10 Dec 2022

3 Lessons Learnt from the DHFL debacle and how we overcame it with sheer grit

21st May 2019 is not a day that I would forget in a hurry! 

In fact, about 77,000 retail fixed deposit holders of DHFL (Dewan Housing Finance Limited) would not forget that day when DHFL announced that it was stopping all maturities of its FDs with immediate effect. The high-rated finance behemoth, in which millions of Indians had invested their hard-earned money for decades getting secured high rates of interest without any problems, went downhill faster than Humpty-Dumpty amid allegations of fraud and fund diversion.

We too had many investors invested in DHFL FDs through us. Many of them had been renewing them year-after-year, enjoying good returns along with the surety of the highest safety rating of AAA consistently over the years.

The saga of requests, petitions and press articles that followed DHFL’s downturn led to the courts also stepping in and finally on 17th Jan 2021, the committee of creditors (CoC) constituted for this purpose approved Piramal Capital and Housing Finance Ltd’s offer of bail-out. But, according to the approved plan, the retail FD holders were to get just 23.1% of their deposit back!! 

We were shell-shocked by this decision!

Our investors in DHFL FDs, all armed forces officers and spouses only, had trusted us to make these investments. And now we were having to convey this drastic news to them. Earlier, we had sought advice from some financial and legal experts on what recourse we might have in the event of an adverse outcome, but we had run into a wall with regard to options.

I and Bindu Govila, the COO of the company, went into a huddle to discuss our future course of action, now that the bad news was there right upfront staring at us. The topic of our discussion that day was not how to convey this news but how we can compensate its impact for our investors. In hindsight we realised that, even in those moments of despair and helplessness, our hearts were still in the right place!

We unanimously decided that we would take on the mantle of giving the balance of the money back to our investors, though without a clue of how we would be able to make that massive amount of money available from the small reserves of our growing company.

Nevertheless, the decision was taken and we were not going back on it. 

We then consulted our CA on how to go about it. After being initially staggered by the audacity of our plan, knowing the company’s and even our personal financial position, he pointed out that the money we were giving the investors could be taxed. However, that was no reason to deter us from what we had decided to do. He also talked to his peers about this, and one of them recalled another Indian company that had attempted something similar several decades ago. This was another positive indicator that we should go ahead…There was now the herculean task of figuring out how this money would be raised. But where there is a will, there is a way.

I and Bindu decided that we would severely cut down our own personal salaries from the company, limit the company’s discretionary expenses, put our future expansion plans on hold to the maximum extent possible and reimburse the money to investors in tranches. But we surely did not want to meddle with anything that was due to our employees – their increments, bonuses and other accruals were to go on as usual, since their families depended on their salaries.

Hectic calculations followed and slowly we started becoming confident that it could be done, if luck favoured us.
The first tranche went to our DHFL FD investors in Nov 2021 amid Covid. Slowly and gradually, the God ensured a good growth of our company, ostensibly to facilitate our resolve (
😊), and a year later, in Nov 2022, the last investor was paid his 100% Principal due. A matter of joy and relief for us!

Within a year, the hopelessness had become a source of pride for us.

Of course, we learnt our Three hard professional lessons from this episode:

  • Nothing is too big to fail – a lesson repeated too often. Data should rule in analytical decisions than just the gut feeling – even the likes of Lehman Brothers, DHFL and IL&FS can go down anytime.
  • Where there’s smoke, there sure is a fire lurking underneath. Don’t miss it; don’t ignore it. Manufacturing good reasons to justify the blindfold still does not change the inevitable.
  • And of course, the biggest lesson was that if you plan to do something good, the Almighty will create circumstances to bring it to fruition.
On that note, I wish you a happy year-end full of reflections on the good, bad and better.
If you need any further details or wish to connect with a Financial Planner, please write to team Hum Fauji Initiatives at contactus@humfauji.in.
Also Read: Bucket Strategies To Ensure Your Retirement Corpus Makes Your Life Fulfilling
19 Nov 2022

Bucket Strategies to ensure your Retirement Corpus makes your life fulfilling

Read our CEO’s article in the highly-respected ‘Moneycontrol’ this Thursday about how to plan the investment and ‘bucketing’ of your retirement corpus so that it not only meets your life-time requirements but also ensures that you have a worry-free retirement all your life.

This article is applicable for civilians as also armed forces personnel who haven’t got or are not likely to get pension. For those who will get pension, Bucket-2 need not cater for household expenses since the pension is generally sufficient for monthly expenses for most officers.

When one retires with a big corpus in hand, it is very easy to get complacent. However, the ‘everything will be fine the way it has always been’ attitude may not work for two reasons:
  • There is no monthly income anymore coming from anywhere, except from what one has already accumulated, unless you get a substantial pension from the Govt.
  • Emergencies will always come unannounced; inflation will always eat into the purchasing power of your money and the longer the horizon, the more pronounced will be the effect of such money depreciation; highest safety in investment will always get the lowest rates of return, and vice versa.

So, what is the way out so that one:

a) doesn’t take unnecessary risks with one’s life-time savings,
b) has the required amount of money every month to lead a comfortable life,
c) can cater to unforeseen emergencies, and
d) has the required insurance covers for the unforeseen.

That is where the 4-bucket strategy comes in. The buckets would be as follows:

Bucket-1 ― Emergency Bucket

Prudent financial planning always demands this bucket be created first. This caters to the emergencies that may come up and needs a careful assessment of the amount required. General emergencies will not demand more than Rs 5 lakh for most people if health insurance is taken care of.

However, circumstances like older dependents, loved ones abroad (hence, sudden costly travel) and medical conditions not covered by health insurance could demand a bigger bucket. The best place to invest is a few small FDs of Rs 1-2 lakh each, sweep accounts linked to savings bank accounts or liquid funds. For most people, an emergency fund of Rs 5-10 lakh would suffice.

Bucket-2 ― Monthly Income (Short-term) Bucket

This is the bucket that caters to monthly household expenses for the next five years of living. In addition, lifestyle travel plans (domestic and international), payment of premia for insurances (health, car, life, house, disability and critical insurance, etc), maintenance costs (house, car, appliances, etc), social obligations (festivals, events like family marriages) and miscellaneous regular requirements like replacement of white goods and house repairs would also be there.

While household expenses can easily be calculated on a monthly basis, other expenses will normally be on yearly basis and divided by 12 to arrive at the monthly requirement. The sum of the two expenses would be the total monthly requirement. Do not forget to add 5-10 percent as contingency to total monthly requirements so that some extra expenses in certain months do not add to worry lines.

Typically, this bucket would be about 20 percent of the total corpus and the best place to invest this would be a sweep bank account or liquid fund for the requirements of the next two years and Ultra Short-Term (UST) / Short Term Fund for three years beyond that. If one so wishes, part of the monthly funds requirement can also come from Senior Citizen Savings Scheme and PM Vyaya Vandana Yojana investments.

Bucket-3 ― Medium-term Bucket

This bucket is an intermediate bucket for growing the money. It would hold the money required for the period 6-10 years from now. It receives money from Bucket-4 and transfers the money to Bucket-2 on a yearly basis. It takes slightly higher risks than Bucket-2.

This bucket would also hold about 20 percent of the total corpus and the best place to invest this would be longer term fixed deposits (FDs) and/or hybrid mutual funds and conservative balanced advantage funds. A review would be required every year in this bucket wherein the next one year’s funds requirement would be transferred to Bucket-2 and the same amount would be transferred into it from Bucket-4.

Bucket-4 ― Long-term Bucket

This is the long-term investment bucket which caters for the requirements beyond 10 years from the date of retirement. It would hold the rest of the money (left after filling Buckets 1 to 3). A very careful risk assessment and preferably a discussion with a financial planner would be required to set up this bucket. This is the bucket which shields one’s life-time savings from the drastic effects of inflation and feeds the previous two buckets. It could take as much as 40-60 percent equity exposure, depending on the retiree’s comfort level (aka Risk Profile). On every yearly review, one year’s requirement of funds goes from this bucket to Bucket-3, and the risk profile of the retiree may need to be reviewed every two years or so.

Finally, a few important points that need to be kept in perspective, while creating and managing the buckets:

1) The buckets have been created with the premise that adequate corpus has been built for the entire retirement period of 25-35 years. In case the amount is lesser, expenses will have to be carefully calculated and taken out from Bucket-2. Some modifications to allocations will be required to various buckets.
2) Risk profile of the retiree is an important ingredient in creating the buckets. An experienced financial planner would be able to align the buckets’ holdings carefully. Nevertheless, the tendency to put everything in the ‘safety’ mode should be avoided since returns would then go down, taxation would be heavy, and the purchasing power of the corpus would deplete significantly.

Check out the originally published article on moneycontrol.com by the author

If you need any further details or wish to connect with a Financial Planner, please write to team Hum Fauji Initiatives at contactus@humfauji.in.
11 Nov 2022

Mutual Fund Investment: Are you a Do-it-Yourself investor by choice or by FOMO?

It is well known that most retail investors rarely ever make long-term wealth in stock markets due to their emotional, jerky responses to adverse situations which an experienced investor sees as an opportunity.

Investing in mutual funds to realize one’s long-term goals has already emerged as a popular investment option with retail investors. No wonder, SIP accounts stand at an all time high level of 5.39 crore in April 2022. While there are a variety of mutual fund schemes across asset classes, there is another variation in them.

All MF schemes, including equity and debt, offer two plans – Direct and Regular. In a Direct Plan, there is no intermediary to help you in completing the purchase and hence the expense ratio is low in them while in a Regular Plan, the investor invests through an intermediary such as a distributor, broker or a banker who is paid a distribution fee by the fund house, thus reflecting in a higher expense ratio compared to a Direct Plan.

Col Sanjeev Govila (retd), Certified Financial Planner, CEO, Hum Fauji Initiativesshares his perspective on these two investing modes with FE Online readers. Read on to get a grasp on some interesting data highlighting the importance of making the right choice while deciding between a Direct Plan and Regular Plan.

‘What? Are you still doing your mutual funds through a financial advisor? Do you know how much extra will you pay over the next 15-20 years by paying that extra 1% to him?’

How many of us have heard similar arguments in person, in whatsapp groups, in various articles written on websites or articles in magazines and newspapers.

To put it in money perspective, let us see what you would save if you were to do it all by yourself or by following the tips that keep floating around.

Say, you invest Rs 10 Lakh initially and a SIP of Rs 10,000 per month in an equity MF. Assuming an average annualised growth of 12% in your portfolio, you would save approximately Rs 3.04 Lakhs of commission/fees in 10 years, Rs 7.17 Lakhs in 15 years and Rs 14.86 Lakhs in 20 years in commission/fee if we assume 1% as the commission or advisor fees that you would pay per year.

During this period, you would’ve made a profit of Rs 32.6 Lakhs, 76.8 Lakh and 1.59 Crores respectively in this simplistic model. Thus, the fees paid out to the advisor amounts to about 9.33% of your profits.

Also, going by the past trends, in those 10-20 years, for more than 90% of the trading days, Sensex would’ve traded below 10% of its peak more than half the time, below 20% of the peak 30% of the time and below30% of the peak 17% of the time. Also, the markets would’ve temporarily declined 30% – 60% once every 7-10 years and there would’ve been 1 or 2 sharp declines of more than 30% every 10 years.

What would a common retail investor do during such ‘scary’ times if she’s on her own? When a profit of Rs 76.8 Lakhs dwindles to say, Rs 30-40 Lakhs, or if the principal investment itself has gone down from Rs 10 Lakhs to 5-6 Lakhs, it is difficult to remain sane and invested for most investors.

What happens if you get out with the aim of getting in again ‘when the time is right’ but market volatilities – markets shooting up for a few days and trending down for a few days – make it difficult for you to decide when to enter?

The past data has shown that, over a period of past 17 years of investing, if you miss just 5 best days in those 17 years, your CAGR (Compounded Annual Growth Rate) reduces by 3% to 11.5% from 14.4%. Missing 10 best days brought it down by another 2% to 9.6%, missing just 30 best days in 17 years brought it down to just 3.3% and, hold your breath, missing only 50 best days in 17 years meant your returns would be down to a Negative 1.1%. (Source: Funds India)

And remember, many of these best days could happen in the middle of a market crash too!

It is well known that most retail investors rarely ever make long-term wealth in stock markets due to their emotional, jerky responses to adverse situations which an experienced investor sees as an opportunity. But if you are steel-willed and understand this, you could be a successful Do-it-Yourself (DIY) investor.

What, therefore, are the attributes of a good DIY investor?

The investor needs to realise that ultimately the markets will align to fundamentals, and short-term movements of particular stocks or markets do not alter this fundamental fact. Asset allocation is always the king and all investing should have that as the inviolable base. Financial investment conclusions should be based on logical analysis of data and emotions that need to remain in control while investing. While monitoring and rebalancing a portfolio periodically is a must, sometimes doing nothing could be a great strategy too!

Another important aspect to realise is that passive investments like Index Funds or ETFs are still 100% equity products and will face the very same market volatility as the markets themselves, while having no capability to beat their benchmark.

So, my final take?

If you can manage all the nuances associated with managing a portfolio as well as your emotions, you could be a person who should be a DIY investor but if you are going to depend on others’ help (aka tips) to do investments, have a rethink. Remember, it doesn’t matter how fast you are going if you’re on the wrong train!!

If you decide to be a DIY investor in Mutual Funds, be careful and check the platform you use as there are many online platforms giving Regular plans for MFs. So, while you’re being charged the same commission as with a financial advisor, the advantage of customized advice is missing.

Check out the originally published article on financialexpress.com by the author

If you need any further details or wish to connect with a Financial Planner, please write to team Hum Fauji Initiatives at contactus@humfauji.in.