Insurance vs Investment

We are into the month of February, the eleventh month of the financial year which spans from April to March. Historically the last three months of the financial year, i.e. Jan to March, have seen an increased demand for Insurance products in India. This is because the premium paid for Insurance products qualify for a tax deduction under section 80C of the Income Tax act up to an annual limit of Rs 150,000. This is quite liberal a limit for most Indians where the average annual per capita income is only Rs 135,048 (ref https://en.wikipedia.org/wiki/Income_in_India). In a country where the largest insurance company LIC – is owned by the government, Insurance companies and their agents have found it relatively easy to sell Insurance products to the vast Indian middle class on the basis of tax savings that will accrue to them for paying Insurance premiums. This narrative has not only suited the Government coffers very well (LIC paid a dividend of Rs 2,610cr to the Indian Government for 2018-19) but also the mindset of the Indian middle class which has been conditioned over the years into saving its hard earned income in tax saving instruments instead of investing it. Consequently millions of middle class Indians even today are more comfortable buying a LIC policy instead of investing in an investment product such as a Mutual Fund.

Truth be told, this mindset worked well during the post independence era when the Mutual Industry in India either did not exist or was in a nascent stage. However ever since the emergence of private sector mutual funds in 1993 and the stringent regulations put in place by SEBI since 1996, the Indian mutual Fund Industry has taken off and since 2004 has evolved into a mature financial industry with Assets under management (AUM) of more than Rs 27 lakh crores at the end of 2019 (ref https://www.amfiindia.com/indian-mutual).  In fact the AUM of Mutual Funds in India has registered a compound annual growth rate (CAGR) of 25 per cent over the five year period from 2013-2018, outstripping the CAGR of only 11 per cent registered by aggregate bank deposits of scheduled commercial banks during this period (ref https://rbidocs.rbi.org.in). Consequently the vast Indian middle class needs to wake up and re-condition its mindset and see-through the sharp sales pitch of Insurance agents who peddle Insurance products to them solely on the basis of tax savings.

Insurance is an entirely different requirement from Investing. Insurance takes care of the protection needs of the individual – due to sudden events related to life, job or health – whereas Investing addresses the topic of wealth generation for building a nest egg for your entire life. Therefore whenever Insurance is being sold as an Investment, you should de-link the Insurance need from the Investment need and only consider buying the Insurance portion (Term Insurance) to satisfy your protection needs and then invest the difference. Combining Term Insurance with Investments in the form of Savings plans or Endowment plans locks investors into long term commitments into products where there are expensive management fees and associated agent commissions which is a drain on the individual’s hard earned money.

The Finance budget for 2020 has taken a welcome step in this direction by giving taxpayers the option to decline these exemptions in order to avail a lower income tax rate. This is a soft signal from the Government that individuals are free to make their own choices for their saving requirements and should not rely solely on the tax incentives provided with Insurance products for this purpose. This option will force all taxpayers to now calculate whether they are better off availing the tax exemptions and paying a higher tax rate or declining the exemptions for paying a lower tax rate. In this process, the re-conditioning of the mindset to buy Insurance products solely for the purpose of saving tax will automatically take place. It is quite possible that existing investors who are heavily invested in Insurance products may choose to avail these exemptions. However new entrants to the job market and other young investors will certainly want to make their own savings decisions and avail a lower tax rate. Both classes of investors will do well to reach out to a qualified Registered Investment Adviser to guide them through this change.

2019 - Letter to Clients

After a lackluster 2018, 2019 turned out to be another difficult year in the stock markets for Indian investors. Here is how the year panned out for various asset classes during the year.

Asset class	2019 return
Gold	23.8
PPF	7.90
NSC	7.90
Debt ultra short	6.92
Post office 3-year deposit	6.90
Debt Liquid	6.32
Fixed deposit (1-3 years)	6.25
Nifty 50	12.02
Nifty Midcap 100	-4.32
Nifty Smallcap 100	-9.53
icAdvisor average	-2.84

No one could have guessed it at the start of the year, but Gold was the star performer during 2019. Appreciation in Gold, an unproductive asset, normally signals a defensive approach by investors. The stock markets were anything but defensive though. The Nifty started the year at 10,862 and ended it at 12,168 – giving a healthy return of 12.02% in the process. The Nifty Midcap 100 and Nifty Smallcap 100 on the other hand gave negative returns of -4.32% and -9.53% respectively. This was the second consecutive year when these two indices gave negative returns. This means that investors with growth portfolios in the midcap and smallcap space will have to increase their investing timelines in order to first break even and then generate a positive return. As far as our icAdvisor advisory service is concerned, the annual return of client portfolios under our advice clocked in at -2.84% this year. More than 90% of our client portfolios are Growth oriented and with this constraint we were still able to outperform both the Midcap 100 and Smallcap 100 indices. Here is how many of our client portfolios outperformed the three indices in percentage terms

Index	% folios outperforming the index
Nifty	32
Midcap 100	68
Smallcap 100	79

 2019 was also a year which was marked by a peculiar trend – large cap quality stocks that were already costly became more costly at the expense of quality midcap and smallcap stocks, which were shunned by investors as being too risky. This led to a situation where the Nifty ended the year at a PE of 28.3, very close to its lifetime high of 29.9 and two standard deviations away from its average of 19.8. At these dangerously high PE levels Nifty stocks have only two possibilities – either deliver increased earnings to justify the stratospheric PE or face a price correction. The December qtr results which are starting later this week will be interesting to watch from this point of view.

In terms of trends the Nifty once again saw three broad trends during the year – two uptrends and one downtrend. The quantum and duration of these trends were as follows:

Trend	Quantum%	Period
Uptrend	14.3	Jan to Jun
Downtrend	-11.9	Jun to Oct
Uptrend	15.0	Oct to Dec

This can be seen visually in the daily chart of the Nifty during 2019 below

The previous year also witnessed three broad trends in the Nifty and 2019 continued this trend. Consequently volatility remained high during the year. In response to this volatility we continuously advised our Clients to sit on cash whenever possible. During the end of the year we saw the emergence of a new trend although in small proportions – booking profits in stocks that had run up way too much and investing into quality names in the midcap and smallcap space. 2019 was also marked by a lot of upheavals in individual businesses, notable among them being DHFL, Mcleod Russell, Cox and Kings, Thomas Cook, Yes Bank, Sintex, Reliance Home Finance, Reliance Communications, Café Coffee Day, Jet Airways, Reliance Power, Reliance Capital, Jain Irrigation, Lakshmi Vilas Bank, Vodafone Idea and HDIL amongst others. All of these stocks lost more than 80% of their market cap during the year. It was perhaps the consequence of this kind of literal carnage in so many stocks that investors flocked to quality large cap names and kept pushing up their price to stratospheric levels!

On the economic front there was bad news all around. The GDP growth rate slumped to 4.5% during the year, the lowest growth rate in decades. Unemployment continued to be high and GST collections also slipped during the year confirming a slowing down of the economy. These and other indicators have put the Governments target of $5tn economy by 2024 at serious risk. On the bright side, the Government was active in acknowledging the problem and took many remedial steps to reverse the trend including a lowering of corporate tax. The cumulative effect of these measures is likely to show result in the next couple of quarters.

What can be look forward to in 2020? The Indian economy has slowed down but the Government is making all efforts to revive it once again. The fact that the elections are behind us and that there is a stable Government at the center with an even larger mandate is assuring for investors. The stock markets have run up already in anticipation of the moves made by the Government. Quality large cap stocks are trading at stratospheric levels and are due for a correction unless their December quarter earnings support their high prices. Quality Midcap and Smallcap stocks however are looking very attractive at the moment. This I believe will be the sweet spot for 2020.

At the end of this difficult year, it is a good idea to take a moment and review the fundamentals of long term investing. We enumerate them here for quick reference:

1. Asset allocation – Diversify your financial assets across Debt, Equity, Real Estate, gold, etc. depending on your risk profile and age. Real Estate and Gold assets should be used to satisfy consumption needs only. It means that your financial assets should be invested only across Debt and Equity. One simple rule of thumb to do this quickly is to subtract your age from 100. The number you get should be the percentage of your assets that you should allocate to equity - the rest should be allocated to Debt.
2. Financial planning - Identify your financial goals and classify them by time horizon – short term, medium term and long term. Use Debt assets to achieve short term goals, mix of Debt and Equity assets to achieve medium term goals and Equity assets for achieving long term goals. This will be the basis of your financial plan.
3. Reviewing your plan - Review your financial plan yourself or with your advisor at least once a year and make adjustments depending on the prevailing market situation.
4. Invest right - When it comes to equity, invest in quality businesses and then give markets time to give you returns. This calls for patience in the face of volatility. Speak to your financial advisor whenever you are in doubt and need a second opinion.

I want to inform all my Clients that during the year we made further improvements to our stock picking algorithm. These improvements include using advanced technical indicators in addition to fundamental indicators to ensure that we get the timing of investments right also. I believe these improvements are already working in favor of our Clients.

I also want to take this opportunity to thank you for putting your faith in our investment thesis and in our icAdvisor service with your hard earned money. Your continued trust makes us stay committed to the vision encapsulated in our tagline – ‘Growth through Knowledge’. I am available to address client queries at all times and am approachable via email or whatsapp. 

Finally, let me wish you and your family a very happy and prosperous Happy New Year and hope that our relationship will continue to grow for many years to come!

Abhijit Talukdar

Founder, Attainix Consulting

SEBI Registered Investment Adviser - INA000006703

Do you know your fund’s TER?

Like a growing number of Indian investors, you most likely invest in Mutual Funds on a regular basis. You are also perhaps aware that Mutual Funds charge a certain percentage of their Assets under Management (AUM) for managing the fund. This expense is known as the Total Expense Ratio (TER) and it is a number regulated by SEBI. The maximum TER that funds can charge as management fees depends on the size and type of the fund, as shown below:

AUM slab (Rs cr)	Equity oriented schemes – max TER%	Debt oriented schemes – max TER%
0-500	2.25	2.00
500-750	2.00	1.75
750-2000	1.75	1.50
2000-5000	1.60	1.35
5000-10000	1.50	1.25
10000-15000	1.45	1.20
15000-20000	1.40	1.15
20000-25000	1.35	1.10
25000-30000	1.30	1.05
30000-35000	1.25	1.00
35000-40000	1.20	0.95
40000-45000	1.15	0.90
45000-50000	1.10	0.85
More than 50000	1.05	0.80

As of end of Aug 2019, there were 269 active equity oriented mutual fund schemes in India, with AUMs ranging from a high of 25,069cr to a low of just 0.64cr (source: www.amfiindia.com). Since fund size determines the maximum TER that can be levied by the AMC, it is important for investors to know the fund size before short-listing it. At the top of the scale of 2.25%, every Rs 1000 invested by investors can lead to a fee income of Rs 22.50 for the AMC. This is an annually recurring fee which will be deducted every year - in fact it is deducted proportionally from the NAV every day. What this also means is that if the fund returns 15% per annum before fees, the investor will only get a return of 12.75% after fees. In fact, since management fees are deducted from the NAV on a daily basis, investors will actually get much less than 12.75% on an annualized basis due to the compounding effect of the daily fees. Hence everything else being equal, a fund with a lower TER is always desirable.

A lower TER is even more desirable for debt funds whose expected annual returns are much less than equity funds. Note that as per SEBI guidelines, the maximum TER for a debt oriented fund is only 25 basis points lower than equity oriented funds in the same slab, although the returns for a debt fund can be less than half that of an equity fund over a longer duration. This means that a lower TER is critical during debt fund short-listing, since a higher TER can eat away a significant portion of the absolute returns of the fund.

What to Do

One way to get a lower TER is to always invest in mutual funds with the Direct plan option. This one action alone can reduce the TER by more than 50% compared to the Regular plan of the same fund. Consider the following table that shows the average TER for the three categories of funds for Regular and Direct plans (source: www.valueresearchonline.com)

Fund Category	Regular plan average TER	Direct plan average TER	Savings in Direct plan
Equity	2.02%	1.22%	39.6%
Hybrid	1.96%	0.98%	50.0%
Debt	0.9%	0.42%	53.3%

Since Direct plans offer savings of more than 50% over Regular plans, it is pretty obvious that every investor should opt for them by default. The question then is how to shortlist Direct funds without the help of a Mutual Fund Distributor (MFD) since they will only offer you funds with the Regular plan. You have two choices here – the first choice is to learn to do it yourself. Apart from the pleasure of saving money you will also have the satisfaction of gaining some investing knowledge in the process. If this option is not feasible for you for any reason, then the next best option for you is to hire the services of a SEBI Registered Investment Adviser (RIA) who will charge you a part of your savings for providing his/her services. In this case you will save a little less money but will have the benefit of professional selection of funds as per your risk profile and goals as well as the facility of reaching out to an investment professional any time during the service period. Both options will save you money and have their own benefits – the choice really is yours. An informed investor is always a wiser investor!

Nifty drops below 11000 again. Should I exit now?

The benchmark Nifty ended the week at 10,829 bouncing back from a 6 month low of 10,637 in the final trading session of the week. The sudden uptrend in the Nifty started after about 1 pm on Friday afternoon, which probably means that the market had got wind of the impending policy announcements by the Finance Minister later in the day. And right on cue, these announcements came after the close of the markets. The Finance Minister Ms Nirmala Sitharaman sought to assuage investor sentiment by rolling back the surcharge on Foreign Portfolio Investors on the one hand while increasing liquidity with a capital infusion of Rs 70,000cr into the banking system on the other. Other announcements included cheaper home and vehicle loans, better transmission of RBI policy rates and quicker GST credit for MSMEs etc. These announcements were timed to address the wide discontent with the performance of the overall Indian economy and the stock markets are expected to cheer these decisions when they reopen on Monday.

So the Government is clearly worried about the economy and is taking short term measures to stem the tide. But experts believe this is not enough – much more needs to be done at a structural level to stem the tide. Notable among these include increasing income for farmers in the agricultural sector, job creation in the manufacturing sector and NPA resolution in the services sector. Truth be told - the NDA Government has addressed these issues in its first term – it just needs to continue addressing them more into its second term. Ultimately the annual GDP growth rate which has slowed to a 5 year low of 5.8% for the last quarter of 2018-19 needs to be reversed back to 8.5% plus and more in order to achieve the Government’s own target of a $5trillion economy by 2024. Is this target realistic? Let’s look at the forecast of the International Monetary Fund (IMF) for the top 10 economies of the world.

Country	2018 actual GDP ($tn)	2018 actual rank	2024 projected GDP ($tn)	2024 proj. rank	GDP proj. growth rate
United States	20,494,050	1	25,728,734	1	3.30%
China	13,407,398	2	21,309,503	2	6.84%
Japan	4,971,929	3	6,848,808	3	4.68%
Germany	4,000,386	4	4,912,299	4	2.98%
United Kingdom	2,828,644	5	3,399,017	6	2.66%
France	2,775,252	6	3,354,126	7	2.74%
India	2,716,746	7	4,729,319	5	8.24%
Italy	2,072,201	8	2,323,028	9	1.65%
Brazil	1,868,184	9	2,468,216	8	4.06%
Canada	1,711,387	10	2,242,038	10	3.93%

Despite the recent slowing down of the global economy, the IMF forecasts that the top 10 economies will continue to grow for the next 5 years with India growing the fastest among the bunch. This will result in India climbing up two steps in the ladder while Brazil will climb up one. The IMFs forecast of $4.7tn for India is close to the Indian Government’s own $5tn target, implying that it is indeed realistic but a stretch target. In order to get there at least one of the three growth drivers – consumption, investments and exports – will have to lead the charge. If two or more drivers fire together we will hit the bull’s eye with ease.

What to Do?

Steep market corrections instill fear and a sense of impending gloom and doom amongst investors. At such times, it is perhaps best to take a step back, look at the bigger picture and try to answer some basic questions. 

• Is India’s fundamental growth story still intact? Largely yes. 
• Is the Government doing all it can to stem the tide?  It has made an earnest beginning. 
• Will the Government do all it can to get back on the growth trajectory? It has no choice if it has to achieve its own $5tn target. 

Add all these answers together and it should be pretty obvious what you need to do as long-term investors in the Indian markets. If you still have questions or doubts, reach out to your SEBI Registered Investment Adviser who will be able hand-hold you through this patch of turbulence in the Indian economy. 

Happy Investing.