Understanding Emergency Funds

An emergency fund is a safety net that you should be able to access quickly, without hassle. By definition, you shouldn’t spend more than an hour to get this money. Two key features define an effective emergency fund:

1. Ease of Access – The money should be available almost instantly.
2. Reasonable Returns – While safety is the priority, the funds should still earn some interest.

In terms of speed, Debit Cards are the fastest, followed by Fixed Deposits (FDs). Debt-based mutual funds can also be efficient, but some are still in the T+1 category, meaning you may need to wait a day or two for withdrawals.

This “time gap” can be easily solved when combined with a Credit Card—you can spend instantly and settle the dues once your redemption is credited. Therefore, it makes sense to classify emergency funds into two buckets:

• Fast Access – FDs, Debit-linked accounts, Wallets.
• Relatively Slower (T+1) – Debt Mutual Funds, Arbitrage Funds.

Once this classification is clear, parking emergency reserves in debt mutual funds becomes an easy and rational choice.

The Problem with Debt-Based Instruments

Debt funds and FDs have one drawback – Taxation. No matter how long you hold them, the gains are taxed at your income tax slab rate.

• If you are in the 30% slab, your post-tax returns shrink considerably.
• For those in the 10% or 20% slab, this may not hurt much.

This is where Arbitrage Funds enter the picture as a smarter substitute.

Arbitrage Funds – Equity Tax, Debt-like Safety

Arbitrage Funds are classified as equity funds for taxation purposes because they invest primarily in equity instruments.

• If redeemed within 1 year → Short-Term Capital Gains (STCG) tax of 20% applies.
• If held for more than 1 year → Long-Term Capital Gains (LTCG) tax of 12.5% applies.

This makes Arbitrage Fund particularly attractive for investors in the 30%+ tax bracket, as their tax outgo reduces drastically compared to debt funds.

How Do Arbitrage Funds Work?

The core idea comes from the age-old practice of arbitrage—profiting from price differences in two markets.

Example: Buy diesel in Goa where it is cheaper and sell it in Maharashtra at a higher price to pocket the tax difference.

In financial markets, the concept is applied to equities and futures:

1. Spot Market → Buy the stock at today’s price.
2. Futures Market → Sell the same stock in the futures contract at a slightly higher price.

Since futures usually trade at a premium to spot price (due to interest rates, dividends, and market expectations), the fund locks in a risk-free spread.

This strategy:

• Eliminates market risk (since the buy and sell are simultaneous).
• Provides stable returns (usually between 5%–6.5% annually).
• Enjoys equity taxation benefits.

Why Arbitrage Fund Is Safe

Arbitrage Funds are often misunderstood as risky because they deal in equities. However, unlike typical equity funds, they do not speculate on market movements.

They buy and sell simultaneously, capturing the price difference without exposure to volatility. This makes them:

• Low-risk like debt funds
• Tax-efficient like equity funds

When Should You Use Arbitrage Fund for Emergency Money?

Arbitrage funds are ideal if:

• You are in the 30%+ tax bracket
• You don’t need instant liquidity (T+1 settlement works for you)
• You want better post-tax returns than short-term debt funds or FDs

For investors in lower tax brackets, short-term debt funds or FDs may still make more sense.

Final Thoughts on Arbitrage Fund

For investors in higher tax brackets, Arbitrage Funds are an excellent substitute for debt funds—combining safety, stability, and tax efficiency. When used smartly as part of your emergency fund strategy, they can significantly improve your post-tax returns without compromising on safety.

The post Arbitrage Fund vs Debt Fund: Smart Emergency Planning appeared first on Fleek Finance.

Individual Stock owners would know that even then while the market rallied, some stocks continued to fall. That is the story of stocks. In the long run, they always reach their right price. As Benjamin Graham wisely said, “In the short run, the market is a voting machine but in the long run, it is a weighing machine.”

Sentiments drive stock prices beyond fundamental valuations, but eventually, the true valuation emerges. So, the voting machine showed all green in mid-2024. What happened then in the second half? The weighing machine triggered. Investors started to pay only as per the true weight of the stock. A stock can fly indefinitely on sentiments. It can stretch all the imagination of valuations, driven by sentiments. However, eventually the weighing machine has to come in to decide the right valuation. This is what happened in second half. Sentiments by design are always extreme.

While we saw one extreme in 1st half of 2024, we saw another extreme in the second half. As seen in H2 2024 (July to December 2024), investors started pricing stocks based on their intrinsic value rather than speculative sentiment, reinforcing the ongoing market correction and reshaping investment strategies for 2025.

The Sentiment Trap in Investing

Investors are generally focused on the buy side, choosing businesses based on their potential. The problem is that they are also trapped by the sentiments and end up paying more than the intrinsic value. That is why when the sentiments change, suffering is higher because in the other extreme, prices tend to go lower than the intrinsic value. Most investors may not be able to withstand this trauma of wealth erosion. I have always been of the opinion that investors with limited knowledge of Business Fundamentals should stay away from picking stocks purely based on relative price or tips.

Mutual Funds vs. Individual Stock Investing

Mutual Funds have corrected equally or even worse. But, the stress of falling market is borne by the Fund Manager and investors are insulated. While, they see their Mutual Funds portfolio falling in value, they can continue to hold because they don’t see the prices falling by 50-80% of underlying stocks. In this Market fall, there are stocks which have or will correct by those level of prices. Most PSU stocks which had their golden run of valuations in 2024 have now corrected by more than 50%. An Individual Investor would feel traumatic at these kind of falls and may not now whether to sell or to stay. Many choose to stay anchored to their buying price and as the joke goes, ‘become long term investors’.

As for Mutual Funds, at portfolio level, they are normally aligned with their benchmarks. Most Active fund managers would do some churning and at portfolio level manage to ensure that the fall is not too high compared to their benchmark.

Large Cap vs. Mid Cap vs. Small Cap Stocks

Now, lets look at Large Cap/Mid Cap/Small cap as categories.

• Large Cap Stocks: Some, like HDFC and Asian Paints, did not participate much in the bull run.
• Mid and Small Cap Stocks: These soared in 2024, with the Small Cap Index reaching an all-time high. The prevailing sentiment was that the India story is unstoppable.

Everyone believed that the India story is here to stay. Now, like everything else, the mean reversion has happened and the narrative has shifted to, ‘India story is over‘.

What Triggered the Market Correction?

So, what happened here and how should you deal with it? In the second half of 2024, there were some fundamental issues with Indian Macros. This resulted in poor earnings by many businesses for past couple of quarters. The poor earnings meant changing sentiments and the valuations fell down as Earnings didn’t match the price being paid. So, partly the fall was triggered by declining earnings. A part of it was sentiment.

Looking at the actions taken by Govt and RBI, we can say they are staring at a possible recession in Economy. Normally, Tax cuts and Interest cuts are expansionary policies aimed at giving money in the hands of businesses and People. The expansionary policy can be inferred to suggest that we have a case of slowdown in Economy which policy makers are trying to tackle.

With these actions, we should see a revival in the Economic cycle. Will it happen immediately? May be not. The outcome of these measures will take few quarters to trickle down. But, the markets are always ahead of the economy. Like the fall which happened without any visible signs of recession. The rise will also happen before the actual recovery. the voting machine, i.e. Market will always play ahead of the true state of Economy.

The prices have corrected for most good businesses and there is always a time in the market when the price becomes too cheap to ignore. Every market has a buyer and a seller. When buyer finds a deal profitable, they buy at any fall. When a seller finds a deal profitable, they sell at any rise. Currently, we are seeing sell at rise phenomenon and the sellers are having fun. The Investors will suffer here because they do not have the ability to profit by selling. If you are an investor who bought some stocks, you cannot do much in this downward rally.

All you can do is, wait for your business to outperform and trigger change in business-specific sentiment. That is where knowledge of valuation helps when you can determine whether you paid the right price and if there is a visible growth in sight. If you are stuck with a business that is slowing down or there wont be growth in near term, the price can keep correcting due to negative sentiments. This market fall is a mix of business and macro sentiments. That why, the correction will be deep and also a longer one. There wont be a change in sentiment soon and we may see a long time correction even after the prices have fallen already.

Investment Strategy in a Falling Market

What should you do?

1. For Mutual Fund Investors

If you are a Mutual Fund investor, you should continue to bump up the SIP this year because you are getting good valuation for your units. You would be able to accumulate more units this year compared to last year. When the market turns, you will reap the benefit because you bought it cheap. Do not try to time the market or wait for the tide to turn because nobody knows. Historically, such falls have led to time correction of at least a year. You will have a long time to continue to add at cheap valuation. A disciplined SIP approach ensures that investors take advantage of market correction to buy at attractive valuations.

Read More: How to Build a Diversified Portfolio

2. For Direct Stock Investors

If you a direct stock picker, you should re-assess the business fundamentals and see if you paid the right price and whether your stocks can de-value further. If there is a lot of value erosion and you do not see recovery in business soon, you may have to take a hard call of booking the loss in a particular stock. Since, we are approaching end of financial year, you can console yourself by calling it a ‘Tax harvesting’ Opportunity to offset the profits booked in 2024.

Read More: How to Choose the Right Investment Strategies for Beginners

That being said, for an investor time is the best asset. If you can avoid doing nothing which means you are not in need of money, just do nothing!! An investor who slept entire 2008 wouldn’t even know what happened!!

If time is not on your side, i.e. you put your emergency funds in Equities or you went overboard looking at growth in 2023-2024, you should learn from this. Its the job of a Financial Advisor to guide you on Asset Allocation. It is important to understand your risk profile and take a call according to your situation. A Personal Finance Advisor can help you assess and act accordingly.

Final Thoughts on Market Correction

The current market correction presents an opportunity for disciplined investors. Whether through SIPs in mutual funds or selective stock picking, those who remain rational and long-term focused will benefit when the market cycle reverses. Patience and strategy are key to navigating such downturns successfully.

The post Market Correction 2025: Investment Strategies for a Volatile Market appeared first on Fleek Finance.

Before diving further, lets understand some common terms in use for Mutual Funds.

Benchmark Index: The Foundation of Active Mutual Funds vs. Index Funds

Benchmark Index is a bucket of stocks, created by BSE/NSE and acts as a window to Markets. It tells you broad picture of the market by taking a bucket of 50-100-200 stocks as a sample. This is the foundation for understanding Active Mutual Funds vs. Index Funds. This bucket itself keeps undergoing change with time. Statistically, the index gives you a clear picture of what the real time market sentiment looks like. For example, global audience views India Markets via NIFTY/Sensex indices. The BSE/NSE decides the list of stocks and their weightage in the index composition

If a fund manager were to invest in such a basket, his/her job was relatively easier. In this case, the system decides for them what to buy and how much to buy. This also takes away the risk of ‘Fund Manager skill’ and automates the process. These benchmarks guide Mutual Fund Managers and help investors judge, how their funds are doing against fixed buckets.

Understanding the Cost Differences in Active Mutual Funds vs. Index Funds

Total Expense Ratio (TER) and Its Calculation

The Total Expense Ratio (TER) is the Annual Fee that an investor pays to the Mutual Fund. It covers operating expenses for the Mutual Fund. These expenses include-

• management fees,
• administrative costs,
• marketing expenses, and
• other operational costs needed to run the fund

An investor will not notice these charges because it is built into the NAV. The daily NAV is the fund value minus the expenses.

Formula for Total Expense Ratio:

Total Expense Ratio= Total Fund Expenses / Total Assets Under Management (AUM)​

This means the higher the expense ratio, the lower the investor’s net returns.

Why Do Expense Ratios Vary Across Funds, and Should You Always Choose the Cheapest One?

Some funds invest in special assets where the operating charges are higher. For example, A fund investing in US Markets will have a higher expense ratio, due to higher brokerage and transaction charges. It can be expensive due to Fund Manager skill. This is where the question of paying extra for activity comes in.

What else does the Total Expense ratio include?

Additionally, TER may include a Mutual Fund ‘Distribution Fee’, which is the money transferred to the Distributor. A few years ago, Asset Management Companies started providing ‘Direct Funds’ instead of regular one to take the ‘Distribution Fee’ out. Almost all Mutual Funds come with a direct and regular plan. The Total Expense ratio includes the Distribution Fee in case of regular fund. This is waived off for direct fund because you don’t buy it through a distributor.

What does an Investor get from a Mutual Fund distributor having paid a higher Expense ratio?

Ideally, The distributors should inform the clients about this fee. Some are doing it diligently, others may be not. One also needs to keep in mind, this fee is directly related to AUM. As your fund size grows, the distribution fee also grows.

A distributor must advise you on your portfolio by providing you information on funds you own. Re-balancing by switching of funds in portfolio can help improve the returns. If a distributor does not add this value, you may want to switch to direct funds. A DIY model is very popular these days because of availability of Direct funds and cheaper Platforms. This has it own disadvantages if not done correctly due to un-advised and uninformed decisions. Especially in a market scenario like current one, this can become trickly and a need for Advisor arises.

Index Funds come with Cheaper Expense Ratio due to Simplicity

A fund Manager of Index funds will simply invest in stocks as per the benchmark recommendation. For example, a NIFTY Index fund would contain all the NIFTY 50 stocks with weightage as per the index. Index Funds come with cheaper expense ratio due to their simplicity.

In their Accumulation Phase, Investors should focus on their primary income more than returns on investment. So, a minor increase in Expense ratio wouldn’t matter much. Index fund is advisable sometimes for peaceful investing as well as cheaper cost. It is peaceful because there are fewer parameters to make it volatile. It just goes based on overall market sentiment.

Check out some Index funds and their expense ratio. As you see, Index funds are cheaper in management. Hence, they come with lower expense ratio compared to actively managed Mutual Funds. An active Mutual Fund charges higher expense ratio in the pretext of generating better returns. We will see later that the data suggests only ~20% of the funds in the Mutual Fund universe beat the Index.

Continued under-performance compared to benchmark indices.

Let’s look at some research data. This SPIVA (S&P Indices Versus Active Funds) India scorecard from 2023, presents a gloomy picture for Active Fund Management:

Large-Cap Funds:

a) 1 year period: The S&P BSE 100 gained 23.2% in 2023, and 51.6% of active managers under-performed the benchmark over that period.
b) 3 to 5 years: Under-performance rates were significantly high over the three- and five-year periods, at 87.5% and 85.7%, respectively.
c) 10 years: Active managers produced relatively better results over the 10-year period, with the under-performance rate dropping to 62.1%.

Mid- & Small-Cap Funds:

a) 1 year period: The benchmark for Indian Equity Mid-/Small-Cap funds, the S&P BSE 400 Mid-SmallCap Index, rose 44.0% in 2023, and 73.6% of active managers under-performed the index over that period.
b) 10 year period: The story for longer period is slightly different from large cap segment. Equity Mid-Small-Cap funds fared the worst in the long run, with 75.4% of them lagging the S&P BSE400 MidSmallCap Index over the 10-year period ending December 2023.

Going by the data presented, most active funds are under-performing the benchmark index. So, why do Investors pay Fund Managers extra in the form of expense ratio, in spite of under-performing? Aren’t the investors better off doing Index fund instead? This also makes it simpler for them as there is less to track and less expense too. It is best to take the money out of these funds.

You would now question whether a high expense ratio of a Mutual Fund is justified. If the Fund Manager does not generate higher returns by managing it actively, why pay high?

Do All Mutual Funds Underperform Their Benchmark?

Check the output list below (Based on data till December 2024). We found 22 Mutual Funds, that stand out in terms of returns against their benchmark. We mined through around 150 mutual funds and arrived at these funds which beat benchmark handsomely across different time frames. These funds have a return greater than the benchmark in 1 year, 5 year and 10 years time frame. Alpha here is simply the difference of fund return from the benchmark return.

Notice, the alpha going down for regular funds because of the extra spend as expense ratio, compared to direct funds. Only 22 of the funds managed to positively beat the benchmark index on a longer time frame. This is not to suggest that returns should be the only benchmark to judge the performance. There are other factors too. But, going purely by returns, there are very few who manage to beat the benchmark in a long term basis. This is not to say we should not choose the other funds. With right allocation and rebalancing, many funds can generate better returns.

Should You Choose Index Funds Over Active Mutual Funds?

Advantages of Index Funds

• Lower expense ratio (typically 0.1%-0.5% vs. 1.5%-2.5% for active funds).
• No fund manager risk – purely tracks the market index.
• Less stress – fewer variables to monitor.

When Active Funds May Be Worth Considering

• If a fund has a consistent history of outperforming the benchmark.
• If the extra cost is justified by better risk-adjusted returns.
• The Fund Manager quality based on their track record.

How to Pick the Right Mutual Fund?

1. Eliminate 70% of underperforming funds based on long-term SPIVA data.
2. Choose Index Funds for simplicity and cost-effectiveness.
3. If opting for active funds, pick only those with a strong track record over 10+ years.
4. There are good resources online which measure the risk adjusted returns ratios to assess quality of funds.
5. You may also want to check Portfolio turnover ratio and the asset allocation to understand better.

Final Thoughts: Making the Right Choice with Active Mutual Funds vs. Index Funds

After looking at various expenses in Mutual Funds, some may move to direct stocks to save the cost. Is it that simple? Do we switch to self-medication to avoid paying fee to a Doctor? Are we expecting everyone to become an expert Fund Manager? Do you think, with your skills, you will beat the Index while ~80% of the expert world can’t? If that is not the case, why get into that trap for saving that extra 1% Expense ratio? If cost is a concern, go for cheaper index fund. Alternatively, switch to a better managed Fund which has consistently generated better returns.

Effective financial planning helps investors make informed decisions about choosing between active mutual funds vs. index funds, ensuring long-term wealth growth. By becoming more informed, you can save on the distribution fee by buying direct funds instead of regular. This is another way to improve your returns. That would mean, you should do your diligence and understand which fund to pick.

The post Active Mutual Funds vs. Index Funds: Costs & Performance Guide appeared first on Fleek Finance.

When people talk about diversification, normally it is from returns perspective. But, at the core of it is managing risk. We diversify because we want to make sure that price fluctuation in individual asset should not impact the overall portfolio. A perfectly diversified portfolio is one where we have inversely correlated assets, i.e. price of one asset grows if other falls and vice versa and on an average level in long term, we manage to generate good return at portfolio level, while managing the risk.

Portfolio Basics and the Need for Diversification

The concept of diversification applies even at single asset class category level too, like Equity. So, if you want to buy some stocks like a Fund Manager, there is a portfolio of stocks which needs to be constructed to ensure that the Equity portfolio is well diversified and we are able to get benefit of different businesses while also mitigating business risk. We will discuss Equity portfolio sometime else. For now, we focus on a wider portfolio consisting of different asset classes.

As you know, there are various asset classes. Typically, investors classify an asset based on its risk category. Risk is directly proportional to returns and hence the returns generated from the asset also depends on amount of risk.

There are different views on definition of risk. For the sake of simplicity, we will define volatility as risk. For example, if an asset price changes by 5-10% every day, it may be called risky because potentially one may make losses in such an asset. If another asset grows at a consistent pace and never falls, it is the least risk or zero risk because potentially there is never a loss. The risk of volatility can also be associated with liquidity or mismatch of demand/supply. When there is huge demand and not enough supply, you would see an asset price rise exponentially. Like, we see in bitcoin for example. Due to volatility, one may call it risky.

To summarize, we want to diversify to have risk adjusted returns which makes the entire portfolio grow consistently while managing risk at individual asset level.

Asset classes and the Risks associated

Lets look at different assets classified broadly based on risk for a diversified portfolio. The risk itself may be caused due to liquidity, credit default, market, business, macros and many other factors.

1. Fixed Rate Assets:

These are fixed income assets where the price appreciation is pre-decided. For example, Bank FDs, Government Bonds, Liquid funds etc. The important thing to understand here is Interest rate. You can understand Interest rate as the fixed price you get for sacrificing your present cash in hand. Money used today is always costlier than used tomorrow. If one wants to borrow it from me, I would demand an interest because I am sacrificing my present. Investors rent money today to gain interest for tomorrow.

Banks give away money as a loan to business as debt and in return, earn interest. As an investor, we deposit money in bank to earn interest. This is normally at a fixed rate based on the dynamics of a country and the central bank. Broadly, the rate is determined by inflation. That explains, why interest rates differ from one country to another.

This is an asset class with almost zero risk. I use the word ‘almost’ because there is always a risk of default in this class. We take sovereign guarantee as a word from God and believe, it will never default. But, we have seen banks default in the past and it can always happen. So, there is a minor risk which you take and that gets added to your return. Banks borrow money from RBI at certain rate and make profit on it. They also borrow from investors and pay them 1-2% higher return. This takes into account inflation and default risk. In Indian context, this returns range from 7-11% depending on the default risk involved.

If you lend it to some unsecured category individual, as some apps like Cred allow, you may get a little higher return. Some Corporate Funds may give you 11-12% return because of the extra risk taken.
Always remember, returns never come without risk. So, if you are getting 1-2% higher, remember the risk you are taking. Never buy the story of risk free return in a fixed income product unless it is a Bank FD or Government bonds. As the famous quote goes, ”In God we trust. All others must bring data.”

2. Gold

This is India’s favorite asset class. Everyone loves the yellow metal and tell stories of high returns it has given. Gold is an asset equivalent to Dollar and you can call it a global currency. Of course, there is a price change due to demand/supply. Normally, this is used by all central Governments to increase foreign reserve and there is always demand/supply mismatch for fixed amount of gold available on earth. Whenever there is a mismatch in demand/supply and there is depreciation of buying power of some currency, the gold price will appreciate. In Indian context, whenever you will see depreciation in value of rupee v/s dollar, gold prices will appreciate. Globally Gold price will appreciate depending on global demand and supply.

Based on the data available by Forbes India for past 25 years, Gold has grown at 11-12% per annum in rupee terms and has been a consistent compounder, helping individuals beat inflation largely and achieve returns better than Fixed income category. There is no liquidity risk in Gold as such since there is enough buying and selling options available. An investor can buy Gold in Physical or digital form via Mutual Funds. Government of India has discontinued fresh selling of Sovereign Gold bond. SGB was a good wealth creator for many in recent years because of it being a combination of asset price appreciation and also regular income. Some amount of Gold in your portfolio is good to keep it shining.

3. Real Estate

Land is another asset available to the world in limited quantity. The price appreciation here depends on demand supply and it is always a local phenomenon. For example, price appreciation in Pune may not be same as Indore, purely in percentage terms. Broadly, this also fits into 10-12% returns to an investor in very long term after taking different expenses into account. The real estate returns are tied to liquidity risk. The biggest risk for an investor is not being able to sell when you want. So, many would classify this as a ‘Use Asset’ for people and not really an investment because you simply buy a house and live there, effectively saving on the growing rental cost.

An individual should consider this as an asset in the diversified portfolio, purely from housing point of view. Getting return etc. will need solid knowledge of property and hence risky. Normal investors should stay away from investing in Real estate as commodity unless there is sufficient knowledge and liquid cash available.

4. Stocks or Equity for a Diversified Portfolio

A misunderstood Asset Class

Equity is a popular asset class with investors. The fact that you can check prices real time makes it an emotionally taxing asset. It requires some amount of financial literacy to make sense of value and price of underlying Assets. Financial world has always kept this as an enigma and the knowledge isn’t much democratized in this space.

Mostly investors just view it from the lens of prices. Business value is always volatile and hence considered risky. An individual should never consider owning stocks directly if they do not understand or do not have the bandwidth to understand.

Fundamentally, one must understand that the underlying asset in a stock price is a Corporate body. So, if you do not know the details of the business, you are taking a risk just based on price and it is not much different from betting in a casino. There are good fund Managers running Mutual Funds to help you own the stocks. An investor with limited bandwidth to understand business must go via Mutual funds and participate in wealth creation journey. This asset class fundamentally can generate much higher return than any other asset because of disproportionate risk involved in the assets.

Business risk and the risk Premium

The biggest risk in Equity is of business. Businesses do go bust, you know. So, the stock prices may come down to zero in such a case. As an investor, if I am taking that kind of risk, the returns expectation also should be higher. So, there is no reason for us to settle at low 10-12% range of returns in long term.

Most of the wealth creation around us is via business only. Either you create a business or own a business created by someone else. The success or failure of the business will depend on macro factors like state of economy, interest rates etc. But, the rewards are always going to be high. Several good Fund Managers have generated 15-20% and higher returns in long term. The key to success here is to think like a business owner and stay invested for a very long time.

Balancing Stocks, Bonds, and Other Assets – How to get a Diversified Portfolio

Now, that we understand the need for diversified portfolio, various asset classes available, lets understand how to diversify.

Debt Funds for Emergency Funds

A smart investor would keep fixed rate investment for emergency funds. Rest of the asset classes if you notice have liquidity risk, i.e. you may not find a buyer when you are in need of money immediately. This is where fixed rate investments are useful if they come with liquidity. PPF/EPF are not liquid assets due to long term lock-in. For emergency funds, one can consider Liquid Funds/FDs/Savings account. Typically, one should have at least 6 months of expense set aside as emergency fund. You may look for Debt-based Mutual Funds/Bank/Post Office or any other mechanism to park your money safely to withdraw on demand.

Liquid funds are not investment. They are just your risk mitigation plan. Do not look at generating high returns there at the cost of locking them up. Anything in the range of 6-8% is good enough. The main purpose here is not to grow money, but to mitigate risk of emergency.

PPF and Government Bonds

Once we have sufficient Emergency Funds, should you own PPF/Government bonds etc.? Once we have sufficient Emergency Funds, we can park money to generate higher risk-adjusted returns. Depending on your risk profile and understanding of asset, one should take risk. Remember, returns are proportionate to risk. So, no risk would also mean no return and hence inability to beat the inflation.

Debt Funds to Manage Risk

Asset allocation is never a straight approach and has diverse views. Broadly for <35 Age category, any money not needed in next 2 years can be exposed to higher risk to generate better returns. For older individuals, nature of job, dependents, short or mid-term goals will decide the risk profile. Allocate funds for near and mid-term goals. But, broadly an investor should look at generating highest possible risk-adjusted returns out of the funds available after we have taken care of Emergency needs and short to mid-term goals.

There is no rule of thumb here and one must get a risk profiling done to understand the level of diversification needed. Sometimes, there are short or medium term goals which need a different asset class. There are many who would suggest Balanced fund or 30:70 ratio for debt to equity ratio. But, it all depends on your risk profile and goal. A Financial Adviser can analyze your financial position in order to create a balanced portfolio of assets.

Adjusting Portfolio Based on Goals

A portfolio needs periodic review depending on market conditions. You will need to adjust the portfolio based on change in immediate goals or change in market conditions. For example, there are years when Equity may not give the expected level of return and optimizing the portfolio by switching some funds to debt or Gold may generate better returns. Multi-Asset Mutual Funds take care of this balancing and is good for peaceful investing technique. Alternatively, an individual can do this exercise. It is not easy to time the markets though and it needs expertise. So, it is advisable to go via Mutual Funds.

Final Thoughts on Diversified Portfolio

A diversified portfolio is key to peaceful investing. An ideal portfolio is where you don’t lose a night’s sleep. Money management should come with peace. Diversification is also a way to achieve peace because it ensures stability irrespective of market conditions. Look at different asset classes and based on your risk profile, allocate sufficient funds in each category. The portfolio needs adjustment based on goals. A Financial Adviser can guide you through the process. It is perfectly fine to manage it on your own if you are equipped with right knowledge. In this internet age, overflow of knowledge can make you confused and you end up making wrong decisions. Hence, consulting an financial expert is always good to ensure you are making a right choice.

The post How to Build a Diversified Portfolio appeared first on Fleek Finance.

Compounding is a concept which is lost to many because of the shorter time frame of Human mind. We always under estimate long term and over estimate the short term. In my earlier life as a Scrum Master, I saw people under-estimating themselves when giving an estimate for smaller project. If realistically a project takes 3 weeks, the team will say, it can be done in 4 weeks. This would mean a ~30% buffer. They end up finishing it quicker though. On the other hand, we over-estimate ourselves when committing for a longer term project. A realistically 2 years project, will be estimated to 1 year. We don’t have visibility to all the unknowns initially. Hence, we poorly discount the unknown. We are worst at doing long term predictions because we don’t have the ability to logically discount uncertainties from future.

But, we love to predict the long term deliverables. We predict even though we know it will be inaccurate. Deep down, we acknowledge that it will miss the mark by at least 50% margins. But, who likes uncertainty. So, we always start with prediction with low margin of error and as usual the confidence is high.

A case in point is Sydney Opera house construction. It was initially projected to be completed in 4 years with a budget of $7 million. In reality, it took 14 years to finish and cost $102 million—over 14 times the original estimate.

There are many examples where the long term predictions go horribly wrong. The important lesson here is ‘Planning Fallacy’ where we over-estimate our ability to make long term predictions.

Lets stretch this case to compounding in investing. When investing, we are good at predicting 10%-20% upside on a stock. Most of the brokers give you target in that range because that is more believable. If I tell you, a stock is going to be 3 times in 2 years, you will frown at me. Also, the chances are you will book the profits at 20% and call me a clown. While predictors are confident about long term, the prediction buyers are always skeptical. Like we over-estimate ourselves when planning long term projects, we under-estimate the returns when planning investment. Some amount of instant gratification is also playing here. The point here is that we underplay the compounding process like we underplay uncertainty in project execution.

There are very few research analysts who can tell that an investment will compound 3-4 times. They won’t place their bet on long term at the cost of risking their reputation. The short term is always easier to predict. Long term needs patience, delayed gratification and leaving it to chance and luck. Tell me one businessman, who says I will achieve 20% compounding every year for next 10 years. If a business can’t predict, how can an investor do so. Some choose the easier way of focusing on short term wealth. There are very few who can build generational wealth. For that, you have to bet on your winners for the longest term possible enjoying the ‘Joys of Compounding’.

This also explains why real estate compounding works better than equity. This is because we do not make predictions. We just sit through all the cycles and eventually enjoy the ‘Joys of Compounding’. We fail to replicate this in equity because there is a price ticker which rewards prediction higher than uncertainty.

Dealing with long term requires conviction and deeper belief in the projection. The long term has a larger margin of error, but with time on your side, you will achieve compounding. Warren Buffet built most of his wealth from several businesses by combining value investing with patience and delayed gratification.

Experience the joys of compounding once in your life. You will never return to active investing. Instead, you will continue to invest passively.

What is Passive Income and How do we generate it?

So far I was talking about passive investment. Lets look into Passive income now. Passive income is letting your money earn for you while you sleep. This is specially useful during your retirement phase. There are different ways you get there.

1. Real Estate Rental Income

Invest in real estate today and substitute your current cash flow with rental income of future. As you would agree, rents are going to go higher, this is a solid plan in that way. The issue is ability to own multiple properties with large enough rental income. Rental income normally ranges from 3% to 5% of the asset market price. Hence, you need to start early when you can buy it cheap enough. The rental yield doesn’t look good to start with. But, with time as rents go high, it starts looking lucrative. Best case is you don’t have to buy it and happen to own an ancestral property.

2. Dividend Income

Invest in solid dividend paying stocks and live your life through dividend. NIFTY index stocks have roughly 2% dividend yield. This would mean, you have a Equity portfolio of 10 cr. to get an annual income of 20 lac. You will argue, we can buy Coal India. But then, we are talking about a balanced portfolio here. So, first we need to build that size of portfolio to live out of dividend income. Through disciplined passive investing, it is possible. But, it will take patience and time to reach there. That being said, its a volatile asset and market caps can go down.

3. Fixed Interest Income

This is the most stable way of income. Whatever comes, you generate 7%-8% of interest income. A portfolio of roughly 3cr. rupees can help one achieve the same effect as Dividend income discussed earlier. A good systematic withdrawal plan on a debut Mutual Fund can help you achieve this passive income. There are also monthly income scheme available from banks/post office which can do this for you.

Final Thoughts on Compounding and Passive Income

Enjoy the Joys of Compounding by doing Passive investing (mix it with some infrequent activity if you will). Avoid too much activity, its not worth it. Investing and compounding is a slow process. Enjoy the journey, destination will follow with time. One should aim to reach a stage of Passive income to replace the current cash flow in future.

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Wealth Creation is always a subject of experience. Same product may give different results to different people. For example, if we say a Mutual Fund has a CAGR of 15% in last 20 years, it doesn’t mean every investor made that 15%. Depending on the cycle and the time of entry/exit, every investor will have a different outcome. Hence, it is important to take a holistic look and seek professional guidance wherever you don’t have an answer.

While knowledge has become democratized due to internet, this can be a problem many times. Knowing and having the ability to create filtered knowledge is important. If you look up ‘You tube’ or any social media platform, there are 100s of videos, explaining Mutual funds. But, they cannot help you decide which one to invest in. Whether you should invest all in Mutual Funds or diversify? What is the ideal level of diversification? Should you buy gold or real estate? These questions appear simplistic. However, their solution is going to be complex because every individual will have a unique risk profile and unique goals.

Which category of individuals should reach out for Financial Planning or Advice?

There are different kinds of individuals depending on their income and wealth status and risk management profile. Broadly, they can be put into 3 categories:

1. Ultra Wealthy individuals:

Rich HNIs with sufficient money to take care of their present and also future of few generations. Do they need Financial Planning? Of course not. Their focus would be mainly on Investment Planning and multiplication of wealth is their prime focus.

2. Low-income Group:

There are people with income just enough to meet their expenses or literally in the hand to mouth category. Can Financial Planning help them? Certainly not. They should first focus on their income to meet their present cash flow. Once their present is secured, they can plan for future. These are the people working hard to take care of their physiological needs and lowest on Maslow’s hierarchy of Needs. Hence, Financial Planning is not really for them.

3. Mid-income group:

The mid-income category of individuals have surplus cash flow. They desire to utilize their resources effectively to reach a stage when today’s surplus can become tomorrow’s cash flow. This category of individuals can really benefit from right Financial Planning advise. They are generally resourceful individuals as far as their present cash flow is concerned. They are on the edge. They can either rise to 1st or fall into the 2nd category, depending on how they plan it from here. They are either the salaried middle class or upper middle class. They desire to break the chain and move up the ladder. A little professional help can help them achieve their milestones better and with confidence.

Transform Your Financial Planning With Professional Guidance

Financial Planning has some core steps involved before we can arrive at a concrete plan:

1. Understanding Cash Flow today.
2. Understanding the net worth or balance sheet.
3. Taking near term and emergency funds into account. Just talking about it can bring up lot of discipline with Cash Flow Management.
4. Understanding long term goals
5. Preparing for the days when cash flow is gone, i.e. Retirement.

A discussion on these details can be an eye opener for many. There are minor behavioral flaws due to family or neighborhood induced reasons. This can be corrected when you begin these discussions with an experienced Financial Planner. This discussion cannot be about get rich quickly. It is about making maximum out of the limited resources available. The solution can vary for different individuals and situations. It can involve “finding the right job or income.” It may include “cutting down on discretionary expenses.” Another potential solution is “finding the best instrument for investment.” There can be various other solutions. It all depends on the uniqueness of ones situation. This is not just about dealing with money, but also discussing behavior and psychology.

Conclusion:

Financial Planning is a well known concept in many countries and taken very seriously by individuals. However, in Indian context, it is similar to how we avoid going to a doctor and instead depend on self-medication. We try to solve problems based on advice from people around or source information from social Media. We may end up getting into mediocre or risky products without completely understanding how they are going to help. Hence, it is worth reaching out for professional help. This can help get things in your hand and be better prepared for the uncertain future. Are you prepared to sign up with a Financial Advisor? Feel free to reach out Fleek Finance Team to help us plan your better future.

The post From Chaos to Clarity: How Financial Planning Can Transform Your Future appeared first on Fleek Finance.

Investing for Beginners: A Step-by-Step Guide

As you see, humans are not designed for delaying the gratification. Most would want to have it today and immediately and sacrifice is a remote concept. If you do not sacrifice some part of your today to fund your tomorrow, you may have to continue to work forever to fund your lifestyle. The system is designed for you to work forever to earn your living.

A smart individual would learn delayed gratification to fund their future. Once you understand this concept well, you are ready to start your investing journey.

If this is difficult to practice, here are some basics you can try:

1. Force savings

There are disciplined approaches like SIP in Mutual Funds which are known wealth creators. Once you start earning, allocate some part of it for investment irrespective of your expense. So, Income-Savings= Expense instead of Income-Expense = Savings. This is a simple, yet powerful strategy which can help you increase your savings.

2. Avoid Complicating

Most individuals spend too much time thinking where to invest. The financial world is complicated by design to keep investors confused. It is your job to de-clutter it and think straight.

3. Do not over-diversify

Some are confused and not sure about any investment and end up over-diversifying. You don’t need to pick 10 different mutual funds. Just pick 1-3 good funds and more or less they will generate similar returns.

4. Track your expenses

Sometimes, people don’t know how much they are spending. You should have clarity of your income, expenses and your savings goal. One of the best investment strategies is to keep it documented. There are software available to help you with it.

5. Think before making discretionary expenses

Yes, you have a solid cash flow today and you can afford it. But, do you buy just because you can afford it? Think, if you are buying something because of a psychological pressure? Many times, it is FOMO or peer pressure which make us get into discretionary expenses. Avoid using your future cash flow to fund your present by taking a loan for any discretionary expense. Debt is a very bad trap and one should avoid getting into it at all cost.

6. Be open about money problems in family

Never hide your financial status with each other if you are married. As a family, if you brain storm investing, you may find a better approach towards it. Never hide your status with your spouse. If you are not doing well, call it out and reach out to each other for support with managing expenses. Many times, people do not tell the truth to their spouse and they don’t have a clarity on Financial challenges. In the end, you suffer as a family.

Why Start Investing Early

Warren Buffet is a great investor and has made lots of money in his life. Do you know he started investing as a teenager? He loved the art and mastered it. However, he managed to get big only in his early 50s. He is this big because he managed to live long. Most of us may not out-live him or become as great as him because of our limitation in terms of tenure of spending. If we do not start early, we are missing on the compounding factor.

To understand compounding, simply understand the ‘Rule of 72’. Money doubles every (72/rate of return) number of years. So, if you earn at 8% rate, you will double your money in 9 years and at 9%, it will be 8 years and so on. For you to start compounding your wealth, you should have a good base which you can compound. If you do not start early, chances are your wealth creation journey will get delayed.

So, you should start early to enjoy the compounding journey.

Low-Risk Strategies

One should always be prepared for emergency. Once you start your investing journey, you will realize that returns are proportional to risk taken. There are some emergency funds you should always have before you can move to risky strategies. This emergency fund should be invested in Low-Risk assets.

Some Low-Risk assets include Fixed deposits, Government Bonds, Liquid funds etc. there are various debt based Mutual Funds which are relatively low risk and useful. The low risk strategy should be deployed when you are trying to do a goal-based investment.

Let’s say, you want to enroll yourself for a course for which you will need some fund in 2 years. You cannot fund this via an Equity Mutual fund because you don’t know where the markets will be when you need the money in 2 years time. Hence, low-risk strategies are needed in such situation. Simply, look for an FD or a Debt based mutual fund which will ensure liquidity because you can sell it any time you like and also give you reasonable return with minimized risk.

So, depending on your goal, you will need Low-risk strategies also along with investment in high risk assets.

Building a Balanced Portfolio

This is not an easy game and you should talk to a Financial Adviser to get your portfolio reviewed. An overall assessment of your assets/liabilities and cash flow will help a Financial Adviser guide you in making right and balanced approach towards investment.

Investment strategies: Common Beginner Mistakes

1. Over-thinking. Investing is easy and simple. The financial media and influencers are responsible in making you think it is complex. A simple Mutual Fund which gives you 10-12% returns is enough. Just stay invested and do not think much about loss. Loss aversion is a key human trait which makes us risk-averse and eternally confused individuals. There is no risk in this world that is not worth taking. Just do it, chances are you will succeed. If you are cluttered, consult a Financial Adviser like you go to a doctor when you are suffering.

2. Insurance trap. Understand different insurance products and see what you need. A 25 year old with no dependents, does not need a term insurance. But, they do need a health insurance. Similarly, a 40 year old will need to make sure they have sufficient insurance for the entire family. These are minor mistakes which can create bigger problems for future while choosing your investment strategies. Also, do not buy endowment plans. Never mix insurance with investment. Keep them separate and simple.

3. Investing in Equity to meet short term goals: Equity is never a short term asset. Equity assets should ideally be never touch kind of money. But, people juggle with it to meet short term goals. For short term, look for low-risk debt funds.

4. Investing in stocks based on tips from Friends/Relatives: This is wastage of time and money. Unless you are seriously looking to understand stocks and investment, do not waste your time in this. Buy stocks via Mutual Funds. This will give you peace of mind along with wealth creation.

5. Delaying investing and increasing your expenses: Since, as a beginner the amount is low, you tend to think if it is of any value. All big things start small. Never stop small savings. Remember, you are delaying compounding if you delay investing. Make yourself a promise to increase your savings with every rise in salary. Generally, people focus on meeting short term goals and delay starting the investment plan. This is a dangerous trap and should be avoided at all costs.

Unless you realize the importance of investment in your life, you will never appreciate the strategies enough. So, it is crucial to know that the cash flow of today is sufficient to fund your today’s needs. But, tomorrow when it stops or a big expense comes for which your salary is not enough, you need to plan in advance. You need proper investment strategies which are based on data combined with research to achieve your goals, be it short-term or long-term.

The post How to Choose the Right Investment Strategies for Beginners appeared first on Fleek Finance.

We learned about moonlighting, where companies complained about employees holding multiple jobs simultaneously. A notable incident was when Wipro fired 300 employees for moonlighting, bringing the issue to the forefront, with many other companies following suit.

Then came the concept of quiet quitting, where employees disengaged from their roles without formally resigning, choosing to hang around until they were eventually let go. While quiet firing—where employers subtly force employees out—has long existed, quiet quitting was a newer trend.

We also encountered the term The Great Resignation. Many employees, prioritizing life over work, began resigning in pursuit of better career opportunities or better work-life balance. This shift caused quite a stir in HR circles, as the cost of hiring new talent is substantial.

COVID also brought a shift in perspective. People began to value life and sought to balance it with work. Businesses, in turn, realized that remote work was a feasible option and that employees didn’t always need to endure the daily grind of commuting to the office. The transactional nature of the employee-employer relationship became more evident. For HR professionals, maintaining trust and engagement in this new landscape became a significant challenge. Remote work made employee engagement even harder, leading to a gradual push toward a Return to Office (RTO). Employees who embraced the freedom of working from home may find this transition challenging, but many will need to adapt to the new realities. In response, employers are now striving to provide greater work-life balance than they did before the pandemic.

From an employer’s perspective, the relationship with employees has always been somewhat transactional. However, it’s the employees who, for the first time, truly embraced the concept of work-life balance, realizing that their careers didn’t need to dominate their lives. The pandemic gave people a new outlook, particularly younger professionals who now tend to be more demanding than their seniors. The older generation often found themselves more emotionally and financially dependent on their employers, making them less likely to push back.

All about Financial Independence, Retire Early (FIRE)

With this backdrop, let’s delve into the latest buzzword to emerge post-COVID: FIRE, which stands for “Financial Independence, Retire Early.” This concept embodies two main ideas: 1) Achieving Financial Independence and 2) Retiring early.

Let’s explore these ideas further.

Financial Independence:

The term independence is inherently tied to its opposite—dependence. We can only understand independence in the context of financial dependence. Early in your career, the primary goal is to earn enough to meet your financial needs. Financial independence becomes meaningful when you realize the freedom it offers from depending on a steady paycheck to cover basic expenses. The definition of basic expenses gets subjective from here on. As you grow in life, you tend to expand the basic expense definition. Many new things get added to this as you grow. This can be easily explained using Maslow’s hierarchy of needs.

Physiological needs are at the base of the pyramid of needs like food and shelter. Fulfilling the remaining needs beyond this level leads to greater happiness. While a house may be considered under Safety and Security, some may argue it falls under physiological needs. The focus here is on the fact that individuals strive to meet most of these needs during their lifetime, with only a few reaching ‘Self Actualization’.

We should learn to make a distinction between needs and desires. Once physiological needs are satisfied, the emphasis shifts to psychological well-being.

It is important to recognize that you are a product of your surroundings, regardless of how you perceive yourself and what you think, defines you. Once you understand this, it will give you a better understanding of root of your desires. For example, if you have friends who love to travel, chances are you will desire to travel. If your friends/family enjoy food, chances are you will be a foodie. The desires are really an outcome of your surroundings and fundamentally there is nothing that ‘Defines’ you. This is difficult to understand because you have always believed that there are certain aspects that define you and you are unwilling to change what defines you. Pay close attention to your habits, likes, desires and you will realize this is all an outcome of your surroundings. If you change your surroundings, your desires will change too.

This may sound defeatist to many, but the reality is that in one life time nobody can fulfil all their desires because there are no limit to desires, which are shaped by people around you. Once you stop internalizing the external factors, you succeed in defining boundaries to your desires. Unless this is done, there will never be ‘Financial Independence’.

Achieving financial independence occurs when our current assets can cover our future expenses to meet our needs. Many individuals lose sight of their initial motivation for entering the workforce, which is typically driven by financial dependence. People work to generate a steady income to meet their needs. As these needs are fulfilled, attention turns to fulfilling wants, which is optional. By prioritizing financial independence above everything else, one can focus on building assets to secure future financial stability. This approach helps avoid perpetual reliance on a job and ensures financial independence.

To summarize, Financial Independence is a state where an individual has built assets which can take care of their future cash flow to fulfil their needs. Once this state is achieved, you are not working for money any more. This is when you may get the ability to start your journey to the final stage in Maslow’s hierarchy of needs, i.e. ‘Self Actualization’.

Retire Early:

Lets look at the next stage of being Financially Independent. Once you have reached the stage when you can call yourself ‘Financially Independent’, you can choose to retire early. The retirement does not mean you stop working. You can continue to work, but you don’t work for money any more. Imagine the independence in your thoughts, once you know you do not have to work for money alone.

Many confuse retire early with getting out of work early. Retirement doesn’t mean not working, all it means is not having to work for money alone. Financial Independence early in your life will give back the time which you were renting so far to get the cash flow. You can focus on getting back your time to do things which are more meaningful to you.

I hear from people, what do I do if not work? This is a side effect of Industrial Revolution. It has converted Humans into efficient robots and made them believe that their only purpose in this world is to work for money. In fact, people do not appreciate the power of ‘Not doing anything’ enough. The thought of ‘doing nothing’ scares many because they never looked at it this way. As I said earlier, your desires are shaped by your surroundings, so is your need to do something. A majority has agreed to normalize ‘doing’ and their definition of ‘doing’ is to do something for Money.

Financial independence opens up a world of possibilities beyond the traditional notion of retirement. It allows individuals to redefine their relationship with work and money, emphasizing personal fulfillment and meaningful pursuits. By breaking free from the cycle of working solely for income, one can explore new passions, engage in creative endeavors, contribute to causes they are passionate about, or simply enjoy the freedom of time. The concept of early retirement, in this context, is not about idleness or escaping responsibility. Instead, it represents a shift towards a more purposeful and intentional way of living. It challenges the societal norms that equate productivity with worth and encourages individuals to prioritize their well-being and happiness above all else. Embracing the idea of ‘not doing anything’ as a valuable and enriching experience can lead to a deeper appreciation for the moments of stillness, reflection, and self-discovery that are often overlooked in a society driven by constant activity and productivity. Ultimately, achieving financial independence early in life is not just about reaching a financial milestone; it is about reclaiming your time and autonomy to live a life that aligns with your values and aspirations. It offers the opportunity to break free from the constraints of a money-driven existence and to pursue a more fulfilling and balanced lifestyle that prioritizes personal growth, relationships, and overall well-being.

Conclusion

After joining the workforce due to financial dependence, one must aspire to reach Financial Independence by creating assets which can take care of future cash flows. Once Financial Independence is attained (not an easy job), try to identify something that gives you more meaning and helps you utilize your time more efficiently to fulfil your dreams. It could be travel, reading, learning, anything that you would have wanted to do with your time, go ahead and do that. Work very hard to achieve Financial Independence early in life so that you can enjoy it in your prime instead of letting the external factors decide when you can get back your time. What is stopping you from taking back the control of your life?

The post The Great FIRE Debate: Financial Independence, Retire Early appeared first on Fleek Finance.

EBI Chief, Madhabi Puri Buch and the recent Controversy

Regarding SEBI Chief Madhabi Puri Buch, targeted by Hindenburg some time back and recently by politicians like Pawan Khera over her past compensation from ICICI, it’s crucial to examine her career.

Based on her extensive background detailed in public sources, she began at ICICI Bank in 1989 and later served in various roles, including a lecturer in England and senior positions in multiple companies, including CEO of ICICI Securities from 2009 to 2011. Buch also held executive and director roles at Zensar Technologies, InnoVen Capital, Max Healthcare, and consulted for the New Development Bank (BRICS bank).

Given her qualifications and career achievements, ICICI’s clarification that her payments were related to ESOP vesting rather than salary seems plausible, unless contradicting evidence, such as specific income tax records, surfaces. However, SEBI’s involvement in the recent de-listing proposal of ICICI Securities, which was controversial and arguably detrimental to minority shareholders, raises valid concerns about Buch’s decisions and potential conflicts of interest. We will find out more on this soon.

However, let’s understand that both she and her husband have had an illustrious career before she became the SEBI Chairman. So, if the allegation is of siphoning, it doesn’t stand. If it is about quid pro quo, further investigation will be needed. But, politicians are not saying that. They simply want to spark controversy and keep public engaged by creating mistrust on the organization and the system at large.

As we know, earlier Hindenburg came out with another research claiming inadequate investigation on Adani by SEBI. To understand that, we should get into some details on Adani.

Adani Enterprises: Stock Price Journey and Controversies

Adani Enterprises’ stock price surged from ₹150 to an all-time high of ₹4,000 in 2022. On January 24, 2023, US-based short seller Hindenburg Research published a report alleging malfeasance by the Adani Group. That included cooking books of accounts, over-invoicing of import costs and round-tripping of own money to push up share prices. The stock tanked to 1300 following this report. There was a hint that the price is manipulated and it is a bubble. The stock price has now recovered to ₹3,000 (All rounded approximate figures). This event triggered confirmation bias, where any mention of Hindenburg now brings Adani and Modi into the conversation. This explains the Congress press conference highlighting SEBI chief’s past compensation from ICICI and the clarification from ICICI. These should be seen as related events.

The politicians very well know that the public, often disinterested in the full story, might conclude, “Something must have happened.” They leverage the widespread financial illiteracy, making issues out of minor facts, such as LIC’s <2% allocation in Adani stocks, while ignoring their broader stock portfolio. They rarely follow up, similar to events in the past.

Let’s now look into Adani business performance vis a vis stock price.

Adani Business and Valuations

I am not an investor in Adani Enterprises, but for those observing from the sidelines, here are some insights into Adani’s business and valuations. Adani group has several stocks. But, for simplicity focusing on Adani Enterprises only.

Enterprises boasts a 10% return on capital employed (ROCE) with a capital base of ₹1.1 lakh crore, excluding current liabilities. This means the company is generating an ope

rating profit of ₹12,000 crore on this capital, with sales of ₹1 lakh crore as of FY24. To put this in perspective, sales were ₹40,000 crore in FY20 with an operating profit margin of 6%. Essentially, sales have grown 2.5 times since FY20, the year the stock started its upward trajectory post-COVID. Whether this growth was anticipated by the market or influenced by manipulation, the stock is currently valued at 4 times its sales, compared to <1 times sales in 2020.

Given the sales growth over the past four years, the market might be projecting similar growth rates ahead. If the business doesn’t perform,the price will go South. A company with a 10% ROCE valued at 4 times sales is not necessarily in bubble territory, especially when compared to other companies valued much higher. Current valuation could at best be seen as expensive, calling it outright fraud or manipulation is an exaggeration. If the claim is that the books are cooked, it’s for auditors to respond. Not sure if SEBI has any role here. They can investigate the stock price manipulation at best.

The fact that all Adani stocks have high promoter holding, makes it illiquid and easy to manipulate. But then, this happens with 1000 other stocks. Didn’t we see a PSU stocks rally last year? Most of them have low float and open to manipulation.

Conclusion: Yes, there are suspicions of government support aiding the rise in sales and assets of Adani, and such claims should be thoroughly investigated. Will targeting SEBI chief personally help here? It’s a political battle and should be fought at political level. Maligning the markets and institutions is unnecessary!!

The post Madhabi Puri Buch (SEBI Chief), Adani and Hindenburg appeared first on Fleek Finance.

The bottom line is, everyone is looking for a place to invest and grow their money quickly. Especially with raging bull markets, there is a sense of FOMO too. The question then is, which mutual fund to invest in?

Mutual Fund Fundamentals

Definition: It is a fund or a pool of money collected from investors and managed by a Fund Manager employed by a Mutual Fund House such as ICICI/HDFC/Kotak/Parag Parikh, among others.

Minimum investment amount: Investors can start with as little as Rs. 500.

Fund Manager’s role and objective of fund: The fund manager is responsible for identifying investment opportunities and making investments. Each mutual fund has an investment objective based on the investor’s return expectations and risk tolerance. Depending on the objective or fund, the fund manager invests the money in various types of assets such as equity, gold, debt, etc.

Diversification and market cap categorization of funds:

Keep in mind that a mutual fund is already a diversified investment vehicle on its own. Typically, a fund manager will have 30-50 stocks in their equity portfolio. A Flexi Cap fund for example, includes stocks from large, mid, and small cap categories. For beginners, Cap her stands for Market capitalization which is the market value of a business, for example if you want to own Reliance, you will pay Rs. 20 lac crore today and that is the market cap of Reliance. Further, large cap companies are the top 100 in terms of market cap or valuation, mid cap companies are ranked 101-250, and small cap companies fall below the 250 mark.

On recent small and mid cap returns:

Analyze the monthly timeframe chart to compare the Sensex, Mid Cap, and Small cap indices in the exhibit below. It is evident that all three indices showed similar returns during the initial 6 years on the 10-year chart. However, starting from 2020, there has been a significant breakout in the Mid Cap and Small cap indices compared to the Sensex, resulting in higher percentage returns. This partially explains the situation. Generally, all funds aim to surpass these benchmark indices. For novices, an index comprises stocks chosen by BSE in this scenario. The sudden surge lacks a specific rationale. Could it be due to a surplus of funds chasing limited assets? In summary, based on the past four years, small and mid cap funds have significantly outperformed large corporations in terms of returns.

Risks associated with small cap funds and equity in general:

If you define risk as potential capital loss, it’s important to note that the risk only materializes if you sell the asset at a lower price. If you have a long-term investment approach and avoid selling in times of distress, the risk is limited. Small cap and mid-cap funds may not offer similar returns in the next 4-5 years, but over a 10-year period, they could potentially provide 10-15% CAGR returns. Therefore, the key factor is the duration of your investment in the market. Risk perception varies based on individual definitions. If you consider risk in the short term, such as the next 6 months, then it is indeed a risk. In general, it is advisable not to invest funds that may be needed in the next 6 months to 1 year in any equity asset. Fund Managers utilize diversification as a strategy to reduce risk.

Picking the right Mutual Fund

Having gained an understanding of the basics of Mutual Funds, let’s explore the process of selecting a mutual fund from a wide array of choices. It is essential for investors to be aware of where their funds are being invested. Typically, investors tend to base their decision on the previous year’s returns or the fund’s rating. However, this approach should be avoided as past performance does not guarantee future results. While the market may have experienced exceptional returns in 2023-2024, this trend cannot be assumed to continue in the future. It is more probable that returns will be more moderate in the upcoming year. Over the long term, equities are expected to provide an average return of 12-15%. Therefore, assessing a fund manager based on their performance over the last five years may still be a valuable criterion.

Utilizing a mutual fund is an effective strategy for establishing an initial capital base before transitioning into wealth creation through the multiplication of that capital. Mutual funds offer disciplined investment options such as SIP/STP/SWP, which facilitate savings. While it is not advisable to go overboard in fund selection, investors seeking returns superior to those of an index fund should conduct thorough research to identify a suitable fund.

Therefore, investors should consider maintaining a portfolio consisting of a maximum of 3-4 funds diversified across equity and debt, including a mix of large, mid, and small-cap equities. Opting for a flexi cap or equity-oriented hybrid fund can generally fulfill this requirement. Alternatively, investors may choose to include a large-cap, mid-cap, and small-cap fund, along with some allocation to a debt fund for risk diversification. Analyzing the fund’s portfolio is crucial in selecting the most suitable option.

6 Key Points to Consider when selecting the right Mutual Fund

1. An effectively diversified equity portfolio strikes a balance between diversification and concentration. A fund manager with a moderate number of high-conviction bets, making up around 7-8% of the portfolio and not exceeding 30 stocks, showcases expertise and commitment compared to an inefficient fund manager who holds hundreds of stocks in the portfolio.
2. Emphasize long-term returns over short-term performance indicators such as one-year returns.
3. Most funds conduct quarterly reviews of their portfolios. Take advantage of these opportunities to comprehend the portfolio and the rationale behind a fund manager’s investment choices. While this may be challenging for some investors, dedicating time to this practice can enhance your understanding of the stock market in general.
4. Sectoral funds such as digital/infrastructure funds are not suitable for ordinary investors, and it is advisable to steer clear of them unless you possess expertise in the specific sector. Often, fund managers introduce sectoral funds when a particular sector is performing well, like the recent launch of PSU funds due to the sector’s momentum. Ordinary investors are at risk of getting caught up in such trends, making sector funds unsuitable for them. This is a common mistake many investors make by investing in sector funds.
5. Do not overly fixate on the expense ratio, as a competent fund manager may come at a higher cost, and sometimes it is acceptable to incur an additional 0.5-1% for better returns. If the fund is managed effectively, paying a slightly higher fee is justifiable.
6. Opt for a direct fund over a regular fund to avoid paying a commission to a Mutual Fund distributor, provided you have a good understanding of the investment process. If you require assistance in fund selection, it may be beneficial to opt for a regular fund through a mutual fund distributor/advisor.

Conclusion

Pick the right Mutual Fund by thoroughly examining its portfolio, investment strategy, and other relevant factors. While diversification is important, avoid excessive diversification. Recognize the risks associated with equity investments, but do not allow fear to dominate your decision-making. To achieve returns that outpace inflation, accepting some level of risk is essential. Once you have a solid grasp of the fundamentals, consider taking calculated risks. Invest only funds that are not designated for emergencies in equity-based schemes. Lastly, exercise patience and stick to your plan, as long-term investment is your best defense against risk.

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