Sandesh Goel

Sunday, March 5, 2023

Target Maturity Gilt Funds

As a follow up to my earlier post exploring the best investment approach for debt allocation (https://sandeshgoel.blogspot.com/2023/02/investing-in-gilt-funds-as-compared-to.html), I set out to find some of the Target Maturity Gilt funds available today.

Interestingly, in all the AMC websites I looked at, they don't list these funds in the Debt category. Instead they show up in the Index or Other funds categories, which makes them notoriously hard to find for the uninitiated.

I am therefore creating a list of all target maturity gilt funds that I could find for anyone who needs this information. I am only including funds which include G-Secs or SDLs, not PSUs.

ICICI Prudential AMC

Edelweiss AMC

HDFC AMC

IDFC AMC

SBI AMC

UTI AMC

Tata AMC

Nippon India AMC

If I missed any funds, please comment below and I will update this list accordingly.

Note that some funds mention SDL in the name, this refers to State Development Loans, which is equivalent to buying state government bonds. G-sec and gilt usually refer to the central government bonds.

Friday, February 17, 2023

Investing in Gilt Funds as compared to FD

Over the last few years, I have internalised the importance of Asset Allocation in planning the personal finances, especially for long term goals such as retirement.

Deciding Asset Allocation

There are many formulas for asset allocation that you will find floating around, but what I have realised is that your ideal asset allocation has much more to do with your your behavioural mindset than anything else. For example, it is often said that if you are young you should have most of your investible surplus invested in equities. But, if you do that without fully understanding the associated risks and the patience needed to achieve optimal returns, you may end up doing even worse than fixed deposits.

That's because we, as humans, are primarily driven by fear and greed when it comes to investments. This leads us to buy equities when they are expensive (since there is a lot of hype) and sell them when they are cheap (since there is a lot of gloom), the exact opposite of what we need to be doing. This is something that's easily said, but very hard to internalise and even harder to practice.

When you decide to invest in equities, don't just consider the amazing profits that you may get, but also think about the realistic possibility that the value of your investment may actually go down during the journey (something technically called a drawdown). There is no way to make good, consistent returns from the equities, unless you have the stomach to weather these drawdowns. And, even in recent past, there have been multiple instances where the stock market has drawn down by 50% or more.

So, how should this affect my asset allocation. Let's say my total investment is 1 crore rupees. Now, I can be aggressive and invest all of it in the equity market. Hopefully, over a long period of 10-15 years, this will give me very handsome returns. But, let's consider the negative scenario. Let's say the stock market crashes by 50% the very next year. So, my total investment shrinks to 50 lacs. I must think about how I would feel about that if and when that happens. Would this cause me to be depressed? Panicked? Lose sleep? In most people, it would do at least one of these.

Consider an alternate approach where I come up with an asset allocation of 50:50 in debt and equity. Then, my debt allocation will only go up in value (albeit at a slower rate than equity in the long term). So, if the stock market crashes by 50% next year, my total investment will shrink to 75 lacs (instead of 50 lacs). This, though still a cause for concern, is a much easier scenario to deal with than the earlier one. If even this appears like an alarming drawdown to you, your ideal asset allocation needs to be even lighter on equity.

In other words, consider the maximum drawdown that you are willing to tolerate when you come up with an ideal equity allocation for yourself. For example, if you don't want to see your net worth go down by more than 20%, your equity allocation should be no more than 40%. This is really the risk reward tradeoff that you need to consider.

For myself, I decided that a 50:50 asset allocation is something that I feel comfortable with. Though, even 20% drawdown in stock markets (which is not very uncommon) seem very painful at times.

Debt Investment

This then brings the other question of where should the debt allocation be invested. Note that the main purpose of debt allocation is safety, that it never goes down in value, and earns a steady fixed income. Fixed deposits are the first thing that comes to mind, but your deposits in any bank are only insured up to 5 lacs. In case the bank defaults (which has been known to happen even in recent past to some banks), you stand to completely lose any amount over 5 lacs that you have deposited. Even though this may be a rare possibility, it doesn't give me the peace of mind that I need with my debt investment.

This is what prompted me to look closer at government (or sovereign) bonds. These bonds are issued by RBI, and guaranteed by the government of India, without any limit. This is literally the safest investment that you can make in the country.

Although, the FD interest rate is typically 0.5-1% higher than the government bonds, and these bonds can not be encashed prematurely either. This is where gilt mutual funds enter the picture. Gilt mutual funds provide you an easy way to buy the government bonds, and also provide much better liquidity. Also, if you hold the gilt mutual fund for longer than 3 years, you get the benefit of long term capital gains (which is taxed at 20% after indexation). This makes even the post-tax returns better than typical FDs.

Gilt Mutual Funds

So, for investments longer than 3 years, gilt mutual funds seem to be the safest ~~and most tax efficient~~ debt option. I see broadly 3 types of Gilt mutual funds in the market:

Constant maturity gilt funds: These try to maintain a fixed maturity duration, typically 10 years. Hence, you are always subject to volatility due to interest rate changes. You need some expertise to navigate these.
Actively Managed Gilt funds: These are actively managed by the fund managers, and the maturity duration varies widely based on the calls taken by the fund managers. Here, you are trusting the expertise of the fund manager to take timely actions, and provide best returns. You still will be affected by the volatility due to interest rate changes, though it may be lower if the fund manager is any good.
Target maturity gilt funds: These funds have a fixed maturity date (not duration). With these, the fund value can vary in the short to medium term, but if you hold it till maturity, the returns are very predictable. In this sense, this is closest to an FD where you know the duration and return upfront, but the risk is lower since it consists of sovereign bonds. Also, if you hold for more than 3 years, effective tax is much lower too.

I personally am inclined towards gilt funds because I prefer absolute safety for my debt investments (for risk I already have equity investments!!). And within gilt funds, I prefer target maturity funds, because the other categories again carry interest rate risk.

Update: Debt funds no longer have the tax advantage effective April 1, 2023. Debt funds are now taxed as ordinary income irrespective of the duration of investment.

Wednesday, May 16, 2018

Personal Finance in Bullets

Here’s some of the personal financial planning wisdom that I have gathered over the years put into bullet points

Spend what you have left after saving, not the other way around
Save at least 10% of your paycheck, go as high as 30% if your income allows it
Start saving as early as possible, preferably from the first paycheck

Create a contingency fund, equivalent to at least 6 months expenses, put this in a liquid mutual fund
Get life insurance (at least 5-10 times your annual salary, it won’t look that high 10 years down the road)
Get medical insurance (go for at least 10 lakh limit)
Don’t keep any high interest loans (credit card loan is an absolute no, repay car/bike loans as soon as possible)
Home loan is okay if it is for your first home (taking loan for second home is like investing, there are other simpler ways to investment, see below)

After all of the above, if you have extra savings, create a long term portfolio
You should not touch this for at least 5 years, and preferably 10-15 years
Go for direct mutual funds, open-ended with growth option
There are many online providers which allow you to invest in direct mutual funds at no cost
Mfuonline.com is a no frills option to invest in direct mutual funds
Kuvera.com is another good option to invest in direct mutual funds at no cost
Plan asset allocation, put (110-age)% into equity and rest into debt (e.g. if your age is 40, put 70% in equity and 30% in debt)

For debt investment, choose 3 debt mutual funds (e.g. short term, medium term, dynamic bond)
For equity investment, choose 5 equity mutual funds (e.g. index, large cap, mid-cap, value, balanced)
Create monthly SIPs to keep adding to the chosen funds

Review and rebalance your portfolio at least twice every year
When redeeming funds, avoid exit load (typically 1 year for equity and some debt funds, 0 for liquid funds)
When redeeming funds, pay attention to capital gains, try to avoid short term capital gain
Gains in a debt fund kept for longer than 3 years, become long term capital gain, which can be index-adjusted, and effectively become zero in most cases
Gains in an equity fund kept for longer than 1 year become long term capital gain, and are taxed at flat 10%
If you need professional help, get an advisor to pick funds for you and periodically review your portfolio
Make sure advisor does not work on commissions, rather a transparent upfront fee
Remember, if your mutual fund name does not include the word "direct", someone is getting a commission out of it

You can also allocate 5-10% of your portfolio to gold, you can go for sovereign gold bonds, or gold ETFs
ETF is a good low cost option for investing into equity indices also (e.g. NIFTY)
For ETF investing, open a low fee brokerage account (e.g. zerodha, upstox)
For any short term goals (less than 4-5 years), create a separate debt fund and invest in it regularly to avoid disturbing your overall portfolio

Never buy ULIPS or LIC or guaranteed return policies, most often their return is lower than even fixed deposits
Maximize your tax savings by contributing 50000 in NPS and 1.5 lakh in EPF+PPF combined
There is not much point in buying ELSS either, they are closed-ended, better to buy open-ended mutual funds, and use PPF for tax savings

Wednesday, December 30, 2015

Comments RE: TRAI Consultation Paper on Differential Pricing for Data Services

Following are my comments in reference to the consultation paper on differential pricing release by TRAI available at the following URL:

http://www.trai.gov.in/WriteReaddata/ConsultationPaper/Document/CP-Differential-Pricing-09122015.pdf

I think the consultation paper does a very good job of laying out the current landscape by outlining the benefits as well as pitfalls of the current differential pricing schemes being advertised by TSPs (Telecom Service Providers). I would like to compliment the TRAI for the same.

I would like to strongly oppose allowing any such differential pricing schemes.

The TSP's and platform providers are pushing these schemes very strongly, under the veil of altruism, without getting into the real motives behind this. This is what makes all these attempts disingenuous and hard to trust.

The dream of digital india and connecting the next billion of our population needs to be fulfilled as soon as possible. And it is the responsibility of Indian government and all regulatory authorities to make that happen faster. But, they must also ensure that it is done in a way that doesn't compromise the most compelling quality of the current internet - that it allows free competition and encourages true innovation.

As an example, if I think of a good idea today and decide to create a web portal, I can bring it online and make it accessible to the entire world within hours. I tried doing that with the "Free Basics" platform, and they require a time of 6-8 weeks to review my proposal, and may very well decide to reject it on "technical" grounds.

Clearly, such controlled platforms and differential pricing by TSP's must be disallowed at all costs. However, I strongly feel that it is irresponsible to simply reject a proposal without providing a workable solution to achieving the idea of digital india.

Towards that end, it is important to understand that the spectrum over which these data services are delivered by TSP's are a national resource, and only licensed to TSP's for deploying their services as per the regulatory guidelines. The regulators have a duty to prescribe rules that ensure the use of this national resource is done for promoting our national goal of digital india.

A very simple way of achieving this is by mandating the TSP's to provide a limited amount of data to every subscriber every month free of cost. This could be something as little as 50-100 MB per month. The free data could even come with some caveats such as no video or file downloads, to ensure that the limited data is used most effectively. It would be perfectly reasonable to throttle the bandwidth for such free users, as well as give them a slightly lower priority over the paid users. There is plenty of other innovation that can be done here, without compromising the basic principle of open internet.

The TSP's will naturally incur some additional cost in providing this "free" service, and they should be allowed to recover it using some reasonable and transparent means, such as delivering advertisements during the free sessions.

In terms of technical feasibility, this is as feasible as the "Free Basics" platform, but is much clearer in terms of the motives behind the approach, and most importantly, keeps the internet open to competition and innovation.

To take my specific example, I will still be able to take my portal online within hours and have people access it over their "free" connection. And since the "free" connection is limited bandwidth and "slower", I will make sure I design my portal to be suitably lean in terms of bandwidth requirements. Open competition will make sure that applications which run well on these "free" connections thrive automatically, without needing a "monitor", just the way internet has thrived over all these years.

Sunday, December 7, 2014

What to see in a leader ...

Don't trust a leader who says he will favour you because of your religion, caste or creed. Such a person has favouritism build into their character. True, he may favour you over other caste and religion, but only when convenient. He will favour himself above everyone else, his family above every other family, his relatives and friends over everyone else, and if there are favours left to dole out, he will favour his caste and religion above everyone else.

This is what we have seen our political leaders do over all these years. This is basically what the "VIP" culture is all about. The "closer" you are to the leaders, the better treated you are.

Instead, look for a leader who promises to be fair and balanced. Look for a leader who promises to do the right thing. He is the leader who you can trust to make decisions in national interest and your interest. He is the leader who will fight for your justice, so that that when you are at the receiving end of an unfair transaction, you can expect justice based on who did wrong, and not based on who is "closer" to the leader.

Monday, March 31, 2014

NOIDA Lok Sabha Elections 2014

Following is a link of a list of all 24 candidates in the fray for NOIDA seat for Lok Sabha elections fo 2014. The affidavit submitted by each candidate is also linked to each candidate's name. The affidavit includes declaration of income, assets and any criminal cases for the candidate and immediate family.

http://affidavitarchive.nic.in/DynamicAffidavitDisplay/CANDIDATEAFFIDAVIT.aspx?YEARID=May-2014+%28+GEN+%29&AC_No=13&st_code=S24&constType=PC

The elections are on Apr 10, 2014.

The website of Chief Electoral Officer of UP is http://ceouttarpradesh.nic.in/.

Following is a snapshot for quick reference.