Mutual Fund : Should You Sell your ELSS After 3 Years?  

Shriya recently read the book and had this query on ELSS Mutual funds.

I came across your book : Grownups are just kids with money and found your inputs useful. I have one ELSS with DSP Black rock. Since ELSS has locking period of 3 years .what should one do after the 3 years are completed ?

 

The simple answer; do nothing.

There is no reason to liquidate an ELSS mutual fund, just because it’s out of the 3 year lock-in period. The point being, that selling off or liquidating any of your investments should be based on your goals.

 

After the 3-year lock-in, nothing about the fund changes fundamentally. The fund manager still runs the fund the same way as he/she did earlier. So if the fund has continued to perform well, you can stay invested and let the money grow. Equities work best when you stay invested for the long term. And history has proven that the longer you stay invested, the better. To see what happened to 1 Lakh of investment, when it was left untouched for 20 years, despite the stock market witnessing several minor and at least one major crash, see this post here.

So, unless you need the money to fund an immediate goal, stay invested. And if your need is say three years down the line, you are better off moving it to a debt mutual fund or an FD, depending on your appetite for risk. Remember though, that debt mutual funds and debt products like FDs are a good way to protect your money, and not necessarily to grow it. So you’ll need to strike a balance, depending on how much of it you can let grow, and how much you need to protect.

 

This answer applies to any equity mutual fund investments; not just to ELSS funds. Always invest/liquidate based on needs and goals.

 

You can see the list of top mutual funds, based on their five year returns, on Value Research’s website here.

5 Things About Money Which Many Will Realize Too Late

If I were allowed to tell you only 5 things about money, here’s what they’d be.

Being able to invest money well, is a life-altering skill. And yet, very few will ever learn it.

Knowing how to grow and protect money in a stress-free manner, is as liberating a skill as knowing how to use a computer or drive a car. It creates a new set of life choices at every step of your life. It can allow you to retire early, comfortably take several years off work to master a brand new skill, work on a life project, improve your health, or allow you to spend more time doing the things that truly bring you joy.

To see the difference which just one well-calculated investing decision can make, have a look at the graphic in this post here.

The impact of several years of good investing, is simply incalculable.

And yet, many will never learn the skill well, despite being fairly aware of its impact. The fear and the inertia towards understanding finances better, will always remain a widespread psychological phenomena of sorts.

No one will take care of your money as well as you would.

  • More than 98% of financial advisors in India are commission agents.
  • In FY 2018 alone, mutual fund middlemen made an incredible 8500 crores as commissions.
  • The highest selling life insurance products in India have agent commissions as high as 35%.

All of this means, that the chances of you encountering someone who you could fully trust with your money, are rather low. The lure of commissions is strong, and ulterior motives kick in sooner or later. I know several advisors who provided good recommendations at the start, but then resorted to suggesting NFOs or expensive PMSs to their clients; both products which most investors can comfortably avoid. SEBI has gone to the extent of warning mutual funds, about excessive distributor commissions.

The entire financial system is designed in a way that it allows the financially educated minds to bypass these commissions with ease. But since that is a very small group, a majority of individuals will lose lakhs and crores by the time they retire, and only a portion of them will even realize that they have. The only way out, is to learn the field yourself. No one will take care of your money as well as you would. Period.

‘Growing money’ and ‘Saving money’ are two vastly different things.

Most of us in India have been taught rather well on the ways to save money. We are a nation of savers. Consequently, most intrinsically believe that creating wealth for future means cutting corners and saving as much of income as possible. So even if they invest their money, they invest in places which guarantee to keep it safe.

But this is a terrible approach to accumulating wealth, and is a ‘poor’ man’s idea of wealth creation.

Accumulating wealth is truly not about saving as much of it as possible, but about growing as much of it as possible.

The quantum of knowledge required to generate wealth in a safe and stress-free manner, is shockingly low.

But this crucial knowledge tends to get drowned in a sea of noise, and is scattered beyond belief. The only way for you to be able isolate this core knowledge, is by first learning how to identify and ignore the noise. A lot of what you’ll read and see on a day-to-day basis is completely useless and is mostly there to fill TV air time and news paper sections.

Once you’re past learning the fundamentals well, all matters of money become second nature. You’ll be able to see through the fog and succeed effortlessly by focussing on a few core, shockingly simple principles. It is again, like learning how to drive a car. It seems daunting at first. But with enough practice, it becomes muscle memory, at which stage, you need a very tiny portion of the mental resources you needed earlier.

After a tipping point, any additional wealth will fail to bring an equivalent, additional happiness.

There is a reason why study after study shows that several rich, self-made individuals, continue to live surprisingly simple lives despite their wealth. This does not mean that they live poorly. It just means that they seem to be content with what they already own, and aren’t in the race to accumulate incrementally better things year after year.

And there’s a reason for this. Once you’ve reached a state of financial security, and know how to create more wealth, you tend to intrinsically lean towards things which are far more rewarding than the temporary joys derived from accumulating things. One tends to get involved in activities like investing more time and effort in their families, teaching, arts, learning new skills, helping local communities, and charity.

At this stage, any incremental wealth fails to bring an equivalent, incremental happiness. Because by then, one has already learnt to derive happiness from the things which either cost very little or nothing.

 

Those there were the five things which many will realize too late. You’re now free to click away and wander the depths of the internet.

However, if any of this has inspired you to take your first steps towards understanding money better, there are two ways you could get started.

1. You could read a good book on finances

I sympathize with you if you aren’t a book reader. But there’s simply no way around it for now. Because the devil is in the details. You cannot gather the core knowledge by watching a Youtube video once a while, or reading an article here and there. Imagine how long you’d take to learn how to drive a car, if you learnt how to operate the brake one month, the clutch another month and so on. It just doesn’t work.

You’re free to start with any good book. Though I do suggest ‘Grownups Are Just Kids With Money’ for two very critical reasons.

  1. I’ve been reading resources in this field for more than a decade, and am still to find one which is as comprehensive as ‘Grownups Are Just Kids With Money’. The book lets you learn everything in one single place. From investing, to insurance to taxation to salary structures, while still being really easy to read.
  2. It’s ruthlessly impartial, and unaffiliated. There are no products to push, no commissions to earn. Everything you’ll learn about, is something which will work best for you and for you alone.

There’s a reason why its been called the ‘Bible of Finance’, and it has an average rating of 4.7/5 on Amazon and 4.6/5 on Goodreads. As an author, I hardly make 10% of the book’s listed price. So I truly have very little incentive to sell you the book. But you on the other hand, stand to gain a 10 year head start on financial knowledge, for the price of a pizza meal.

2. You could look for a financial workshop in your city

Good workshops are even harder to come by, but you may just find one.

You could also find courses which you could take online, but fair warning; online courses usually have a 96% dropout rate. So you’re better off keeping a tab on the events in your city for an in-person workshop. A word of caution again here, is that several commission-earning platforms often masquerade as financial education providers. Many even offer free workshops and courses, since they stand to gain a lot in commissions from your investments. In which case, you’ll not be signing up for education, but for propaganda.

If you’d like to attend mine, I’ll be conducting the first public workshop on the first weekend of 2019, on Jan 5th & 6th in Bangalore. You’ll find some details about the program here. I’m still to finalize a venue and I’ll ensure I post a new blog here when the details are final. It might just make sense for you to subscribe to the blog so you receive an alert the minute that comes up. Only 20 seats will be sold. I enjoy teaching small groups, since the learning is so much more effective.

You can subscribe for alerts below. There will never be any spam or any ads. Since I detest ads and value privacy as much as you do. You can additionally write to me at frontdesk@desaivinod.com and I’ll add you up.

Until then, Happy Moneyplanting.

[Update: Tickets for the workshop on Jan 5th can now be purchased online here. ]

Best Financial Advisors in India

My last post, spoke about the advantage which Direct plans have over Regular plans and how commission-free, fee-only financial planners help us invest in them.

Here’s the latest list of all such commission-free, fee-only financial planners I’ve come across so far. Before proceeding to contact them however, you should read the FAQ further below. Here’s the full list.

FAQ

1. Are these the only commission-free financial planners in India?

Perhaps not. But these are the ones I could locate after extensive research online, while sifting through their blogs and ‘About me’ sections. A big shout out goes to https://freefincal.com/ which is where I first learnt about the existence of fee-only financial planners in India a couple of years ago.

If you are yourself a fee-only financial planner, or know someone who is, please write-in so I can include them in this list.

2. Can I trust them with my wealth and goals?

I would vouch whole heartedly for them. But I still expect you to do your own due diligence. Investing is not a one size fits-all strategy and a lot depends on how comfortable you are in your conversations. But, the very fact that these people have stayed from the lure of high commissions speaks volumes about their principles. I have personally interacted with some of them from the list, and I’ll happily trust them with all my wealth.

3. Does the physical location of the advisor matter? Should I only look for one in my city.

I would say No. Almost all investing now occurs online, so the physical location of your advisor does not matter. If you fail to find one in your city, you could always get onto Skype calls with any of them. I am sure they’ll oblige. You may have to do some one-time offline work in your city; like submission of CKYC documents and the like. But again, you don’t need your financial advisor with you for such tasks.

4. What all do I need to know before approaching them?

The first thing you’ll need to know are your goals and life’s milestones. What you invest in, depends a lot on how close your milestones are. So, a clear idea of your life goals will help not just you, but also your financial advisor in creating a better plan.

Other than this, though not necessary, I’d strongly recommend that you understand the fundamentals of this field. This isn’t a pitch for my book, but I do recommend reading it. Over a period of one weekend, you’ll learn just about everything you need to know about investing and living a financially well-rounded life. After the costs of distribution and publishing, an author barely makes 10% of the price of the book, so I have little to gain in book sales, but a lot to gain as human goodwill. You can buy the copy on Amazon here.

I’ll add more FAQs as more occur to me. For now, Good luck and Happy investing.

Why Stocks Go Up And Down

There’s a popular story on stocks which very well explains the behavior of the short term stock markets. And at a time when markets are showing high volatility(as they often do), I thought you’d find this story interesting too.

So here goes.

It was autumn, and members of a Native American tribe ask their New Chief if the winter was going to be cold or mild. Since he was a Chief in our modern day society, he couldn’t tell what the weather was going to be like. Nevertheless, to be on the safe side, he replies to his tribe that the winter was indeed going to be cold and that the members of the village should collect wood to be prepared.

But also being a practical leader, after several days he gets an idea. He goes to the phone booth, calls the National Weather Service and asks,

Is the coming winter going to be cold?

The weather man responds,

It looks like this winter is going to be quite cold indeed.

So the Chief goes back to his people and tells them to collect even more wood. A week later, he calls the National Weather Service again.

Is it going to be a very cold winter?

The man at National Weather Service again replies,

Yes. It’s definitely going to be a very cold winter.

The Chief again goes back to his people and orders them to collect every scrap of wood that they could find. Two weeks later, he calls the National Weather Service again.

Are you absolutely sure that the winter is going to be very cold?

The weatherman replies,

Absolutely. It’s going to be one of the coldest winters ever.

To which the Chief finally asks,

How can you be so sure?

And the weatherman replies,

Well, the tribes are collecting wood like crazy.

This is pretty much how the stock markets work.

A critical point new equity investors need to understand is that when you buy the stock of a company, you are becoming a part owner of the business. You haven’t just bought a piece of paper which is supposed to just go up in value overtime. But what you’ve bought is a piece of all the company owns and represents. It’s brands, its hard working people’s aspirations, its infrastructure… And good businesses take time to grow and increase their profits.

On a day to day basis, despite the company’s stock price going up and down, nothing fundamental about the business changes. Factories still run as they would, people work as hard as they were in the days before. As awareness towards equity investing grows, you can only expect even more disconnect between a company’s stock price and its fundamentals.

So a stock price, and hence the market in itself acts like a crazy, neurotic child. But as long you own stocks of companies which are fundamentally good to begin with, you should just stop listening to all the noise and get some peace.

In a way, these market corrections are often necessary to give new investors a much needed wake up call. Several who do understand equities as an asset class, tend to panic and liquidate their mutual funds or discontinue their SIPs. While it is clearly a bad idea to do that for SIPs, study after study has even shown that liquidating your investments too, is one of worst things an investor could do.

Life is unpredictable and could be short. There is very little value in living it under duress; especially the kind of duress which news channels bring on the volatile stock market. They need news to put out. So you should gather enough wisdom to know when to ignore it.

Happy Moneyplanting.

Do Nothing When Stock Markets Crash

Over the past couple of days, I’ve had several friends and colleagues who displayed signs of panic. They were looking at the markets and frantically  sharing snapshots of their investments, which unsurprisingly, were all in the red. They were all holding highly rated, good performing funds. But they were nevertheless in the red.

By by its very inherent nature, Equity is a volatile asset class. At times, even after a full year of investing, your portfolio could show zero or negative returns. There have even been times in Indian stock market history where investments took 6 years to recover from their losses.

So seasoned equity investors, only concern themselves with the long term. They completely ignore this day-to-day market noise. While it drives most new investors mad, it doesn’t affect the peace of a long term investor much.

Equities aren’t supposed to be an asset class which go up, week after week. As an investor, if you aren’t able to understand and make peace with this, it may be best to avoid them an as asset class all together, and invest in safer, less volatile investments like FDs and Debt mutual funds. These low risk investments will almost always appear green anytime you look at them. But since they’re low risk investments, your returns would also be low(around 8-10% at best).

As an example, here’s an updated chart I created yesterday based on actual data between 1998 and 2018. This denotes the number by which your investment would’ve multiplied by, over this 20 year period.

Comparison of returns FD versus Mutual funds - Grownups Are Just Kids With Money - The Moneyplanting Program

Even the worst performing mutual fund gave 28X returns, compared to FD which gave 4X returns. But, remember that we had several minor and at least one major market crash during this period. In 2008, people’s equity investments were literally cut down in half as the markets crashed by almost 50%.

And despite of all that volatility, equities still managed to give the type of returns which you see in the chart above, with even an average performing mutual fund, providing a 50X return. Several mutual funds, including the ones listed in the chart, were in the RED for years together at a stretch, during the recovery from 2008 crash.

The most important trait you need to be build as a long term investor, is patience.

8500 Crores Lost to Mutual Fund Commissions

If you’re wondering why you’re seeing so many ads from mutual fund investing platforms like @scripbox and such on your social media feeds, allow me to throw some light.

These platforms are mutual fund distribution agencies. Middlemen of sorts. And they make anything from 1 to 2% as commissions. Some of them never mention the fact that they make commissions. Some do.

But the problem either way, is that they make these numbers sound insignificant.

It’s just a measly 1-2%.

It does sound small. It’s easy to shrug it off. And several do.

But here’s some simple math.

  • Assume you invest 15,000/- per month for the next 20 years, and your mutual fund returns an average of 14% per year.
    If you invest through these middlemen, you would eventually end up with 1,97,45194/- (About 1 Crore, 97 Lakhs)
  • But, if you bypass these middlemen and invest directly, you’d make 1% more. Applied over the entire timeframe, that would translate to 2,27,39,325/- (About 2 Crores, 27 Lakhs)

That 1% made a difference of over 30 LAKHS. Basically, you’d lose a non-trivial 30 Lakhs, since a middleman was involved. As a matter of fact, if you are a prudent 25-year old, and end up investing 15,000/- per month until the age of 60, you would lose a mind-numbing 5.5 Crores to commissions!

1% seem small still?

In reality, the difference between the returns of commission-based and commission-free mutual funds is often far higher than 1%, with some even exhibiting more than a 2% difference.You can only imagine now how much of an impact that would make.

So what happened to this money?

Where did it disappear? And how was someone able to take it away from you, right from under your nose? You’re a smart cookie after all.

Well, the middleman took it. Call them whatever you want – agents, distributors, advisors, middlemen. And these commissions are rolled into a mutual fund’s NAV. So, many investors never even realize that they are losing money.

In the financial year 2018, mutual distributors made an astounding 8,500 Crores in commissions.

This is why platforms like Scripbox and the like allow you to use their portals for free. But nothing comes for free. There is always a price to pay. The price in this case, is all that wealth you lost.

I’ve met several investors, even those who have been investing for over 10 years, who were never really aware that there has been a direct way to invest in mutual funds since 2013.

The ones who are aware that commissions exist, continue to assume that 1-2% is measly. So they let it be, never realizing how these small percentages chip away at wealth, in a significant way.

The returns of these no-commission products are higher, since no middlemen are involved. Consequently, no middleman has any benefit in promoting them. More than 98% of financial advisors in India are commission agents, and they too almost never mention these to their clients. So the burden of discovering their incredible impact, is left purely to an investor’s curiosity.

At the end of the day though, commissions are necessary. Without commissions, products don’t reach the masses.

But why lose so much wealth to commissions when you could easily bypass them? The system is designed so that the more educated investors can bypass them. So the question is, on which side do you want to be? There’s a clear winning side, and a clear losing side.

But here’s where the problem gets worse.

Quite a few of these middlemen platforms, have started masquerading as financial education providers. They conduct workshops and corporate financial literacy programs, and often for free. And a lot of folks who manage their organization’s training needs, fall for the pitch quite easily.

Completely free financial wellness workshops for all our employees. What’s to lose?

I have no qualms against someone trying to spread financial literacy. India needs it. But it gets a little twisted when organizations with self-serving interests do this. There is huge amounts of money to be made off your, and your people’s investments. And due to this very nature, their workshops hide a ton of useful facts and practices.

They may not insist that you use their platforms, but they will neither showcase other competing platforms which are better, nor educate on the dozens of ways people could invest directly, by-passing those commission costs altogether.

They may defend themselves in several ways.

We provide valuable add-on services like free workshops, single window access and handpicked, algorithmically selected mutual fund recommendations.

The problem with that argument, is that there are plenty of platforms which offer commission-free products and provide equally good recommendations. And between you and me, selecting mutual funds isn’t rocket science. It’s a skill which can easily be learnt. It’s just never been taught.

At the end of the day, Education needs to be impartial, unbiased, comprehensive.

Else it isn’t really education. Its propaganda.

So what can you do?

It is incredibly hard for anyone in the financial service industry to not become a part of the system. The lure of commissions is very powerful. My earlier post on this also highlighted the study by Harvard Business School which spoke of rampant ‘mis-selling’ in the Indian insurance space.

Even a platform like Jagoinvestor, which claims to have a readership of over 6 Lakh investors, has mentioned commission-free plans all of just once in its 10 year existence. This platform too provides financial ‘education’. It also conducts wellness workshops.

As you can clearly see, the problem is widespread, deep-rooted.

  • But as an investor or an organization, there are things you could do.
    If you are an investor: Read up online about ‘Direct plan mutual funds’. With just a tiny bit of effort, you could save yourselves lakhs and crores in the long run.
  • If you are responsible for your organization’s training needs: Ensure you’re not hiring middlemen. As an employer, you have the privilege and the burden of providing true financial literacy to your people. You are after all, your employee’s primary, and perhaps only source of income. And by hiring middlemen to teach such a critical life-skill, you’ll play into the middlemen’s agenda and do more harm than good.

Now, to do my part to the cause of spreading true financial wellness, I’ve started ‘The Moneyplanting program’. You can read about the program here. It’s a one day workshop which you, as any employer can host at their organization. The response so far, has been nothing short of overwhelming, because the topic of finance has never, ever been taught this way. But that’s not even the program’s best selling point.

The best selling point of the program, is that it’s ruthlessly impartial and obsessively independent.

There are no products to push, no commissions to earn. The program’s only source of revenue is the fee earned from conducting the program. It guarantees completely impartial, unbiased education, and one that provides you and your people with true financial wellness.

If you’d like to know more, drop in a note to moneyplanting@outlook.com to receive the workshop brief. You could even request for a free session for executive review.

Until then, Happy Investing.