Cards India 

1 – Interest-Free Credit Period – This is the biggest benefit. If you don’t know how it works, then here is a small example. Suppose your billing date is 15th of the month. And your bill due date is 5th of next month – i.e. about 20 days after bill generation date. So now if you make a purchase of let’s say Rs 10,000 on 17th August, then this transaction will only get reflected in the bill generated on 15th September. Since the bill has to be paid by 5th October, you get about 49 days interest-free period between 17th August and 5th October. On the other hand, if you made the purchase instead on the 13th of September, then you will only get 22 days (13th Sept – 5th Oct). So all transactions do not get the full interest-free period of about 50 days. Depending on the transaction date with respect to billing date, the number of interest-free credit days will differ for each transaction. But nevertheless, this facility allows you to manage your finances and cash flows. This can be a useful facility for most people.

2 – Handling Emergency Situations – Most people can arrange money for emergencies (from savings, family, friends, etc.) in a couple of days. But what if the need is more urgent? Credit cards are useful in such cases. More so if you know that you do not have enough savings. A credit card allows you to take the money and use in emergencies and then figure out how to repay it later. And that is what is needed in emergencies.

3 – Reward Points & Cashbacks – I am not a big fan of these as these can psychologically force people to spend money unnecessarily. But it is still an added advantage. I generally use reward points to buy books via ecommerce sites. So good for me. 🙂

4 – Discounts – These again entice people to spend more money. But if you only stick to buying what you need, then discounts are a good thing to have. Isn’t it? Who doesn’t want them?

5 – Possibility of Interest-Free EMI – Many cards have tie-ups with various sellers and at times, allow you to convert your purchases into interest-free EMIs (at times with and at times without processing charges). This is helpful for people who want to spread large expenses over a period of a few months to reduce the burden on their monthly budgets.

6 – Credit Card usage helps build CIBIL Score – If you maintain a decent credit limit and % utilization of the credit limit, then slowly it will help you increase your credit score. But do not go for too many cards as this will seem like a credit-hungry behaviour to the rating agencies.

7 – Then there is the factor of operational efficiency that comes with credit cards. This factor in itself clinches the game for me.

Before you accuse me of painting too rosy a picture of credit cards, please understand that credit cards by themselves are neither good nor bad. If you use it irresponsibility, you will end up damaging your personal finances and future financial health. Having the discipline, using it only when you can pay it back fully, staying within reasonable % of credit limit, etc. is how this tool should be used.

But if you cannot do these, then the credit card is not for you. You should not have them. And you should not read the rest of this post. 🙂

Now if you are still with me, let’s move on…

How does Credit Card charge interest?

If you do not understand the mathematics of credit cards, you will not use it well. And if you don’t use it well, you will become a victim of mounting credit card debt. And that can be disastrous.

I will try to explain the maths of how credit cards calculate interest and how it works in as simple an example as possible.

But before we proceed, do remember and acknowledge this fact that the interest rate on credit cards is highest among all forms of credit facilities that are available to us. It can be as high as 40% annually or 3.5% monthly. Just read those interest rates again. For comparison, let me remind that a fixed deposit gives 6-7%, savings account 4-6% and equity gives about 12-15%. And with credit cards, you are paying 35-40%.

So with that understood, let’s understand a few terms that you should be aware of when using credit cards:

‘Interest-free period’ is the difference between the date of the transaction and due date of payment for that billing cycle. This period is obviously different for each transaction and during this period, you don’t have to pay any interest on your transaction – provided you pay the entire bill outstanding by the due date.

‘Minimum Amount Due’ (MAD) is the minimum amount that has to be paid by the due date. Paying atleast MAD will ensure that you don’t pay any late payment fee and your credit card account will not be reported as irregular which can have an adverse impact on your credit score. But remember… by paying just the MAD, you will still not avoid interest on the unpaid amount (Full Due Amount minus MAD).

Let’s take a scenario now.

Assume the following:

  • Credit Card Bill is generated on 15th of every month
  • Payment Due date is 6th of every month
  • Interest charged is 3% per month

Here are the transactions:

Scenario 1: When Full Dues Cleared before Due Date

  • 9-Aug – Purchase (Rs 20,000)
  • 15-Aug – Bill generated (Outstanding-Rs 20,000; Minimum Amount Due-Rs 1000; Due Date-6th Sep)
  • 3-Sep – Payment (Rs 20,000)
  • 15-Sep – Bill generated (Outstanding-NIL; Minimum Amount Due-NIL; Due Date-6th Oct)

Scenario 2: When Full Dues Not Cleared before Due Date

  • 9-Aug – Purchase (Rs 20,000)
  • 15-Aug – Bill generated(Outstanding-Rs 20,000; Minimum Amount Due-Rs 1000; Due Date-6th Sep)
  • 3-Sep – Payment (Rs 1000) (Paid only Minimum Amount Due)

Now the statement that will be generated on 15-Sept, will have the following components:

  • Outstanding Amount = Rs 19,000 (Rs 20,000 – Rs 1000)
  • Interest@3%p.m. on Rs 20,000 from 9-Aug to 2-Sep = Rs XXX
  • Interest@3%p.m. on Rs 19,000 from 3-Sep to 15-Sep = Rs YYY

So the bill generated on 15-Sep will be of Rs 19,000 + XXX + YYY.

And that’s how to calculate Credit Card Interest. You can even find credit card interest rate calculators online.

And had you not paid the minimum amount due (MAD) of Rs 1000 before the due date (of 6-Sep), you would also have to pay an additional late fee.

As you can see, if you make regular and full payment to your credit card account, you can get interest-free credit. However, if you don’t make the full payment and/or pay only the Minimum Amount Due, you will not get any interest free credit period. Also, you will be charged a lot of interest till you clear it off. So if you are planning to just Keep Paying the Minimum Amount Due on credit card every month, then let me tell you that it’s a very bad decision. You will bear a lot of interest cost over the period in which you will be clearing the full outstanding. And if in between you keep making purchases, then those too will be added to overall outstanding and will be charged interest accordingly. This can easily spiral off into a debt disaster.

These are the very reasons why you should pay off your credit cards dues in full. Now you know the right answer to the stupid question ‘is it better to pay off the credit card or keep a balance?’ 🙂

So to repeat – it’s in your best interest to try and make credit card payments in full every month.

If for some temporary reasons you are unable to clear the full dues, make sure that you pay atleast the Minimum Amount Due. However, don’t make this your default option and clear off the full due as soon as possible.

So now you more or less know how to calculate interest on credit cards. I would suggest that you go through the ‘Most Important Terms & Conditions’ or MITC of your credit card. The MITC of your credit card clearly explains the methodology used to calculate interest with examples and have a lot of other important details.

Some Tips & How to pay off your Credit Card Debt?

You have your credit card. Few people already know the best ways to use credit card in India. 🙂

The basic principles are universal. But if you have doubts, then the questions you should be asking is to how best to utilize it without making the common mistakes that credit card users make.

Let me try and list down some tips or let’s say, best practices:

  1. Always pay the credit card dues on time and before the statement due date.
  2. Do everything possible to pay the full amount, on time and every time. If for some reason, you can’t do it occasionally, its fine. But if this becomes a regular thing, that means you are spending more than what you can afford. Stop using your credit card immediately.
  3. This is linked to the above point. Try to pay in full. But if not, make sure you atleast pay the Minimum Amount Due.
  4. Do not use the full credit limit of your card every time. Every rupee you use, it is you and you alone who has to repay back. Some estimates say that using about 30% of your credit limit is considered to be healthy.
  5. Credit cards offer attractive reward points and cashbacks. But that doesn’t mean you should use the card unnecessarily just to score some cashbacks or earn reward points.
  6. To start with, just keep 1 credit card. That is sufficient for most people. But if you really have the need for another, then question yourself whether you are spending more than what you should be? Or if you want to have more cards due to your spending patterns and as many spend-specific cards can be actually beneficial, then do not go beyond 2-3 cards.
  7. If you have two cards, try to keep the statement dates around 15 days apart. So, for example, Card#1 has a statement date of 15th of the month and Card#2 has a statement date of 1st of the month. Then if you want to optimize your spendings and make full use of the interest-free period, you should use the Card#1 for spending between the 1st and 15th of the month and use Card#2 for spending between 15th and 31st of the month.
  8. If you unfortunately and somehow run up a huge credit card outstanding balance, then first of all, stop using the card. Next, liquidate some savings or borrow money from family, friends to clear the mess. Credit card interest rates are 30-40%. So you should get the mess cleaned before it becomes a personal finance disaster. You can even consider taking a personal loan which will be much cheaper than credit card debt.
  9. If you are about to take a card, do pay attention to the joining and renewal fees. Some credit cards offer zero joining and renewal fees. But when looking for a credit card, pay attention to the fee structure alongwith the card’s benefits. Moreover, many cards allow a fee reversal if you spend a certain amount annually. Look out for these benefits and be prudent about it. Do not go after benefits which are not useful to you.
  10. Some people are credit card reward point’s monsters! 🙂 They know how to take out the maximum benefit from their cards. Maybe you and I cannot be like them. But still, take time to understand the rewards structure. Maybe, it might work for you well.
  11. Do check and verify your credit card statements every month. Scrutinize each item carefully to be sure that you are not been taken for a ride knowingly or unknowingly.
  12. If you feel that a high credit limit is the reason you are unable to lower your card spends, then first of all, you are to be blamed. Go ahead and get your limit lowered. But remember, lowering of credit card limit may not be the solution. If your credit limit is reduced, your % utilization of the credit card will increase. And it will have a negative impact on your credit score. So better to control yourself.
  13. Do not withdraw cash from ATM using credit cards. There is no interest-free credit period if you use your credit card to withdraw cash. You have to pay interest from the very first day and remember, the rates are exorbitantly high.
  14. If you want to get a credit card but can’t get it, you can consider applying for Credit Cards against Fixed Deposits. This will help you build credit history and a decent credit score – which will be needed for future (bigger) loan applications when you apply for home loans, etc.

Since we have discussed enough best practices, let’s tackle just one major question – which many people having unmanageable levels of credit card debt would be asking.

Should you take a Personal Loan to pay your Credit Card Dues?

The mere fact that someone is asking this question means that they are in trouble.

If it is you, then first of all, you spent more than you could afford. You spent more than what you could repay immediately. You spent more than what you could repay after some time. You either don’t have savings to dip into or you don’t want to liquidate them. You may have also tried borrowing money from friends and relatives without success.

So you are here now.

A lot of credit card debt which you find it extremely difficult to service every month.

The realization might have now been there that handling credit card is not as easy as it seems and it is way too easy to overspend when using your credit card.

But there is a solution. It’s not perfect. But nevertheless a better one. And that solution is to take a small personal loan. It will act as a credit card debt consolidation loan – which will help you overcome your credit card dues at one go.

There is an obvious advantage of this strategy – A personal loan is way cheaper than the credit card interest rates. You can get personal loans at around 15-20% whereas credit card costs around 30-40%. And before you take a personal loan, you can check out personal loan EMI calculators that are easily available online.

Since you would have cleared your high-interest loan at one go, this will have a positive impact on your credit score. But beware – you still need to service the personal loan EMIs and if you fail to do so on schedule, you will once again receive negative vibes in your credit score.

Now those opting for this strategy must not forget that in spite of comparative cheapness of personal loan (when compared to Credit Card), the fact is that personal loans themselves are very costly loans. So this should be your last move after you have tried our all other options like reducing your expenses to pay more, liquidating some short-term savings, borrowing from your people, etc. And why you should aim to be loan-free? You already know how relieved you feel when that happens. Isn’t it? 🙂

Finally…

Credit cards are useful no doubt. But if you can’t manage its power well, then you should not keep it with you. They say with great power come greater responsibilities. 😉

I don’t have anything else to say after what I have already written.

Just be careful when using your credit cards, be sensible about your spendings and try to understand how credit card and credit card interest calculations work. Once you know it, you yourself will become extra careful about how to use credit cards and in fact, how to use credit cards smartly and wisely.

So is it good to have credit cards?

I have already written a few thousand words in this article and an earlier one. So I have nothing to add now. 🙂

State of Indian Stock Markets – August 2018

This is the August 2018 update for the State of Indian Stock Markets and includes historical analysis and Heat Maps of Nifty50 as well as Nifty500‘s key ratios, namely P/E, P/BV ratios and Dividend Yield.

Please remember that these numbers are averages of P/E, P/BV and Dividend Yield in each month. Neither Nifty50 heat maps nor Nifty500 heat maps show the maximum or the minimum values for each month. Also, note that NSE publishes PE ratios based on standalone numbers and not consolidated numbers (Read why this may matter too).

Caution – Never make any investment decision based on just one or two ‘average’ indicators (Why?) At most, treat these heat maps as broad indicators of market sentiments and a reference of market’s historical mood swings.

So here are the Nifty 50 Heat Maps…

Historical P/E Ratios – Nifty 50 (Monthly Average)

Historical Nifty PE 2018 August

P/E Ratio (on last day of August 2018): 28.40
P/E Ratio (on last day of July 2018): 28.22

The 12-month trend of P/E has been as follows:

Nifty Average PE Trends August 2018

 

And here are the average figures of Nifty50’s PE for some recent periods:

Nifty 12 Month PE Trend August 2018

Historical P/BV Ratios – Nifty 50

Historical Nifty Book Value 2018 August

P/BV Ratio (on last day of August 2018): 3.76
P/BV Ratio (on last day of July 2018): 3.70

Historical Dividend Yield – Nifty 50

Historical Nifty Dividend Yield 2018 August

Dividend Yield (on last day of August 2018): 1.15%
Dividend Yield (on last day of July 2018): 1.18%

Now, to the historical analysis of Nifty500 companies…

As the name suggests, Nifty500 is made up of top 500 companies which represent about 95% of the free float market capitalization of the stocks listed on NSE (March 2017).

Nifty50 on other hand is an index of 50 of the largest and most frequently traded stocks on NSE. These represent about 63% of the free float market capitalization of the NSE listed stocks (March 2017).

So obviously, Nifty500 is comparatively a much broader index than Nifty50.

Historical P/E Ratios – Nifty 500

Historical Nifty 500 PE 2018 August

P/E Ratio (on last day of August 2018): 34.50
P/E Ratio (on last day of July 2018): 33.59

Historical P/BV Ratios – Nifty 500

Historical Nifty 500 Book Value 2018 August

P/BV Ratio (on last day of August 2018): 3.52
P/BV Ratio (on last day of July 2018): 3.45

Historical Dividend Yield – Nifty 500

Historical Nifty 500 Dividend Yield 2018 August

Dividend Yield (on last day of August 2018): 1.04%
Dividend Yield (on last day of July 2018): 1.08%

You can read the previous update here. The State of Markets section has also been updated with new Nifty heat maps (link).

For a detailed analysis of how much returns you can expect depending on when the investments have been made (at various P/E, P/BV and Dividend Yield levels), please have a look at these 3 posts: