Whats better Concentrated portfolio or diversified portfolio?

If you read what John Templeton says, you will believe that you need to create a diversified portfolio - a little of Japanese stocks, lots of American, some emerging markets, etc. in equity alone. Apart from this some debt - short term, long term, etc.

Warren Buffet on the other hand says you should concentrate your portfolio if you wish to create wealth.

Whom should you listen to?

Both!

You should have a concentrated portfolio - which means in the Indian context, if you have a Rs 2.5 million portfolio you may not need more than 6 companies. However, once you have created some wealth, you need to protect a portion of it from the vagaries of the market.

Let us take an example. In case you had invested Rs 10,000 in Wipro in the year 1980, today it would be worth Rs 3.50 billion (assuming you consumed all the dividends). However, at various stages you would have sold some part of your Wipro shares to invest in other companies too - now if Wipro had not done well, but some other company in which you invested (say Silver line) had done well, you would have looked smart (but actually you were lucky, simply, lucky).

However if you are still holding on to all the shares of Wipro, it makes sense for you to sell a portion of Wipro and invest in a simple index fund, some real estate, some RBI bonds, etc.- P.V. Subramanyam on MyIRIS.Com

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What to do Intrest rates are going down ?

So you quickly repaid a big part of your home loan because the interest rates went up did you? Welcome to the world of fluctuating interest rates!

Interest rates play an important role in your personal finances. The RBI tries to raise or lower key interest rates that trickle down and affects everything - from your housing equated monthly installment (EMI) to the interest rates on your savings bank account.

As rates begin to fall, what should you do?

Accept that experts also only guess!

First of all it is necessary to understand that interest rates are a function of inflation, interest rates in other countries, money supply, government spending, government policy, demand and supply of money - from businesses and households, etc.

Even for experts being able to predict the US meltdown, the slowing down of growth in Asia, Brazil, etc. is not really easy. So generally they take a 2-3 month view - which is not useful when you are planning investments for the next few decades!

Planning for interest rate changes requires that you understand why RBI makes these decisions in the first place. In a democracy (in an election year that too!) governments are particularly sensitive to inflation. So the RBI is pressurized to reduce inflation - by sucking our liquidity in the market. Interest rates increase in an effort to make borrowing money less-attractive and slow a rapidly growing economy. Exactly the reverse is done to make the economy go faster! Lowering the rate will make money flow more freely and hopefully stimulate economic growth.

Not always a blessing!

When interest rates go down, there is a sense of happiness amongst the consumers. Please remember you are a producer too! Decreasing interest rates is normally in response to a slowing economy. As we have seen the last few months have not been kind to anybody`s portfolio. All asset classes have done badly - we are only measuring how badly. If somebody told you cash is king, well it is because the others are paupers! Remember somewhere in your family your father, father-in-law, mother etc. are worried about lower bank interest rates.

Your strategy does not change!

Will you buy a bigger car because petrol prices have come down by Rs 5 a liter? Exactly so for your interest rates coming down. If you have a lot of debt, tackle the highest interest rate loans first. It still makes sense to cut down on loans. Especially if you realize that last years` bonus figure is now in the history books. If your HR does not call you to ``discuss`` a voluntary separation, treat that as a bonus! A rate change by RBI does not automatically reduce your interest rates.

Call your bank and ensure that your housing loan, credit cards, personal loans, etc. are all charged at a lower rate. A consumer is no longer the king unless he/she is well informed! Also realize ``we will get back to you``, ``we are examining your requests`` are all nice answers which actually does not reduce your debt! Try refinancing your loans if you must. Act tough - a few ``reputed`` organizations need more than a nudge to change!

Floaters rejoice!

For those who are looking to buy an asset (on borrowed money), or those on a floating rate already, decreasing rates is certainly a good thing. While housing EMI rates aren`t directly linked to RBI`s rate cuts, the signaling surely helps. Of course, do not get carried away and buy a house much bigger than what you actually need. Even those of you who have kept your savings in floating rate funds are now getting a higher return on your monies. If you already own a home and purchased it when the rates were a bit higher, this could be an opportunity to refinance. Even being able to reduce your borrowings by One point of interest can make a lot of difference, in the total price that your asset!

What about your savings?

Clearly, low interest rates are great for borrowing money, but when it comes to trying to earn money on your savings, it isn`t to your advantage. However, if you have invested in HDFC Prudence or Templeton India Pension Plan, the debt portion would have appreciated in the last couple of weeks - a falling interest rate regime is benign for older portfolios. However, it will not happen continuously unless the interest rates keep falling. If your bank fixed deposit rates are dropping you should quickly tie-up for 18-36 months. Banks are as likely to reduce fixed deposits as they have done on home loans. You could perhaps look at some Income funds - with a 2-3 year view! Instead of a savings account, you should look at a floater fund or a liquid fund if you are not sure of how long you want to keep the monies there - Income funds have an exit load! Also remember dividend distribution tax, short term capital gains tax and income tax while dealing with savings. Investments on the other hand are more tax efficient. My IRIS.

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What to do during recession time?

Its recession most people are free as there is nothing to trade or else salary cut so less on spending, on luxury and comfort and worst case is that they have lost their jobs so nothing to do.

But one should not underestimate these recession times as they can last longer than the good times.

Is the US housing bubble responsible for all this mess?

The answer is yes and there is no use of sitting and crying.

There are few things you can do during recession times.

They are –

1. Firstly don’t see Business news channels all the time and also be away from stock tickers (Do not watch stock prices every now and then).

2. Keep your mind running, plan out new ideas. Research on stocks which you think are a value buy and accumulate them. Remember buy when others are selling and sell when others are buying.

3. Don’t sell just buy. Your long awaited bluechip stocks would be available at a dirt cheap rate. For me it is Unitech (BSE) and Suzlon (NSE).

4. Don’t over trade – Some times even some quantity of day trade can get you a huge loss. So be careful and trade when you are confident.

5. Games can help – Play Poker and get some cash or else play some online game on stock markets say for example Money Bhai Investor from MoneyControl.com so in this way you wont forget how you used to trade.

6. Read Books – Reading books can help you figure the economic situation at macro and micro level.

7. Save fuel. Rather than using your car or bike use public modes as it is cheap and economical. In fact you are just not saving fuel but you are saving your precious money.

8. At the end be away from loans. If you already have taken loan which is yet to be re paid don’t take a fresh loan again.

Chirag Jethmalani

Happy Investing.

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Are you adequately insured?

In light of the recent terror attacks in Mumbai, I would like to reinforce our belief in `Adequate life insurance` cover. The word `Adequate` here is very important. Many believe that they are adequately insured if they have some money-back or endowment policies in their name and in the name of their children. They look at insurance as an investment product and expect that they should receive money from the insurance after certain years when they are alive. There are still many people who relate the term `Insurance` with `LIC`. They blindly go by their agent`s advice and take number of insurance policies without knowing whether they actually require the same or not.

In your day-to-day routine you often overlook some non-urgent but more-important things in life. It is far too late when you realize the importance of it. For example, if you are 35 years of age, you have a spouse who is a home-maker, two children studying in school and dependent parents who are retired. In this scenario you would give more priority to earning income and fulfilling the family`s present needs and wants. Some would be little smart and would also invest their savings for family`s future requirements. But a million dollar question is that, if something happens to you now, will your family members be able to live the life they are presently living? Will they be in a position to pay the bills, outstanding loans, future expenses of your parents and children? Will they be able to maintain their life style without any sympathy from relatives, neighbors or friends?

These are some of the thought provoking questions which needs to be answered. You may find these questions important if you want that in your absence your family members, who are dependent on you, should not suffer. Protecting your family against unforeseen eventuality may not be as urgent as going to work or enjoying time with family, but it is very important if you truly want your family to live the life which they desire even in your absence.

Having said this, let us understand the methodology used to arrive at the figure of `Adequate Life Insurance` cover. There is couple of complicated methods to ascertain your life insurance requirement, however I would like to discuss about a simple method by which you can calculate your `Adequate` amount of life insurance.

1. Calculate the amount of future family needs in Present Value: This is not as easy as it sounds. It depends on number of people financially dependent on you, their future needs and wants, your responsibility towards their future requirements, etc.

2. Calculate the amount of outstanding loans and liabilities: You need to sum all the present loans and liabilities which are outstanding. This amount helps you determine the amount of dues which your family will have to settle in case of your immediate demise. 

3. Calculate the Present Value of family member`s House-hold expenditure: This is the amount of house-hold expenditure excluding your personal expenditure. This amount would be required for family members throughout their life to at least maintain their current lifestyle.

4. Add other Contingent expenses: This may include funeral expenses or immediate contingency fund required immediately on your demise. 

5. The total of all the above points is the amount of `Adequate Life Insurance` required.

6. From the above total, existing life insurance and present assets (excluding residential property) should be deducted and you would arrive at the amount of under or over insurance. 

The above method helps you determine the amount of `Adequate Life Insurance` and compare it with your `Existing Life Insurance`. The deficit or surplus in insurance cover should be accordingly adjusted.

If you feel the above methodology is difficult, you should consult a professional financial planner who would assist you to determine the adequate amount of insurance cover required by you. It is important to get yourself adequately covered for all future uncertainties. 

Author: CA Priyesh Shah on MyIRIS

CA Priyesh Shah is a Chief Financial Planner and presently working with SRE Financial Planners.

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