19 May 2020

Hacking Kuvera “family account” for goal separation

tl;dr: Create “fake” family member profiles to keep short-term and long-term goals separate or to keep your debt/equity investment ratio intact.

Let’s say you’re investing for some long-term goals (10 or more years away). Simultaneously, you also want to save for some short-term goals (1 or 2 years away). Or you just want to park some money in some debt funds (such as ultra short term funds). Kuvera’s default setup doesn’t support these needs very well. (Maybe for a good reason? They have SaveSmart which is probably what one should be using?)

Cash in a sack bag
Photo courtesy: PickPik.com
Mixing of short- and long-term goals
Kuvera uses unified goal planning, which takes advantage of the fact that as years pass, you’ll be earning more but your needs will reduce (because, say 2 of your 6 goals are already accomplished). But what it also means is that you cannot use Kuvera as a “recurring deposit” for saving (not investing) for a short-term goal. When you add a short-term goal, Kuvera will ask you to add just a tiny bit to your existing (long-term) SIPs because unified goal planning is inherently like that. If you kept adding many such short-term goals—I don’t pretend to know what really will happen—but intuitively it feels like you won’t have sufficient time for the money to grow for your long-term goals. It feels safer to keep the long-term SIPs and short-terms SIPs separate.

Parking surplus money for a few months/years
Let’s say you have some extra money lying around. You cannot quite invest it because you know you’ll have to spend that money in a few months. Or you may want to put a portion of your emergency funds in ultra short term debt funds that give higher return than liquid funds. (Also something wise people advise you to not do. Debt funds are for giving stability to your portfolio; don’t chase returns without understanding the risk.)

Basically, you want to park some money in debt funds. The moment you do that, your goal-based investments’ debt/equity ratio gets out of whack. This can be confusing and if you aren’t careful, would make your portfolio less than optimal.

In search of a solution…
Making Kuvera ignore your short-term or parked funds is easy: go to the folio management page and hide the folios that have the short-term funds. But now you cannot keep an eye on those funds.

I looked for alternate apps to track these funds. I tried ET Money and MoneyControl. They had the main feature that I wanted: I can enter when I bought what funds for how much; they’ll show me the current value, daily change in valuation, etc. But their user interfaces were a mess compared to Kuvera’s clean and beautiful UI. I tried Goalwise, but they only support defining and tracking goals, not the “I just want to track these external investments” use case. Their UI was so cluttered I didn’t even have the desire to learn if I can use their app somehow.

After struggling through this for a few weeks, I suddenly thought of a solution: just add a new “fake profile” to my account. I have enabled Family Account feature on my account so I can track my wife’s and brother’s investments. Now I have added a fake profile (i.e. a nonexistent family member) to the family for tracking short-term goals and parked funds. Now that I have learned this trick, all my recurring deposits will be going to Kuvera. I hope I’m not making a dumb mistake here 😬

11 May 2020

Notes from ‘Happiness Unlimited’ #2

I have been watching 1 episode of Happiness Unlimited, a show where Mr Suresh Oberoi interviews Sister BK Shivani. Notes from the second episode ‘Stop Postponing Happiness’ that I watched today are here.

  • We have 2 choices: I’ll be happy when I achieve this, and I’ll be happy while achieving this.
  • We are not going to be able to lead our lives without goals, aims, and objectives. Because without goals, we’ll become very passive. I wouldn’t know where I’m heading.
  • It’s not about what has happened. It’s about what I need to do now, how does my state of being have to be. I have to take care of that. Otherwise I’m in the vicious cycle of negativity.
  • Whatever may be the situation, however challenging they may be, I am not going to get the solution unless I take care of myself.
  • Let’s say I’m a family of 5 people. And 4 of them are not well. They are ill. I want to take the responsibility of taking care of them, of healing them. I’ll only be able to do it if I’m fine. This is about physical health, but now you take the same equation to emotional health.
  • Happiness is an internal strength. Happiness doesn’t mean excitement. I’m not going to be jumping and dancing the whole day. I have lost my job; I am not excited about it.
  • My child has got less marks. My responsibility at that time would be first to take charge of my mind... fine... first I have to remain stable so that I don’t react, I don’t shout at him. I don’t upset him. Then my responsibility is to take care of his state of mind. Then my third responsibility is to take care that he studies and gets good marks next time.
  • The only reason a child commits suicide is because he is not able to face his parents after a failure. It’s not because he failed. It’s because he doesn’t want to see his parents unhappy. And he holds himself responsible for the parents’ unhappiness, because the parents conditioned him the whole year that we’ll be happy only when you do this.
  • Every individual’s life is based on 4 aspects: physical, intellectual, emotional, and spiritual. Like the 4 legs of chair we are sitting on. If I want to be successful in life, all 4 should be equally balanced.
  • It’s possible that a parent has not gone to school, but they send their child to the best school. It’s possible that a parent doesn’t eat, but gives food to the child. But it’s not possible for a parent to have his child happy without the parent being happy himself. You cannot make your child emotionally strong without being emotionally strong yourselves. That’s where the responsibility comes first on yourself.

6 May 2020

Analysing the health of mutual funds

What should a mutual fund investor ideally do? Study mutual fund documents first and then invest. What did I do? Bought some funds without much analysis or reasoning and then, after a few months, I am looking at fund fact sheets and trying to understand how well they are managed. I am saying this upfront because I want to highlight that I am just doing things haphazardly, including the analysis itself. I don’t know what all information one should look at in a fact sheet, and how to determine if a fund is doing well. With that caveat out of the way, let me get into what I found from my analysis.

As a newbie investor, Franklin India’s decision to shut down 6 debt funds was bizarre to me. That news made me realise how some mutual funds can be bad. I had noticed this Reddit thread before, but couldn’t understand what they were talking about. I didn’t try to understand the discussion because I hadn’t invested in any of those funds. After the news, I reread that post and read some more on the web. I started to get some idea on what fund attributes I could look at.

If monitoring the health of mutual funds is an important thing investors should do, there must be dashboards on the Internet… or so I thought. After failing to find such a dashboard, I decided I had to make one myself. I downloaded March 2020 fact sheets of all my funds and I summarised some key stats (click on the image to magnify):
Spreadsheet showing AUM, NCA, and % of risky debt assets of some mutual funds

This was more confusing than useful to me: of the 12 funds I had data for, 6 had negative cash! Many debt funds, including liquid funds, had exposure to sub-top-grade debts. Is every debt fund taking risk in the market then?

After a few hours, I decided to add data from February so I can see how things have changed over the course of March. This turned out to be a good idea. Now I was able to see a clearer picture:
Spreadsheet showing some mutual funds' NAV, AUM, NCA, % of risky debt assets, and change in the number of units held

The market was less crazy in February, and that shows up in the numbers:
  • Only 2 funds had negative cash. They also held a fairly low amount at -0.29% and -1.46% of respective AUM.
  • Other than Kotak Savings, exposure to sub-top-grade debt was also minimal. Nippon Liquid fund had 0.35% lent to unrated borrowers.
In March, uncertainty rose sharply due to Covid-19 lockdown. That is also reflected in the numbers:
  • Many investors have redeemed their debt funds: 30% reduction in AUM seems normal! (Remember, this was before the Franklin fiasco.)
  • Quite a few funds now hold negative cash, probably to accommodate the high number of redemption requests.
  • Risky debt has also increased across the board.
  • PGIM is the only fund house to exclusively hold top-tier debts; they are also the only debt fund managers to hold some cash in hand.
(One surprising observation from the data is that people have bought equity mutual funds while they have exited debt funds. Maybe they were rebalancing because it was the end of quarter?)
What are my takeaways from this exercise? I was fond of Kotak Savings fund because it looked so nice. Kotak web sites are so good, I just loved looking at this fund’s official web page. PGIM UST fund’s site looks okay, but it’s hardly impressive. Logging into PGIM’s investor web site also doesn’t work most of the time. Due to all this, I didn’t really like PGIM funds. Dumb mistake, I know! I was judging both Kotak and PGIM ‘books’ by their ‘covers’. When I look at my spreadsheet, however, I see how disciplined PGIM’s fund managers are, and how risky Kotak Savings fund really is.

If I hadn’t gone through this exercise, I might have sold the PGIM units and bought Kotak units instead. I am so glad I sat down and looked at the numbers.

1 May 2020

Legalese vs code

This morning, I had to read the text of one section of India’s Income Tax act. Unsurprisingly, reading the text and understanding it was not easy. The difficulty is so well known that there’s a name for the language used in such legal documents: legalese. As I was reading through the rather short document, I was reconstructing an internal version of the same document in my head. Only this internal version was easier for me to understand.

Suddenly I realised this practice of reading something complex and reconstructing it inside my head is something I had been doing for years. Reading legalese and making sense of it is not very different from reading legacy code and trying to understand what it does.

Understanding code is easier sometimes because experts have been steadily making progress in making code easier to understand. These include creating new languages that are easier to understand as well as coming up with ways to alter existing code to make it easier to understand (known as refactoring in the programming community).

Compared to lawmakers and lawyers, programmers are at a better place because programmers have the tools to help us simplify code. Less readable code is also culturally frowned upon.

Lawmakers, on the other hand, are stuck with imprecise human language to write precise laws. Inventing new languages for writing laws is not an option. Think of it as a surgeon using a kitchen knife to perform a surgery. It’s doable, but it’s very hard to be as precise as the surgeon would want to be. That’s probably why laws are so hard to read, understand, and interpret.

30 Apr 2020

“Children are seriously children for a decade. But for five or more decades after that, they will be your friend—if you're fortunate to like each other.” — Elaine N Aron in The Highly Sensitive Child

22 Apr 2020

How big a bag do you need for a 1kg gold bar?

I don’t often go to jewellery shops. The first time I was at a shop exchanging an old gold jewellery for a new one, I had a pretty novel experience. They took our old jewellery and melted it down to a small piece of gold. What was a relatively big piece of wearable shrank to a tiny piece of metal. I held it in my hand, and it was surprisingly heavy for its size! Of course it’s the same weight as the jewellery we gave them, but the smaller size made my brain expect something much lighter.

You can look up the density number on the web and see for yourself. However, I think the image below communicates gold’s density a lot more intuitively. (This is a screenshot from “Coins vs Bars“ video of Strategic Wealth Preservation YouTube channel.) The larger bar in the picture weighs 1kg despite being so small! This is so novel, I want to get a 1kg bar and just keep it with me, like a fancy toy. 😬

Picture showing a 10 ounces (about 283 grams) gold bar and a 1kg gold bar

20 Apr 2020

Capital gain tax and reinvestment (into residential property)

I just came across something interesting: apparently if you sell some long-term asset, such as shares/mutual funds or house, and put that money into buying a residential house property, you don’t have to pay capital gain taxes on the sale. Quoting ClearTax article on Capital Gains with some edits:
Exemption under Section 54F is available when there are capital gains from the sale of a long-term asset other than a house property. You must invest the entire sale [proceedings] to buy a new residential house property to claim this exemption.
Making it apply only to residential property is limiting: you’d still have to pay capital gain taxes when switching from one mutual fund scheme to another or while rebalancing your portfolio by selling equity/debt shares and buying the other. However, I think I should still be happy about this exemption for these reasons:
  1. This is better than nothing. Governments usually subsidise only some kinds of investment; investing in residential properties is a popular one.
  2. This can actually be useful to me. I have been toying with the idea of selling some equity shares and putting that money into buying a house. Saving some tax in the process only makes the idea more attractive.
  3. While some of us might be unhappy that for some capital reinvestment there is no tax break, we should keep in mind what Aashish Somaiya of Motilal Oswal Asset Management Company said in a recent interview: “tax is a happy incidence; you have tax when you have a return”. Rather than fretting about the 20% tax, one should be happy that their investments have made them the remaining 80%.
PS: This is no tax advice. Neither am I qualified to provide tax advice. Even if I were to take advantage of this scheme, I’d consult a professional tax advisor before executing the plan.
Update (1 May 2020): I was re-reading information on this topic and was dismayed to see mentions of “new residential house property” in ClearTax:
A new residential house property must be purchased or constructed to claim the exemption
This was a shock to me because the house we were considering to buy was not a new construction. Worried if I might not be able to take advantage of this tax exemption, I decided to read the actual text of the law itself, rather than interpretations of it, to see for myself what restrictions apply. Going through the text of Section 54F of the Income Tax Act, it’s clear that the exemption applies to both newly constructed and old houses. Phew!

3 Apr 2020

How I blew an opportunity to buy equity funds for cheap

Equity investments are losing valuation due to the market crash. Depending on whom you ask, what to do in such a situation varies. The advice I took was to maintain asset allocation and rebalance when the allocation is off.

It’s not obvious how maintaining asset allocation can help during a market crash like this. But it’s not hard to understand if you think about it a little. Let’s say your desired asset allocation is 30% debt and 70% equity. When equity loses value and debt increases in value, your portfolio could get to something like 38% debt and 62% equity. The advice is to sell your (potentially overvalued) debt and buy undervalued equity at a cheaper price. As the equity market recovers, you would make some profit.

I did have a desired asset allocation before market rout, but due to some (self-induced) complexity, I had messed it up. I was over-invested in equity than I had thought. I discovered that mistake when I was taking a deeper look at my portfolio. I also found out that equity losing value had brought my portfolio down to the desired allocation. I don’t have to do anything for now; the market has rebalanced my assets. 🤦🏾‍♂️

But that also means that, because my asset allocation was off, I am not able to buy more equity at a cheaper price now. The equity I hold were bought at a higher price and I am holding onto the loss. It’s a lost opportunity.

While it’s true that nothing stops me from buying more equity now even if it means my asset allocation will be off for a while. I have decided to not do that because that’s essentially timing the market. There’s no guarantee that the market will recover after my equity purchase. Debt funds, at least in India, are not really going up in value either. Because many companies are at the risk of going bankrupt, investors are not keen to buy debt funds as well. Because demand is fairly flat, the value is also mostly flat. By selling my debt funds now, I may not be selling overvalued assets.

Moral of the story: asset allocation is actually important. Assets being off balance could lead to lost profits.

20 Feb 2020

Choosing mutual funds to invest in

You want to invest in mutual funds, but you don’t know which of the thousands of available funds is right for you. The easiest thing to do is just look at historical returns and pick one that has performed well in the past. That’s pretty much what I did when I started investing in mutual funds a few years ago. Unsurprisingly, the returns weren’t as mind-blowing as I had expected.

Fast forward to 2020, I am now a Kuvera customer. (Plug: join using my referral code JK1P3 and get 100 Kuvera coins for free.) In addition to providing a well thought-out investment platform for free, Kuvera has written quite a bit about how to think about investing and wealth management. From the experience using Kuvera and reading about the thinking behind their decisions, I think I am starting to see some of the intricacies in choosing a good fund.

In October 2018, Kuvera changed their recommended funds. In October 2018, they started recommending DSP Equal Nifty 50 instead of IDFC Nifty. I compared the facts and performance of these 2 funds, and it was surprising how unattractive the DSP fund looked to a novice investor like me.

In the past year, the IDFC fund has given an impressive 15.25% return while the DSP fund has given a mere 6.69%. The DSP fund’s return is below the benchmark return, actually!

Comparison of past 1 year fund performance. IDFC Nity has yielded 15.25% returns while DSP Equal Nifty 50 has yielded only 6.69% returns.

The fact that the DSP fund is underperforming the benchmark is reflected in its “info” statistic. The IDFC fund has 0.8 for “info” while the DSP fund has -0.04! The IDFC fund wins in other attributes too: it has a cheaper expense ratio (0.24% vs 0.38%) as well as barely less volatility (14.14% vs 14.25%).

Fund statistics comparison between IDFC Nifty and DSP Equal Nifty 50

How then is the DSP fund better than the IDFC fund? They mention 3 reasons:
  • Lower concentration of financials
  • Historic EW premium
  • Buy low–sell high in a systematic way
Of these, I don’t fully understand the “buy low–sell high” point, likely because I haven’t read the fund documents.

Lower concentration of financials
This becomes obvious if you look at the stocks held by these funds. The IDFC fund holds HDFC Bank shares for 10.6% of its value. In other words, you would be buying HDFC Bank shares roughly worth ₹10.60 if you were to buy the IDFC fund for ₹100. Intuitively, that is not something you’d want to do if you want to diversify your investments. But there’s more than just intuition.

Top 10 holdings of IDFC Nifty and DSP Equal 50 funds

Historic EW premium
I think the “EW” refers to “equal weight” here. The DSP fund distributes the money roughly equally between every share in the Nifty 50 basket. While intuitively this is a good diversification strategy, apparently this has yielded better returns historically. Gaurav Rastogi, CEO of Kuvera, states in a comment:
The reason we choose DSP Equal Weight Nifty fund instead of a plain vanilla Nifty index (IDFC) fund is because Equal Weight indices have outperformed their plain vanilla indices globally and in our back test in India as well on a risk adjusted basis.

What are my takeaways from this?
  • Past returns are useful data, but comparing the returns of 2 funds may not give us the full picture.
  • Understanding how a fund is managed such as how they choose shares, the objective of the fund, etc are important. Investors should understand what the fund manager does with our money.
  • Because most of us don't have the time or skill needed to study the mutual fund options, following the recommendations of good financial advisors is an easy shortcut to picking good investments. (How you tell if an advisor is good, I have no idea!)

3 Feb 2020

Knowing where you’re headed

It’s far more productive to make tiny progress in solving the real problem than making huge progress in solving an irrelevant problem.

23 Jan 2020

Fear of success

Just like how one fears failure, fear of success is also a real thing. Maybe it’s just the fear of unknown, and you haven’t seen success that often.

No matter what the cause is, fear of success can be terrifying!

3 Jan 2020

Communication effort

If the sender of a message spends time crafting the message, making it easier to read, readers can understand it without much effort.

If the sender did not spend as much time in crafting the message, each reader would have to spend more time/energy in understanding the written message.

That should be obvious to everyone. Here’s my random thought: maybe, the effort it takes to communicate something is fairly constant. What varies is how much of that effort is contributed by the writer vs the reader.