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D.Muthukrishnan (Muthu), Certified Financial Planner- Personal Financial Advisor

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It’s simple but

Posted by Muthu on February 23, 2012

‘Gokulam Kadhir’ has published an article with my contribution in the current (February) issue. Current issue of ‘Nanayam Vikatan’ too carries my contribution. Whether you happen to read these magazines or not; I just make it a point to keep you informed:-)

I was chatting with one of my friend recently. The topic was about meditation. Since I sort of meditate with some regularity, he was asking what I do and what benefit I get out of this. I simply sit in a chair with eyes closed for 45 minutes or an hour in the morning. I keep the alarm at the time I want to complete the meditation. Not that I go somewhere deep inside forgetting even the time; it’s just that if I don’t get keep the alarm, there is a tendency to keep opening my eyes and see if 45 minutes is over:-)

I simply keep looking at the thoughts or keep my attention on the breath during the above period. That’s it. During the day also, I take some moments to keep attention on the breath. He asked me whether I’ve become a better person. Definitely not. I’ve not got worse:-) Doing this occasionally helps me to not completely get identified or carried away with the mind and at times feel some space inside.

He said that the process look too simple and also with out any tangible benefits. How can meditation be this simple? If you don’t become a better person or get any benefits, then why even meditate? I told him that he is a ripe candidate for many courses and teachers. There is so much guaranteed benefits in their literature with no disclaimers:-)

When it comes into personal finance and investments too we like complexity and more activity. Complexity and activity gives us a sense of doing something better.

There are individuals and families who have 20 to 30 bank accounts! From what I understand some do this for diversification, some to oblige friends and relatives working in banks, some other keep carrying their salary accounts from different employment without closing them and have different transactions happening from different accounts.

It is enough if someone has two accounts – one for expenditure and outflows and other for investment, insurance etc. The former can be tagged as a salary account and if the employer insist on opening a separate salary account; the same can be closed after leaving the employment. It is always better to formally close the bank account by giving letter than leaving it dormant. It’s fine if someone wants more than 2 accounts for their own reasons, but the kind of numbers some people have amazes me. Is there anything wrong with this? No. But it makes life that much more difficult and painful.

Again there are people who have 20 to even 40 insurance policies. These are cocktail of endowment, whole life, ULIP, money back and rarely some term in it. There is all kind of crazy ideas that a policy would start paying for itself from x year (it’s your own accumulated corpus which is getting debited), from the age 45, one policy would mature for each year for next 35 years giving cash flow every year and so on. With this many policies, each having quarterly premiums, tracking these itself becomes a task for every weekend.

Most people strive hard to keep fulfilling their insurance commitments. Any increase in income is channelised towards new insurance policy and they further strive hard to keep pace with the commitments. Despite earning good income, there is no free cash flow. I feel that these people work for the sake of insurance companies rather then their own families:-)

We’ve repeatedly shared our view that other than term insurance; any other kind of life insurance is sub-optimal. What is the fun in getting around 5% p.a returns when the long term inflation itself is around 6% to 7%? Why look at returns when the purpose of insurance is covering risk? Even term cover; if you have from one or two companies it is sufficient. As long as you’ve given all relevant information and facts, a claim cannot be denied. Even in the case of denial, one can appeal to Insurance Ombudsman which is customer centric and not insurer centric.

Same is the case with FDs. If you’ve 20 lakhs in FDs, it is better to divide into not more than 4 FDs. So when there is an emergency, you can break one or two depending on the need. I’ve seen people having more than 20 FDs totaling Rs.10 lakhs. We love to complicate things.

I was speaking to a friend last week. He has invested 12k per month into 12 different MF schemes. This has been suggested to him in the name of diversification. MF itself is for diversification as each MF scheme invests in many stocks according to its mandate. In my opinion, for the quantum he invests, just two funds would do. I’ve seen individuals and families having between 30 to 70 folios and schemes. No wonder we find life difficult.

It is not necessary one should have all the good funds in the market in his portfolio. A limited number of good and consistent funds should do. Just because I know very many good funds; I don’t have each one of them in our family portfolio. I follow the same yardstick I apply for you. For example, having too many large cap funds may end up in we owning the same set of stocks. So diversification beyond a point does not make any sense. Also there is a tendency to think that only what is popular is good. This is only a perception and has no reality behind it.

I see share portfolios too running into 50 stocks. One need to be a full time fund manager to keep track of these companies:-) The sad part is that people buy these simply based on what the brokers said. They have no clue about what the company produces, its profitability, why did they purchase it, did the price paid by them is a good one, how long they are planning to hold, how they monitor the company etc. That’s why only very few people make money from directly investing in stocks.

Personally I make it a point not to invest more than a dozen scrip (companies) for our family. After I do all the required analysis from information available in the public domain, I write (type) in one or two sheets the reasons why I want to buy a scrip at that price, what can all go wrong (there is no stock investment which is non-risky), what is my margin of safety, the probability of loosing the capital etc. and then only buy it. Having concentrated holdings ensure that I take the capital allocation seriously and if I’m right few times (which I hope), I would make good money.

Investing directly in stocks is not everyone’s cup of tea. Unless one has time, inclination and ability; the job is best left to fund managers.

There is a tendency to keep changing the funds based on what is performing well in the last quarter or so. This would lead us to no where except constant churning of portfolio. Unless something has gone wrong with fund or fund house, periodic under performances should be acceptable. As fund management is an art and not a science, these would inevitably happen. Only prolonged period of under performance or certain other reasons should warrant change. That’s why we suggest a change in portfolio only if required. Please understand that monitoring the portfolio is also activity where as the perception at times is that suggesting change only implies activity. Again perception need not be the reality. Activity for the sake of it offers no value addition and at times can even be value erosion.

Though I may repeat it; I’m really glad that most of our clients share the same investment philosophy. It is good to work with them and eventually produce good results too.

Investing regularly, not monitoring frequently, proper asset allocation, not worrying about price fluctuations in the short run as the value created at the end of committed holding period is what really matters; this would ensure you reach the goal. It’s simple in practice provided we tune our psychology accordingly. We’ve natural propensity to make things complex. But we can practice not be complex. It’s simple:-)

Someone asked me other day, if my investment philosophy would change if have Rs.100 crores. I thought about it and told him that I don’t see any change in approach; except more work for my auditor in terms of advance tax, maintaining accounts etc. and writing an earlier and stronger will as the amount involved is huge. Neither he nor I may ever make Rs.100 crores in life. Hypothesis is also not reality. Remember writing essay in 6th standard as to what I would do if I become prime minister?

2 Responses to “It’s simple but”

  1. amol said

    always loved reading your articles…taking the learning and implementing them
    thanks Muthu!

    please write more often…!

  2. mangesh said

    this is my first read of your article…
    liked it!


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