Building an equity MF portfolio in new FY

Much as I would like to write regularly for the blog, of late I find it difficult to get the time to do so. In the last 3 months I have been rather busy mentoring B school aspirants and very recently went on a vacation to Phuket for a week. The blog remains close to my heart though and in this new FY I will make a renewed attempt to be regular in writing.

I get a lot of reader queries on how to create an ideal long term portfolio of equity MF schemes. There have been several posts written on this and you can search the blog to read those up. However, fund performances and the market dynamics keep changing, so it will make sense to revisit that now. With the new SEBI classification of MF categories it is easier to build a portfolio now. You can have a set of choices in each category and then select one from each to get your 4-5 funds. I have given a choice of a few funds in different categories below and any selection of these will result in creation of a robust, long term portfolio of equity MF. These are all well known funds that have been recommended by several analysts and I have done my own fact finding about these too, so I can suggest them with complete confidence.

Here are the MF scheme suggestions in the different categories :-

  • Large cap funds
    • HDFC Top 100
    • ABSL Front Line Equity
    • ICICI Blue Chip
  • Multi cap funds
    • Franklin India Equity
    • Mirae Asset India Equity
    • Kotak Standard Multi cap
  • Mid cap funds
    • Franklin Prima fund
    • DSP Mid cap fund
  • Small cap funds
    • DSP small cap fund
    • HDFC small cap
  • ELSS funds
    • Axis Long term equity
    • Franklin India Tax shield

If you want you can add an international fund to this mix but that is only required for sophisticated investors. Most of you can simply select funds from the categories here and build a portfolio where you can invest for the long term. Some pointers for this :-

  • If your risk appetite is low and you are disagreeable to market volatility then you may want to stick to only large cap and multi cap category, with a small investment in mid caps. Avoid small cap funds in this case.
  • If you believe in the India growth story and are looking at the long term for your portfolio then have a mix of all categories with sufficient allocation to mid cap and small cap funds.
  • If you are well off and looking at this portfolio to have high growth with tolerable risks then put most money in mid cap and small cap funds. There will be a lot of volatility but over the next 15-20 years you will be able to get good benefits.

What about the likely returns from these fund categories and where should we invest for fixed income then? I will cover these in other posts, hopefully soon !!

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How has my first Mutual fund investment performed?

Over the last week, I have been taking a closer look at some investments I have done in my early days as an investor and trying to see how they have worked out. While readers will know by now that I started investing in stocks since 1990, my foray into the Mutual fund world was only in the year 2001. This was after we had shifted to Chennai in 1998 and, despite having 2 young kids with high expenses, happily found that we had quite a bit of invest-able surplus every month, thanks to a strategic job change that had resulted in a pretty decent take home compensation.

When we were approached by a Financial adviser who wanted us to invest in equity through the vehicle of MF, it seemed a natural progression from my investments in stocks. To start with we wanted to look at a large cap fund and see how things worked out for a while. The choice of Franklin Blue Chip fund was a logical one among the schemes that were in vogue then. We started off with a 10000 Rs investment in February 2001 and over the next 12 months this investment went to 50000 Rs. The NAV of the scheme was around 10 Rs only during those days, courtesy the markets having tanked due to the Harshad Mehta scam and we got 4722 units for our investment. With one thing and another I did not keep up with my investments in this after January 2002 – our focus shifted to buying an apartment in Chennai, we started a stock portfolio in a meaningful way and my professional life got busy. When we did start our MF investments again in 2008, the MF universe had changed quite a bit and there were many schemes on offer. 

So the long and the short of the story is that I have had the investment in FT Blue chip fund for nearly 17 years now. This makes it an ideal investment candidate to check if equity investments in the long run have really worked. We had invested in the dividend option  and the fund has declared a dividend unfailingly every year since 2002. Some basic data on the fund performance is as follows :-

  • Dividends over the year have added up to 2.85 lacs
  • Current value of my units in this scheme is 1.83 lacs
  • As I said earlier, our investment between Feb 2001 and Jan 2002 was 50000 Rs
  • From the FT site, I can see that this translates to an XIRR of 30 % plus.

Without getting into any discussions of relative performance etc, one can see quite easily from the above that the investment has done rather well. Though future projections are fraught with risks, this should encourage all investors to invest in MF schemes for the long term. The expectations should not center around the XIRR here, but even with an 18 % XIRR your investment will grow 16 fold in 16 years, which is remarkable.

Was a dividend option a good idea? Yes, for us it was as it enabled us to spend on some things during the years when money supply was tight, despite my high income, due to our buying the Chennai apartment and trying to pay it off quickly. I also have a feeling that taking some money off the scheme has worked well in the bad years of the market. This has to be corroborated by data and I will do a separate post on that soon.

The bottom line though is this – investment in MF is a very viable option in the Indian markets for the long term. If you have time on your side, start this now. In fact, any investor with more than 10 years till he needs the money must do so.

Long term performance of MF – personal example #2

I am currently writing a series on real life MF performances on my blog. The first post of the series was about my portfolio created through monthly SIP between April 2008 and March 2010. Around the same time another portfolio was started by my wife and this too ran for the same period. Of course, in her case there was one fund which continued for 3 years but that will not change the analysis much.

So here is the portfolio and the performance of individual MF schemes in it:-

  • ABSL Frontline Equity fund has XIRR of 12.65 % and has been down nearly 4.75 % this year.
  • HDFC Top 100 fund ( earlier HDFC Top 200 ) has XIRR of 12.07 % and has been down nearly 1.21 % this year.
  • ICICI Prudential Value Discovery fund has XIRR of 18.63 % and has been down only 0.37 % this year.
  • DSP Equity fund  has XIRR of 11.04 % and has been down nearly 10.76 % this year.
  • IDFC Multi Cap fund ( earlier IDFC Premier Equity ) has XIRR of 16.07 % and is down 8.78 % this year.
  • UTI Dividend Yield fund has XIRR of 11.91 % and is up 1.61 % this year !!
  • Sundaram Small Cap fund has XIRR of 11.08 % and is down 31.54 % this year.
  • The overall XIRR of the portfolio is 14.35 %

Now, at first glance, this appears quite good and most MF investors will be happy to get such a result. However, when we buy into equity we need to look a little deeper to get a clear picture. So here then are some critical points to consider.

  • Starting on a positive note, the portfolio XIRR was about 20 % just 2 months back !!
  • Note that these purchases through SIP were between April 2008 and March 2010 ( March 2011 for one fund ), a great time to invest in MF.
  • The data clearly shows our markets have performed well over 10 years – after all Sensex was below 10000 in 2009 and has been to 37000 this year.
  • So even with the best buying price and the best market performance ( discount the last 2 months ) we are looking at a return of less than 18 % over 10 years.
  • Consider also that these are some of the best funds of that time and fairly reputed now too. 
  • These are all regular funds so the expenses are higher as compared to Direct.

Summing up, it is good to invest in MF regularly and if you can do it at a time when the markets are in a downward trend then all the better. However, under most conditions you should temper down your expectations of XIRR to 12 %. If you get more than that it is a bonus but any plan with a return expectation which is greater does not make sense.

In my other posts on this series, I will provide more data and insights on this.

Long term performance of MF – personal example #1

Over the years I have been very impressed in seeing how investors have taken to investing in MF schemes. The success assumes more significance if you consider that Indian investors were rather averse to equity and retail participation in our stock markets have been a very poor percentage, in low single digits even today. Marketing of MF as an investment vehicle has a lot to do with the success and there are a few themes that are hammered incessantly, be it in advertisements or by financial planners or MF distributors.

The first of this is the long term performance of MF schemes and the second is the value of regular investments through SIP mode. So much so that most planners work with an XIRR of 12 to 18 %, depending on the type of MF being invested in. This is clearly not a good way to sell as the risks of the equity markets are greatly downplayed. The proof of the pudding is however always in the eating, so it is important to check this against some real data to see how it works. In this post and a few following ones I will aim to do that.

My own investment with MF dates back to 2001 when I did a few investments in Franklin Bluechip fund and ICICI Technology fund. While I will cover those in a future post, let me look at the investments that I did between 2008 and 2010 for an MF portfolio. I started the investments as the stock markets were really down and we wanted to look at some alternative to our normally heavy stock buying. From a market perspective it seemed a great idea and we obviously had time on our side – we did not want to take the money out for the next 10 years and maybe much more than that.

Cut to 2018 October, when I did a review of how the investments had fared in 10 years. I will just give the MF scheme names and XIRR here as the invested amounts are nor really relevant for the purpose of understanding long term performance.

So here is the portfolio and the performance of individual MF schemes in it:-

  • Reliance Value fund ( earlier Reliance Regular Savings Equity ) has XIRR of 12.6 % and has been down nearly 12.6 % this year.
  • L & T Equity fund has XIRR of 13.36 % and has been down nearly 5.5 % this year.
  • HDFC Mid Cap Opportunities fund has XIRR of 20.84 % and has been down nearly 14 % this year.
  • DSP Small Cap fund ( earlier DSP BR Micro Cap)  has XIRR of 21.06 % and has been down nearly 26 % this year.
  • The overall XIRR of the portfolio is 15.28 %

Now, at first glance, this appears quite good and most MF investors will be happy to get such a result. However, when we buy into equity we need to look a little deeper to get a clear picture. So here then are some critical points to consider.

  • Starting on a positive note, the portfolio XIRR was about 20 % just 2 months back !!
  • Note that these purchases through SIP were between April 2008 and March 2010, a great time to invest in MF.
  • The data clearly shows our markets have performed well over 10 years – after all Sensex was below 10000 in 2009 and has been to 37000 this year.
  • So even with the best buying price and the best market performance ( discount the last 2 months ) we are looking at a return of less than 18 % over 10 years.
  • Consider also that these are some of the best funds of that time and fairly reputed now too. 
  • These are all regular funds so the expenses are higher as compared to Direct.

Summing up, it is good to invest in MF regularly and if you can do it at a time when the markets are in a downward trend then all the better. However, under most conditions you should temper down your expectations of XIRR to 12 %. If you get more than that it is a bonus but any plan with a return expectation which is greater does not make sense.

In my other posts on this series, I will provide more data and insights on this.

Strategies for your MF portfolio

Over the last month or so, I have been inundated with several queries about the fall in the markets and the effect it is having on the MF portfolio of investors. In August all investors were happy as the large caps did rather well and even the mid caps and small caps seemed to be recovering a tad bit. Just 6 weeks down the line the picture is one of utter despondency – this, of course, makes no sense at all.

I keep reminding readers that equity investments are subject to steep rises and falls at times and they will always need to look long term. However, this is not easy to do temperamentally for MF investors as many have been told that the MF schemes are managed well and would be subject to less volatility. While a good fund manager will be able to do better than a poor one, the fact remains that when the markets fall sharply then the NAV of all MF schemes will decline – some more than others. So, in reality what is happening to your MF schemes and your portfolio is natural, you only need to see what you should be doing right now.

Here are some of the things you must be considering now :-

  • Do not stop your SIP investments, if you are doing them regularly. Falling markets are a good time to invest and you will get great value for money at a future date.
  • In case you are thinking of making a lump sum investing into MF schemes, hold on for some time and keep studying the 200 DMA levels of the indices. For example, if you want to put 1 lac in a large cap fund, look at the 200 DMA of Nifty. As long as it is declining and 50 DMA or 30 DMA is also declining, do not put your money. When there is a reversal in these figures start putting money in 3-4 instalments.
  • Review your MF schemes – if they are underperforming both the benchmark indices and peer group schemes, then you need to think seriously about moving out. However, this is a bad time to sell so hold on till the market improves and then do it in a proper manner.
  • For all MF schemes which are in the top 20 % or so there is really no need to change. They may have been beaten down badly but you will just have to give time to them for recovery, there isn’t much else you can really do.
  • In case you have any goals coming up in the next 6 months or so, take stock of your entire portfolio and check how you can arrange the money. Do not sell equity MF unless there is no other option at all – redeem your debt, withdraw from your PPF, even take a loan from family/friends if need be.
  • If you have done your asset allocation right then you need to stick to it. This is the time to put more money in equity despite the brutal cuts. Do not redeem debt investments for this but put your current surplus in equities largely.
  • In case you have time on your side there is no need to panic, markets and economy will do better eventually. You do need to review and get out of bad investments.
  • For people retiring or planning FI in the next 5 years or so, think of deploying your assets so that you are able to give more time to equity.
  • Mid caps and small caps allocation can be looked into – ideally put 50 % in large caps, 20 % in multi caps and the rest in mid caps and small caps.

So, for people who are trying to change schemes or starting their MF portfolios now, which are the good funds to look at? Here are some suggestions from experts :-

  • Multi cap funds
    • Motilal multi cap 35
    • Kotak standard multi cap
    • Invesco India contra fund
  • Mid cap funds
    • HDFC mid cap opportunities
    • Kotak Emerging equity
    • L&T mid cap fund
  • Small cap funds
    • HDFC small cal
    • Reliance small cap
    • L&T emerging equity
  • Large cap funds
    • Reliance large cap
    • ICICI Blue chip
    • Birla Front line

A final point – you will now need to look at the portfolios of MF schemes too. This is really the job of a fund manager but you have to check if they are taking the right calls. Many of you cannot do this on your own, engage an adviser then.

Happy Dussehra to all my readers and their families.

Some model portfolios based on CRISIL ratings

I received a lot of feedback on my earlier post about the CRISIL ratings of MF schemes. Many readers expressed surprise that their schemes were not in the Rank 1 or 2 categories, while others wanted to question whether the CRISIL ratings are really trust worthy. Well, the report is available in the public domain so I will definitely recommend that you get hold of it and read it, it does contain a lot of useful information. As far as my opinion goes, I found the report to be quite a good one and fairly objective in assessment of the different MF schemes.

So why are the erstwhile favorite schemes such as HDFC top 100, DSP small cap fund, Sundaram Select mid cap etc not doing well according to this report? Well, the issue is largely with the funds and not so much with the rating. You need to remember that the strict rules by SEBI has led to a fair bit of portfolio churning for several MF schemes and these are now really aligned to their respective categories. So it is now not possible for a fund manager of a Large cap fund to take some Small cap bets in order to increase the returns. All of this will be great in the long run but can have a dampening effect on the performance of the more popular funds in the short run. As I said, there is no need of a knee jerk reaction right away, wait for a couple of quarters to see if they recover.

However, if you are starting off with a new portfolio, then it surely makes no sense to invest in the funds that are currently doing poorly, such as the HDFC Top 100 etc. It will be way better to look at funds that are doing well in the context of the past few quarters. As I have said repeatedly in my blog, a well constructed MF portfolio should have about 4-5 funds from different categories. As we are talking about an initial MF portfolio here I will look at 4 types of funds, 1 in each category namely, large cap, multi cap, mid cap and small cap. The allocation can differ based on the risk temperament but for a long term portfolio, it will be fine if you invest equal amounts in each of them.

With all that out of the way, here are my model portfolios:-

  • Model portfolio #1 
    • Axis blue chip fund
    • Principal multi cap growth fund
    • L & T mid cap fund
    • HDFC small cap fund

 

  • Model portfolio #2
    • HSBC large cap equity fund
    • UTI equity fund
    • Axis mid cap fund
    • Reliance small cap fund

 

  • Model portfolio #3
    • ICICI Prudential Bluechip fund
    • Kotak standard multi cap fund
    • Edelweiss mid cap fund
    • L & T emerging businesses fund

 

  • Model portfolio #4
    • Reliance large cap fund
    • Mirae Asset India equity fund
    • HDFC mid cap opportunities fund
    • Franklin India smaller companies fund

 

  • Model portfolio #5
    • UTI Mastershare unit scheme
    • Motilal Oswal multi cap 35 fund
    • Kotak emerging equity
    • SBI small cap fund

You can take any of these portfolios ans start investing for a year, keeping a look at how their ratings change every quarter. After one year if you are not happy about the performance of any scheme, look at changes.

My feeling is that sustained investment in any of these portfolios over the long term will create serious wealth and help you achieve all your life goals.

Best MF schemes as per CRISIL – do you have them?

With the recent categorization of MF schemes by SEBI, there have been several changes to the portfolios of many schemes. In the current context, it becomes important to rate the performance of the schemes, not only on the basis of annual or historic performance but also by how these have performed in a quarter. CRISIL is one of the rating agencies that has high credibility and reputation and they have recently come up with their MF schemes rating for the June 2018 quarter.

It is important to understand that the CRISIL ratings focus more on the current performance both against the benchmark indices as well as the peer category schemes. I think this gives a much better handle as opposed to historic performance. Many financial advisers will tell you to look at a scheme only if it has a 10 year history etc. Believe me, that is absolute nonsense – an MF scheme has a portfolio and what is important is the quality of the portfolio today, when you are putting in money. It is of no use at all to invest in a fund just because it is 15 years old and had been number 1 some 4 years back.

If you look at your portfolio you may find several schemes which had been very good earlier but are doing poorly now. Before I share the results from CRISIL let me outline the rating method employed by them. The ratings are from 1 through 5 with 1 being the best. There may be more than 1 fund ranked 1 etc. In general funds ranked 1 and 2 are the ones doing rather well, schemes ranked 3 are just about ok and rest to be avoided.

So without further ado let me give you the rankings in the different categories:-

  • Large cap funds
    • Rank 1 : Axis blue chip, HSBC large cap equity
    • Rank 2 : ICICI Prudential blue chip, Reliance large cap, UTI Mastershare
    • Rank 3 :ABSL Frontline equity, Kotak blue chip, SBI blue chip, HDFC Top 100
  • Large and Mid cap funds
    • Rank 1 : Canara Robeco emerging equities, Sundaram large and mid cap fund
    • Rank 2 : Mirae Asset emerging blue chip, Principal emerging blue chip
    • Rank 3 : DSP BR equity opportunities, Franklin India equity advantage
  • Multi cap funds
    • Rank 1 : Principal multi cap fund, UTI equity fund
    • Rank 2 : Kotak standard multi cap, Motilal Oswal multi cap 35 fund
    • Rank 3 : ICICI Prudential multi cap, SBI multi cap
  • Mid cap funds
    • Rank 1 : Axis mid cap, L & T mid cap
    • Rank 2 : HDFC mid cap opportunities, Kotak emerging equity
    • Rank 3 : ICICI mid cap, Sundaram mid cap, Franklin India Prima
  • Small cap funds
    • Rank 1 : HDFC small cap fund
    • Rank 2 : L & T emerging business, Reliance small cap
    • Rank 3 : Franklin India smaller companies, SBI small cap

Now many of you may be feeling that your funds are not there in Rank 1 or 2 and that is not really an immediate problem. However, if your fund is not there in Rank 3 too then you need to worry. One example I can easily give is that of DSP BR small cap fund, whose erstwhile name was DSP BR micro cap fund. This fund has had a great run over the years and had to even stop subscription as the AUM was getting to be unwieldy. However, in the last year several other funds have done well and the DSP fund has a Rank of only 4 now. Does it mean you should get out of it, if you have invested in it for long, like I have? Not yet, I suggest you look for another couple of quarters before taking that call. For new investors though, it makes no sense to invest in funds that are not Rank 1 or Rank 2.

I will do a couple of posts on the CRISIL June rankings – one on some sample portfolios the investors can have and the other on how some of the best known funds have fared badly in the ranking and why.

I know a lot of people read my posts but would love to see more comments on the blog. Do go ahead and comment about this post after you read it.