Best performing MF s – do you have them?

It always amuses me when I see people doing all kind of verbal and mathematical gymnastics in trying to decide which MF they should be investing in. Terms like “downside protection”, “Sharpe ratio” etc are spoken and written about with great enthusiasm, but unfortunately with little understanding of how MF’s really operate. You see the critical issue is this – holding stocks of an MF change over time, so there is little point in trying to make an analysis like you do for stocks. Not only is it a completely wasted exercise but it can lead or mislead you into buying the wrong MF too.

So what should you look at when you are considering whether to buy an MF for the long term or not. Well, while the risk adjusted returns sound an obvious kind of thing to look for, I believe much more in the absolute and relative performance of the fund over a period of time. For those who say they are happy if the MF of their choice meets their own return expectation my comment is simple – you never know what may happen in the future irrespective of your plans. Therefore, it makes a great deal of sense in maximizing your returns out of your investments. There is absolutely zero need to be loyal to your fund or fund manager – remember, they do not lose money if the market crashes but you do.

So from a performance point of view, these are the best MF schemes in the different categories. The source is ET Wealth, you can read more about it in this week’s edition.

Large-cap MF:

  • SBI Bluechip fund
  • Birla Sun Life Frontline Equity Fund
  • Birla Sun Life Top 100 Fund
  • Quantum Long Term Equity Fund
  • SBI Magnum Equity Fund
  • Invesco India Growth Fund

For all these funds 3 year returns are greater than 22 %, 5 year returns are more than 15 % and 10 year returns are similar.

Multi-cap funds:

  • ICICI Prudential Value Discovery
  • Birla Sun Life Advantage Fund
  • Birla Sun Life Equity Fund
  • SBI Magnum Multicap Fund
  • Franklin India Prima Plus Fund

For these set of funds the 3 year returns exceed 30 %, the 5 year returns are nearly 20 % and the 10 year returns are between 12 and 17 %.

Mid-cap funds:

  • Franklin India Prima Fund
  • BNP Paribas Midcap Fund
  • UTI Mid Cap Fund
  • HDFC Mid-Cap opportunities Fund
  • L & T India Value Fund

For these set of funds the 3 year returns exceed 35 %, the 5 year returns exceed 20 % and the 10 year returns are nearly 15 %.

Small-cap funds:

  • Franklin India Smaller Companies
  • DSP BlackRock Micro Cap Fund
  • Reliance Small Cap Fund
  • Canara Robeco Emerging Equities

For these set of funds the 3 year returns exceed 40 %, the 5 year returns are nearly 25 %.

So if you are just starting to build a portfolio, your plan can be really simple. Just pick one fund from each category, add one International fund with focus on US for diversification and start investing. It is really that easy, do not get confused by reading all kinds of theory and opinion that sound impressive but make little practical sense.

What if you are already having a portfolio where you have been investing for some time? Well, if your returns are broadly compatible with these funds, it will make sense to stick to your current one. If the returns you are getting are significantly lower then you must change some funds in your portfolio. Remember that over a long period of time, even a 2-3 % difference in returns will mean a big difference in your corpus.

I hope this gives you enough ideas to start evaluating your portfolio or start creating a new one.

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A Growth portfolio for MF

The portfolio which you need to have for your MF is dependent on the stage of life at which you start to build it. In the previous post we had discussed Aggressive portfolios which are really suited for investors who have more than 20 years in their investment horizon. For such a person, focus on mid cap and small cap oriented MF is a logical choice.

What happens when your time horizon is reduced to say 15 years or so? This is quite possible as many investors have not looked at building up an MF portfolio till the time they are 35 or so. In such a case, their time horizon is probably 15 years – on the positive side, they will probably be able to invest more as their starting income base is higher. In such a situation the Aggressive portfolios we had in the last post will not be an ideal solution for them. Investors Guide, suggests a different model for these profile of people, termed as the Growth portfolio.

The essence of the growth portfolio is to balance the risk and reward, keeping in mind the time horizon available to the investor. You are trying to manage your risks here and at the same time you want to optimize growth. You therefore look for funds which do both of these. One other important factor in managing risk/returns is diversification. An MF focused on international opportunities will give you this.

The portfolio recommended by Dhirendra Kumar of ValueResearch Online is as follows. Note that all the 5 funds suggested have an equal weight of 20 %.

  1. Motilal Oswal NASDAQ ETF 100.
  2. ICICI Prudential Dynamic.
  3. PPFAS Long term value.
  4. Quantum Long Term equity.
  5. Birla Sun Life equity.

Notice the differences from the Aggressive portfolio. All funds here are either looking actively for value or are focused on large caps with lower risk. There are also two funds that look at diversification in international markets and risk reduction through appropriate asset allocation. Overall this portfolio seems to have all bases covered.

While I do think this will be a pretty good portfolio for a 35 year old ( or older ) investor who is getting started, I must say these are not really funds I have invested in now. At an earlier point I had invested in 2 but gave it up as I believe in keeping my debt and equity investments separated at all times and carry out my own asset allocation. I also had 5 some years back but gave it up in favor of some funds which I thought were better in the large cap space. I think 1 is too narrow in it’s focus and prefer an international fund with wider coverage. 3 and 4 have just not been in my radar so far.

However, the above is a pretty decent portfolio and is likely to give annualized returns of 12-15 % for investors over the time horizon of 15 years or so.If you are just starting to build up a portfolio, this can be the one to go for.

An aggressive MF portfolio

I am generally interested in good TV programs on personal finance and the one program which I like for the MF space is Investor’s Guide on ET Now. The anchor Fay D’souza is quite articulate and reasonably knowledgeable. She has Dhirendra Kumar of VR Online as the expert in the show, whose insights and analysis are worth listening to.

One of the useful things I find in the program is their construction of different types of MF portfolios, depending on the temperament and life stage of the investor. They have 5 different portfolios and have simulated an investment over the last seven years, putting a monthly amount of 10000 Rs in each of them. The portfolios are reviewed annually and changes made to them if needed.

In this weeks program there were some changes carried out by Dhirendra Kumar in the Aggressive portfolio. This is particularly suited to an investor who is willing to take some risks with his money, is able to withstand volatility and is having a long time horizon of 15 years and more. The suggested funds with their weights are as follows:-

  1. 10 % in Birla SunLife Dynamic Bond fund
  2. 15 % in DSP BR Micro cap fund
  3. 15 % in Franklin Smaller companies Fund
  4. 20 % in ICICI Value Discovery fund
  5. 20 % in Mirae Asset Emerging Blue Chip fund
  6. 20 % in Franklin High growth companies fund

In my opinion this is a very well constructed portfolio. The focus is clearly on mid and small cap funds which makes sense, given the long time horizon available. Also, the multi cap funds in the portfolio will have a fair share of large cap funds.The Dynamic bond fund will provide some dampening effect on the volatility which is going to take place over time. I think it is quite possible to achieve annualized returns of more than 15 % here.

However, if I were to construct an aggressive portfolio of MF schemes then I would make some changes to this. Firstly, I believe in keeping my Debt and Equity portfolio separate and therefore will not have the Dynamic bond fund.Also, I believe  having an international fund will provide some useful diversification. Thus my portfolio will look like this.

  1. 20 % in ICICI Value Discovery fund
  2. 20 % in Mirae Asset Emerging Blue chip fund
  3. 20 % in DSP BR Micro cap fund
  4. 15 % in Franklin Smaller companies fund
  5. 15 % in Franklin Blue Chip fund
  6. 10 % in ICICI US Blue chip fund

I will however, not invest in these funds through the SIP mode. My investments will be 4-6 times a year, based on the markets. Read my blog posts under the MF category if you are interested in knowing more about this.

Education loan – A personal case study

In the previous post I had outlined a plan that can be used for paying the Graduation expenses of a child through Education loan. Now, whether you are paying these expenses through invested money, current active income or through an Education loan, I am of the opinion that parents are responsible for the graduation expenses for the child. In effect this means, even if you take a loan, you should be paying it back and not the child. Of course, this will differ if the parent is economically weak, in which case it makes sense for the child to take care of the loan repayment once he/she gets a job.

When it comes to post graduation, my thoughts are quite different. I feel that children need to be responsible for their post graduation expenses and fund it through Education loans to be paid back when they start their working life. A second professional degree needs to be funded by the children as the purpose of it is to get a better career, after the first degree has been sponsored by their parents. Note that I am talking of expensive degrees such as an MS or an MBA here, not PG degrees from government universities that are relatively inexpensive even today.

When my daughter Rinki was looking at admissions to a good B school, she and I discussed extensively on these issues in order to figure out an optimal way in which we could do this. I will not go into details, if you are interested look up the posts in the “Education” category of my blog.She had been groomed in a way that she was quite prepared to take the loan on her own and pay it back in a reasonably short time. Her admission in the BM program in XLRI meant the costs would be 21 lacs for the 2 year course. Assuming another 1 lac for travel and personal expenses it meant an outlay of 22 lacs. While I wanted her to be responsible for this amount, I did not see much point in paying a huge amount of interest to the bank. Based on this, the plan we worked out was as follows:-

  • I will loan her the first year expenses and the second year will be funded by the bank. She will first pay off the bank loan to minimize the outgo of interest.
  • Repayment to me could be done later and would depend on factors like whether she wanted to do something on her own ( instead of a job) etc.
  • Based on this we got a 12 lacs loan sanctioned from the SBI branch at XLRI. The plan is to pay the loan in 5 years with the EMI being 25,173.
  • The loan is in her name, with her mother being the co-borrower. There is no collateral needed for the SBI scholar loan.

This plan is in motion now and I have arranged to pay the fees for the first two terms till now. I have also kept money aside for the third term fees that need to be paid in November. Though we have sanction for 12 lacs loan, we may not take the full amount – in case some surplus money is available next year, I may pay off part of the year 2 fees also.

If readers have any queries about the plan or anything about the loan, I will be happy to answer these.

Innovative use of Education loan

As all my readers will know, I am not fond of loans by a long stretch of imagination. In general, I believe that loans should not be used for consumption and, even in a crisis situation, they should really be the last resort. If a loan is needed to acquire a high value asset like a home, my preference is to pay it off as soon as you can. However, there can be some specific situations where an Education loan can be used in an innovative manner.

Before getting into the how and why of it, let us take a look at how we normally plan for the graduation expenses for our children. Typically, this will be done over a period of 15 years or so through some equity instrument such as Mutual funds through regular SIP or other mode of investment. If you have assumed a 12 % return over a reasonably long period it is likely that you will achieve your goal targets. To be on the safe side you may want to follow something like the plan below:-

  • Let us say, your estimate of your child starting his college education is in 2020 and the amount estimated over 4 years from 2020 is 12 lacs.
  • Your SIP corpus has reached a level of 11 lacs now, after the current market run up.
  • You can redeem your corpus in MF, put it into a safer debt fund and be quite certain that you will have the 12 lacs needed in 2020 when it is needed.

While the above is a perfectly acceptable way of doing things, it does have certain basic deficiencies which you may want to look at:-

  • You are redeeming your portfolio 3 years early, to be on the safe side. This may seriously hamper the growth opportunities.
  • You do not need all of 12 lacs in 2020, the requirement is over a 4 year period. It is therefore inefficient use of resources to block it in a low return debt fund etc.
  • As you are not aware of what exactly your child will land up for graduation, your need for money may be more or less than the plan you have made.

One way to look at this issue afresh is to consider Education loans from Public Sector banks. Now, the earlier rates of loans were in the range of 13% and more as it was not perceived to be a safe loan by the banks. At these prices, it does not make sense to take a loan. However, there is a class of loans nowadays, which are restricted to some listed Educational institutions, where the lending rates are way lower. At the present point of time the rates are in the range of 9.5%. With this option being available to you, the plan can be sufficiently tweaked as follows:-

  • Focus on the preparation of your child for competitive exams, so that he is likely to get into one of the listed colleges.
  • If you think it is needed for your child, have a goal amounting to 3 lacs or so when he starts in class 11, for the expenses related to coaching for competitive exams.
  • You may have earmarked an investment for your child’s graduation, but simply let it grow without getting into unproductive mechanisms of redeeming it and then putting the amount in debt instruments etc.
  • At the point of time you get admission for your child, take a sanction for the full expenses through an Education loan from a PSU bank, SBI or otherwise. Make sure it is a loan where there are no pre-payment penalties.
  • As far as payment goes. it will normally be every 6 months or so. As far as possible try to pay it from your active income if you are in a job or profession. If not look at whether it makes sense to redeem your equity investment to the extent of the installment of fees. The final option will be to get the Education loan disbursed for this part.
  • Whenever the market goes up substantially, redeem part of your equity holdings and try to pre-pay part of the loan already disbursed.
  • Over a 7 year period ( 3 years before the course and 4 years of the college), it is very likely that the markets will do well in a few years.
  • In the worst case, just keep holding equity and use the Education loan to the full extent. Start paying the EMI and when the opportunity presents itself, repay as much of the loan as you can.

Of course, there will also be situations where you have not invested adequately for your child’s education. In such cases the Education loan is a boon as it will still enable your child to study in the course and college of his choice. Once he/she passes out the loan can be paid off over a period of time.

I will encourage all of you to look at this strategy. It will ensure that your investments are being used productively and you do not need to redeem them at an inopportune time.

Alternative ways of owning a car

As you read in my previous posts, I do not think taking a car loan to buy a car is really a good idea. Some people have got back to me saying that, while they principally agreed to buying cars through cash payment, it probably means they would not be able to buy the car which they want to buy.

My first response to it will be that you need to cut your coat according to the cloth that you have.If you do not have money to buy the car you want to possess and cannot hope to save up for it within a reasonable period, then you probably cannot afford it anyway. A slightly risky way will be to invest in equity or hybrid products in the hope you will be able to get better returns in the time period under consideration. For example you may want to buy a car costing 10 lacs after 3 years. The scenarios can play out as below:-

  • Let us say you have 2 lacs today and will get about another 2 lacs by trading in your present hatchback after 3 years.
  • Assuming a 8 % return in debt products, your current 2 lacs will be 2.5 lacs in 3 years time. You therefore need additional access to 5.5 lacs.
  • You will need about 13828 Rs investment every month if it grows at 12 % and the cost of car rises by 5 %.
  • In case your investment returns are 8% then the amount you need to invest 16128 Rs every month.

As you will see from here, investment in equity will help you get a car of your desire. However, in a short period like 3 years there is a significant risk of the market returns being poor or in some cases, even negative. A better way will be to simply go by the 3 portfolio strategy, not bother too much about the particular goal, invest as much as you can and withdraw money from the appropriate instrument when the time comes. For instance if the markets are doing really well, sell a few stocks from your portfolio in order to buy the car you wanted.

For people in corporate jobs, the best way will be to get a car given to them by their company as a perquisite. This works out well for the company as they can claim depreciation and also for the Employee as the tax incidence is not high. However, as only a few roles have such perquisites inbuilt , this will not be of use to majority of people. You can then look at the option of leasing a car from your company as part of your CTC. The company will normally not have an issue with it, you save something on taxes and after 3-5 years you can get out of the lease. This is actually a good way of changing your cars every 5 years or so, provided you are in a stable job and plan to be there for a fairly long term.

An easier way, in case your spouse is not working or is in a lower tax bracket will be to buy the car in his/her name and get your company to lease it. Even though the lease rental paid will be taxable in the hand of your spouse, the overall tax impact for the family will be lower. This mode is easier as you can easily shift the lease to your new employer, in case of a change in jobs.

Of course, if you are a self employed person or in business you can show the car as an asset and claim depreciation on it. This will be the easiest way of buying a more expensive car. In this situation too, leasing a car directly from leasing companies will work out well as you can write off the amount paid as an expense.

So, go ahead and plan for your first car if you are not having one now. And, if you do, make a plan as to what your next car will be and when are you going to get it.

Buying cars – my personal experiences

In the last two posts I had shared why I love cars and do not think taking a car loan is such a good idea. Let me share in this post about my own experiences of how I went about it. A lot of what will be written here are personal situation and preferences.

I came to Delhi in the year 1988 after completing my post graduation from IIM Calcutta. Over the next 5 years, I had no real need for a car as I was quite happy to use autos and chartered buses in Delhi, also my jobs entailed a fair bit of travel. It was only when I got married to Lipi in November 1993 that I felt the need of a car. Fortunately the job which I joined in mid 1994, gave me a car for use and, though there was a change of job in between, this continued till 1998 when I took up a job in Chennai. Though both Lipi and I were working in Delhi, the salaries those days were quite low and as such it would have been a stretch for us to buy a car with our own money. With both our children being born in that period, it was a boon to have a job giving a car as a perquisite – relatively rate in those days. It was only a Maruti 800 but it served the purpose and choices were few then.

The shift to Chennai was good for me overall in terms of rewards but the job did not give a car as a perquisite to people who were not at a VP level. As I was only a GM then, I needed to buy a car before shifting my family from Delhi. The conflict I had then was whether to go for a car like a Maruti 800 AC which I could pay on my own or take a higher end model for which I needed to take some loan. As Lipi was giving up her job with our shift to Chennai, a loan did not seem like a great idea. However, I wanted to get a Maruti Zen VX costing about 4.2 lacs in 1998. Even with the Gratuity money from Lipi we were still short by about 1.5 lacs. I bridged this by a loan for 1 year that cost me only 6000 Rs in interest as there was some special rates for the company.

Zen was a great car and I loved driving it all around Tamil Nadu, with my family and also my parents and in-laws when they visited us every year. I was quite happy with it but with children growing up and my getting a job as a CEO in 2001, it seemed that a change was in order. The number and choices of cars in the Indian market had also increased dramatically by then. I settled for a Hyundai Accent GTX which would cost about 8 lacs on the road. After trading in the Zen VX, this amount came to about 5.5 lacs. By that time my compensation was at a higher level and we were able to foot the bill on our own. We bought the car in September 2002 and it really served us well for over a decade.

Our shift to Hyderabad in 2007 end was a good one for the family and after settling down, we wanted to look at the possibility of buying a higher end car. This time, as the company had provided a driver to me, we did not want to sell the Hyundai Accent. After a lot of search and decisions we narrowed it down to Toyota Corolla Altis which was costing about 14 lacs on the road in 2009. Once again, I was able to pay it off directly. Over the next few years having the car and a driver made our lives considerably easier, both in terms of travel within and outside Hyderabad. We kept the Accent car till my daughter Rinki started her college as it was useful in taking her to the coaching classes etc.

In my last corporate role till December 2014, I again had a car from the company along with a driver. This resulted in a fairly low running of my own car, in fact it has done only about 25000 Kms in the 7 year period. The advantage is that it is relatively new and in really good shape, thanks to the Toyota quality. Though I am in no hurry to replace it, if we shift out of Hyderabad that may be a logical point to look at it.

What have these cars meant to me? Well, happiness of possession and loads of good memories are the first things that come to mind. All the travels that we have undertaken are fond memories. Notable of these are the trips from Chennai to Pondicherry, our travel through Karnataka culminating at Hampi, beaches of Karnataka, drives from Hyderabad to Bangalore etc. 

A car may or may not make economic sense but these cars of mine have definitely enriched my life immeasurably and continue to do so even today.