My plans for my MF portfolio

If you are a regular reader of my blog you will know my 3 portfolio strategy for investment by now. I have portfolios in Debt, Stocks and MF. In the initial part of my working life I invested in mostly debt, the mid part was largely used to build up the stock portfolio and 2008 onward till now it has been largely MF. Of course, once I decided about giving up my regular corporate career in 2012, I boosted my debt portfolio significantly.

Over the years I have bought several MF schemes, initially with one time investments, thereafter with SIP and now back to investing at the right times. I have therefore collected a large number of MF schemes and in several of these the amounts invested are not very significant. The ones where I have done SIP obviously have some decent amounts, but even here there are several funds as my portfolio had changed over my 7 years of SIP.

In the past whenever the markets have gone up significantly, I have thought about cleaning up my MF portfolio. Somehow or the other it has never happened and I am stuck with a multitude of MF schemes, most of which I do not really want to keep. This weekend, I took a look at my MF portfolio after a long time and these were my observations.

  • I am currently investing in 4 MF schemes which are as follows. My plan is to continue investing in these for the future, at least till I have active income to do so:-
    • ICICI Focused Blue chip fund
    • ICICI Value Discovery Fund
    • HDFC Mid cap opportunities Fund
    • DSP BR Micro cap Fund
  • There are some other funds where I have significant investments but have dropped now. I will be keeping these for now but may want to sell them off during any annual review that I undertake. Future investments in these are unlikely:-
    • HDFC Top 200 Fund
    • IDFC Premier Equity Fund
    • Birla SunLife Frontline Equity Fund
    • DSP BR Equity Fund
    • Sundaram Select Mid cap Fund
    • Franklin India Blue Chip Fund
    • UTI Dividend yield Fund
  • There are some Close ended funds such as the ICICI Value Series Funds. I had invested in these as they give regular dividends which is useful to me. I will either continue with them or shift to other similar funds. To give readers an idea, ICICI Value Series 2 has given an XIRR of 30 % plus in the 3 year investment period.
  • Everything else, I want to get red of ASAP.

How do I plan to go about it? I have a feeling that next week may be the best chance if Nifty goes to 8750 etc. Once the US elections are through and the Fed rate hike does happen, our markets are very likely to down to 8200 or even below that on the Nifty. Once I sell all my disposable MF, I will just be in cash and wait for the right opportunity.

What will I be buying with the cash I get? Well, one option is to invest in some of the stocks I had outlined in the last post. I am sure that if I buy these at Nifty levels of 8000 I will definitely see significant returns over the next 3 years etc.Another option will be to space out the stocks and invest in my 4 MF’s .

Unless the NIfty shows a rising trend next week, I am finally ready to pull the trigger on this. Even if it keeps rising, I will still sell when it reaches 9000, as I do not believe that is a value at which the Nifty can sustain itself.

My stock choices for investment this Diwali

More than the new year or the financial year, traders in the stock market consider Diwali to be the beginning of their investment year. If you look at the performance over the last Samvat to this one we will see that the Sensex and Nifty have given about 10 % returns whereas the mid cap and the small cap index have given returns in excess of 20 %.

How will things work out for the next one year? From all indications the following outcomes are quite probable, with the normal caveat of all market projections being a hazardous game at the best of times:-

  • Nifty will probably be choppy through the year and end up with about a 7-8% gains from the current levels. 9500 will be a great level to achieve, I do not see Nifty crossing 10000 in 2017.
  • Mid caps are doing quite well now and will face a correction. Unlike in 2016, the next year will be the one where large caps will probably do better than mid caps.
  • Small cap index will continue to do well and will be the best performer.

Which stocks will be worth buying this Diwali with a hope of gaining at least 30 % and above in the next 12-18 months? I have been following a few of the good analysts and traders to understand what they are recommending and why. Based on that here are some of the stocks which are likely to do rather well. Make sure you do your own learning before you invest in any of these.

  • Kingfa Science
  • Rajratan Global wires
  • Cineline India
  • Jayant Agro
  • EPC Industries
  • Praj Industries
  • BEL
  • Vindhya Telelinks
  • CARE
  • Sadbhav Engg
  • ILFS Transportation
  • UCAL Fuel
  • KEC International
  • INOX Leisure
  • Indo National
  • Umang Dairy

While I have a few of these stocks I am planning to add some of these to the extent of 3-4 lacs between now and end of year, based on the right pricing levels. The idea will be to see if the investment can give an XIRR of about 18-24 % and double in the next 3-4 years. I plan to use the amount for a family vacation outside India for all 4 of us.

How do I know that such returns will be there? Well, I do not really but having looked at these stocks closely, it does seem to me that these companies will definitely have great chances of growth in the next few years.

MF managers are not yet into some of them, so go ahead and grab your chance while these are still reasonably priced. Wishing all my readers a very happy and prosperous Diwali.

My MF buying method -what is the impact?

We live in a day and age today where everything needs to be looked at through the prism of some data and numbers. My view on this has always been that if you fundamentally understand a concept then it does not really need the crutch of the numbers. However, I will make an exception for this post as there have been too many queries on it. 

So let us look at my MF buying for one scheme this year and see how it has an impact on my overall financial situation. I will choose the DSP BR Micro cap fund. The following simple analysis will help us in seeing what has happened here.

  • I have so far bought 1818 units in 2016 at an average price of 38.5 Rs.
  • Had I continued in my normal SIP for 7 months of the year ( my earlier SIP on this was 10000 per month), the average price would have been 45 Rs. Note that this is a conservative estimate, in reality it is a little more.
  • I would therefore had to invest 12000 Rs more in 2016 itself to get same units. Note that your asset is really the number of MF units you have in your account.
  • If I was spending 70000 Rs in 2016, I would have got about 1555 units.
  • Assuming that I let the extra 263 units be invested for the next 18 years @ 12 % XIRR the extra money I will get is equivalent to 1.1 lac. I have assumed the current price of 50 Rs in the DSP BR Micro cap fund.

So, there you have it – an investment of 7 months translates to a difference of 13000 Rs in a year and 1.1 Lac plus in 18 years even with a relatively conservative return expectation of 12 %. You can easily calculate the impact for a person who will be investing in MF for 25-30 years. At a conservative estimate again, the number will be in crores.

One can point out for argument’s sake that the impact is appearing more because I have been “lucky” with how the market tanked in Feb/March and recovered subsequently. But, if you think about it a little you will understand “luck” has nothing to do with the process.I would have bought my MF units based on the plan at the same time. Yes, the recovery has helped but that would have happened, some time or the other.

The simple reality is SIP is a completely illogical method to buy MF. Even if you want to buy every month, make sure you vary your amount so that you are able to take advantage of the opportunities that will present itself. Doing it blindly is simply like shooting blindly at a target and hoping you will hit it.

My MF buying in 2016

As many of my regular readers will know, I had been investing in MF through SIP between 2008 all the way through to October 2015. Based on my experience of more than 7 years in MF investing and a much longer period of more than 2 decades in building a direct stock portfolio, I came to the conclusion in 2015 October that SIP was not the right way to invest in MF. After stopping the SIP’s I wanted to invest a certain amount through the year 2016. If you are interested in why I wanted to stop SIP, go ahead and read the posts in my blog.

My investments in MF are in the following funds and I was having SIP of 10000 Rs every month in each of them:-

  • ICICI Prudential focused Bluechip
  • ICICI Value Discovery
  • HDFC Midcap opportunity
  • DSP BR Micro cap

In 2016 I wanted to invest the same amount as before but it was to be based on the market levels rather than in a time dependent manner. Also, I was not worried if I could not invest the entire amount in this calendar year. After all, it is better to buy MF at an NAV of 45 rather than 50, by waiting for some time.

The proof of the pudding is always in the eating, so let me describe for you how my plan has worked out so far in 2016.

  • I have made 3 purchases in the period January to March 2016.
  • My overall investment goal was 4.8 lacs, out of which I have invested 60 %.
  • After March, I have not really got a buying opportunity as I do not want to buy any MF with the Nifty being more than 8000. I am happy to roll over the surplus to 2017.
  • My average buying price of the MF and their current price are as follows:-
    • DSP BR Micro cap – Average NAV 38.5 , CMP 54.3
    • HDFC mid cap opportunities – Average NAV 35.7 , CMP 47.6
    • ICICI Value Discovery – Average NAV 105.4 , CMP 129.3
    • ICICI Focused Blue chip – Average NAV 26.7 , CMP 32.9

I feel that my overall strategy of buying MF has been way more effective than SIP. At the end of the day I want to invest low and redeem at a high, which is the basic idea of any equity investment. Yes, I may not be able to invest the entire 4.8 lacs in this calendar year but that does not matter to me.

I am absolutely certain that Nifty will breach 8000 in the short term and I will buy more MF when that happens.

Nifty call and investment rationale for rest of FY

Any prediction of the markets is always a hazardous job but in order to benefit from the markets one must attempt it nevertheless. For the last few months the Nifty has ranged between 8400 and 8900. It has threatened both these levels several times but have not been able to break out in a decisive manner. The Indian situation in terms of the economy has been improving but the overall global economic environment and therefore the market sentiments have really not been positive.

This has resulted in the Nifty finding good support at 8400 and even 8600 recently, mainly due to the high availability of cash being brought in by FII players. At the same time, it has faced resistance at 8900 as at that level the valuations become rather unattractive. As we wait for the Q2 results, we are observing a strange situation. At long last corporate earning growth for several sectors in the Indian economy, most notably Auto/Cement are looking up. With a supportive global environment. one would expect the Nifty to decisively cross the 9000 levels and make new lifetime highs by the end of 2016. Unfortunately the serious headwinds in terms of the US Fed hike, US presidential elections, situation in Europe/Japan, now rising crude prices and the fallout of the BREXIT impact will not enable us to see these Nifty levels.

So what will be a call on the Nifty then? I think the following scenario will play out:-

  • There may be fluctuations of the Nifty on both sides of 8500 levels in October, to the extent of 300 points. I think we are more likely to find support at 8500.
  • In November and December the US news will dominate and any event there will probably have a negative fallout for our markets. If the Fed rate hike takes place as planned, we will easily see 8000 levels being breached on the Nifty.
  • Between January and March 2017, local factors such as the budget and state election forecasts will dominate the news and sentiments. This will result in the Nifty being in the overall range of 8300 to 8700, depending on how things pan out.
  • By the end of 2017 a pessimistic Nifty projection will be 9000 and an optimistic one will probably be about 9500. It is very unlikely to be either lower or higher by much more (say another 200 points).

Based on this, how should you plan your investments?

  • If you want to rejig your MF portfolio, get out of your unwanted funds when the Nifty hits 8800 or so in the next rise. You can then wait till 8300 or lower to invest in the funds of your choice. I have about 7-8 funds which I plan to deal with in this way.
  • Over the next 6 months or so, SIP will actually be a good way to invest. You can put most of your annual money in the next 6-8 months and then stop your SIP for the remaining part of 2017. For my part I plan to invest the remaining 40 % of my MF investments when the Nifty gets close to 8000. It is likely to be in December.
  • As far as stocks go, keep your shopping list ready and add to your portfolio by seeing the right prices. Keep a watch on the DMA figures closely between now and the next 3-4 months. There will be serious buying opportunities.
  • Pure debt instruments will give lower returns over the next 2 years or so. Even then keep investing in PF/PPF/SSY as per your regular plan. Duration funds may be a risky bet as there is a possibility of the interest cycle turning.
  • Arbitrage funds will not make much sense going forward, unless you are purely using these for short term goals. Gilt funds again will give higher returns but are fraught with risks.
  • I will focus on MIP, Equity Savings Funds and some hybrid FMP in the debt space. Returns from pure debt FMP will be low, so not much point in being locked into such schemes for 3 years.

Overall between now and 2017 end will be a rather interesting period and I do think thart my call on the Nifty figures will largely hold good.

Financial freedom is the only goal I ever invested in

I think goal based investing has a lot of positives going for it, the most important one being it gives you a target to aim for. Without this, a lot of our investment actions can be distracted and lack coherence. However, while I have always had life goals in terms of how my family and I should lead our lives and what we will hopefully strive to achieve, I have never really invested financially for these goals. In fact, all of my investments in life on the financial front has been targeted towards only one goal – Financial freedom.

What does financial freedom mean to me and why is it the only goal for me? In very simple terms it has the following aspects inherent in it:-

  • I can choose to spend my time in a way that I choose. This may include “work” in the traditional sense of earning an active income, but that is not mandatory.
  • I do not need to do anything I am not liking, simply in order to earn money.
  • There is no need for me to monetize my hobbies in any manner. At the same time I am able to indulge in them to the extent I need to.
  • What about other goals like children’s college, paying for the home etc? Well, unless I am having enough funds for these I cannot consider myself financially free. Other goals are therefore, part of the overarching goal of financial freedom.
  • As an example, if I had to figure out the corpus needed at a very safe level for me at this stage of my life, it will probably go as follows:
    • Annual expenses of 8 lacs for 35 years = 280 lacs
    • 4 trips outside India @ 7.5 lacs = 30 lacs
    • Replacement of car and furniture over next 10 years = 30 lacs
    • Expenditure on children’s marriages = 50 lacs
  • The above comes to 3.9 crores in current financial assets. Note that this is very liberal in terms of expense estimates and quite conservative in terms of returns as I am not expecting any real returns from my portfolio at all.
  • As my current financial assets significantly exceed this figure, it is quite realistic to say that I have achieved my goal of financial freedom.

One can, of course, argue that your corpus should be 10 crores or something similar before you choose to spend your time as you please. My simple question will be, how do you plan to spend the money? If you are earning as your annual expenses are very high or you are doing it for others in your family till they are able to take care of themselves, then you need to continue working. But, if you are doing it for leaving a legacy for your children, then I am not in that boat at all. I believe in giving a good education to children and supporting them to get started in life. However, by the time they are 22 or 24 years old, I completely expect them to be taking care of themselves. I have never expected my parents to leave a legacy for me, nor have I encouraged my children to feel that they will be getting any. Emotional attachment is lifelong, not to be confused with financial support.

So, if you were to arrive at a figure for your financial freedom what will it look like? Against that figure, how much have you done till now? What is your plan to achieve the shortfall and by when are you likely to get there?

If you are able to answer these questions then you are well on your way to achieving your own financial nirvana.

An MF portfolio for Retirement

Most of us are familiar with creating and investing in an MF portfolio during our active earning years. We start off in a small manner, keep increasing our investments as our incomes keep rising over the years and hopefully get to a stage of having sufficient corpus in hand when we retire and no longer have an active income. This post is about the aftermath – what happens when we retire and id there a way in which we can deploy the corpus through MF? 

Firstly, let us examine whether it will make sense to be invested in equity as an asset class after retirement. My view is, unless your corpus greatly exceeds your needs, you will need some amount of equity growth to take care of unexpected circumstances which can impact any of us. This can be a sudden illness, some other emergency in the family or simply having the good fortune of living longer than what you had estimated. Being invested in only debt instruments and drawing out of it, may result in a situation where you run out of money when you need it the most. I. therefore, am a big supporter of being invested in equity to the extent feasible even in the retired stage of life.

Secondly, the question arises as to how should you be invested in equity then? Well, the ideal way will be to keep having your 3 portfolios of Debt, MF and Stocks even in retirement. You start realizing money out of these portfolios in the same order so that your equity investments have the maximum chance to grow. However, as many readers will surely point out, what happens when you do not have sufficient corpus that allows you to follow this strategy? One way will be to invest in equity through MF which carries a lower risk by their hybrid nature. You are now not in a growth phase of your corpus but in the drawing down phase. At the same time, you want to ensure some decent growth as this will ensure the longevity of your corpus.

The following portfolio is again taken from Investors Guide and has been suggested by Dhirendra Kumar of VR Online. The idea is to put most of your corpus, save some emergency money, into the following funds:-

  1. FT Dynamic PE Ratio fund
  3. Reliance MIP

Note that the choice of funds ensure that the risks are contained either through Debt investments for 2 and #, or through market actions in the case of 1. Let me take an example to illustrate how this will work in real life.

  • Consider a person who will retire in the next 2-3 years and has about 1.5 crores with him. He can put 50 lacs in each of these funds.
  • For taxation issues, investments in 2 and 3 should be ideally done 3 years prior to the first year when money has to be withdrawn.
  • The growth of the portfolio will be about 10 % on an average.
  • Withdrawal rate can be about 6-8 % of the portfolio value, depending on the need.
  • In the first year this will give about 9-12 lacs which is sufficient for most of us to run their annual expenses. I am assuming here that the investor already has a home.
  • The surplus can be invested in some safe avenue or reinvested in these funds if some risk is OK.
  • In case the corpus is 1 crore, the withdrawal will be 6-8 lacs in a year.
  • Assuming a 6 % inflation, this will last about 20 years or more with a reasonable degree of comfort.

Note that depending on the corpus available, you can have more complex bucket strategies but this is probably a simple hassle free way to achieve what you need.

Conservative investors can try out this MF portfolio

In a high inflation economy like our’s it is almost an imperative to invest in equity as an asset class for any long term goals.  Investment in debt products will simply not have the required growth to meet your long term goals be it children’s higher education, their marriages or your retirement. Despite this it is an unfortunate reality that many investors shy away from investing in equity and go for products that are clearly not suitable.

One of the main causes for this is the volatile nature of the stock markets and how it is hyped up by the business media. The doom and gloom scenario often painted by the TV channels and the newspapers make it seem that the stock markets are only a little better than gambling casinos, where only the exceptionally skilled or lucky people will have any chances of decent returns. Many investors are temperamentally not suited to high volatility and it is almost impossible for them to see a reduction in their capital value, even if the decline may be only temporary in nature.

While I can understand the psychology of such investors, their investments in fixed income and other debt products will unfortunately not take them very far. With the FD rates coming down in a relentless manner we will very soon have rates below 7 %. Investing at these rates of return when real inflation is equivalent or higher for most items of expenditure. In order to get these type of investors started in equity investments. what is really needed is a low volatility portfolio which will be able to manage the anxiety levels and hopefully pave the way for them to take a little more risk as time goes by.

The below conservative portfolio has been designed by Dhirendra Kumar of Value Researcn Online and was televised in the program “Investors Guide” in ET Now. Over the last 10 years, an investment of 10000 Rs per month has yielded an XIRR  of 10.5 %. While this is not earth shattering, it is way better than some of the returns investors are getting from their current fixed income and other debt instruments. The 4 funds in the portfolio are:-

  1. FT Dynamic PE Ratio fund.
  2. HDFC MIP.
  3. Reliance MIP.
  4. Tata Balanced fund.

The reason the portfolio works is simple – it tries to take the advantage of equity returns while lowering risks wherever possible. For example, the FT fund invests more in equity when the PE is lower and shifts money to debt when the PE begins to heat up. The Tata Balanced Fund has a similar mechanism, though the way it is done will be different. Also, in a Balanced fund 30 % or more is always in Debt anyway. The MIP funds will have much of the money in Debt but they are able to take advantage of equity buying at the right times in order to increase their returns overall. So, while the returns of this portfolio will never be spectacular due to the reasonably high debt component at most times, the risks are definitely on the lower side. In other words, a perfect recipe for conservative investors.

If you are hesitant about starting your equity investments you can begin with this portfolio. Over a period of time, you will be glad that you took the plunge.

Small savings rates and market alignment

In the budget this year, one of the significant announcements was that the small savings rates in the various schemes will be aligned to the market rates. From an economic viewpoint this is unexceptional – after all it does not make much sense for the government to pay you more than what the market is offering you on similar instruments, often coupled with a higher level of risk.

However, i was somewhat skeptical with this announcement as similar attempts have been made before and not much had come out of it. In case you follow the annual chaos that often accompanies the fixing of PF rates every year, you will probably get what I am trying to say here. The basic issue is this – there is a very strong constituency which invests in these products and it is not easy to disregard them for any government. Over the years dependence on these products have reduced to some extent, thus making is possible to reduce the rates significantly over time. Nevertheless, it will be quite another matter to make the rates completely market linked without raising a lot of hue and cry.

In the actual event the rates were changed for the first quarter, left untouched for the second quarter and have only been marginally tinkered with in this quarter. So the PPF rates are still 8 % and the SSY rates are at 8.5 %. If you look at these rates being market linked as per the declared policy then we are about 50 basis points higher today. The chances are that the rates will hold for the current FY and further reductions will happen in the April 2017 quarter.

What does this really mean for your investments in schemes such as PPF and SSY? Consider the following :-

  • These are part of your debt allocation, so cut out the noise and do not try to compare it ever to equity returns.
  • Understand that though the rates will probably not be completely market linked, over the next 2 years or so they are very likely to go down further.
  • I feel that PPF rates can go down to 7 % in the next year or so. The SSY rates will generally be 50 basis points higher than the PPF rates.
  • 7 % tax free returns on your money is still worth quite a lot. At the highest tax bracket you will need to earn more than 10 % from an instrument whose returns are taxed, in order to match this. There are simply no such instruments.
  • If you are not needing income out of your investments, just keeping them where they are makes a great deal of sense.

Remember, these are long term products and will also get benefited by the interest rate cycle. Over the next 5 years or so interest rates will rise again and all your investments earning a tax free return will be a bonanza then. Furthermore in a low inflation regime any real rate of return that is guaranteed along with tax breaks will always make eminent sense. Debt has a specific place in your portfolio, understand and act accordingly.

What are my plans on these schemes? Well, I have a long running PPF account and my wife has restarted her account 3 years back. Till the rates are at 7.5 % levels I plan to keep contributing regularly to it. At the current rates today, we earn sufficiently from it to cover about 50 % of our annual expenses. Assuming we keep investing 3 lacs in it for the next 7 years or so, the income generated from these accounts will probably cover our entire annual expenses at that time.

The only caveat to this is any possible changes in the tax treatment of these schemes. I do not think that is likely, given the difficulties that the government is facing in aligning the rates to the m