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.

Advertisements

Build a long term portfolio through focus on sectors

In some of my blog posts I have covered the topic of building a portfolio for a new investor. While there are many ways to do this, building a long term robust portfolio is best done through sectoral focus. This has several advantages and one should keep these in mind while building the portfolio. Firstly, investing in a few important sectors will ensure that your portfolio is a representative one and reflects the indices in some manner. Secondly, a combination of such stocks will act as a natural hedge against any serious downfall in the markets. Thirdly, it will be easy to review and change such a portfolio as you are having both the industry and company dimension to look at.

Which will be the sectors to put in money now? Given the economy and demography of India, anything which is related to the domestic infrastructure building or domestic consumption will be great areas to bet on. Remember, you are building a portfolio for the long run, it does not matter if it tanks by 20 % in the present year. The important thing is to identify good companies in the sector – these must have good market presence and asset base to ensure longevity in a positive manner. Avoid flashy companies where results go all over the place and which are in high debt.

For people starting off here is a set of sectors and some suggested companies in them :-

  • Financial sector (Banks)
    • Large private bank – choose between HDFC Bank / ICICI / Kotak / IndusInd
    • Large PSU bank – SBI / PNB
    • Smaller private banks – Yes Bank / Federal Bank / RBL
  • Housing Finance companies
    • LIC Housing Finance / HDFC
    • Indiabulls Housing Finance
  • Cement / Paint companies
    • ACC / Ultratech 
    • Heidelberg / Ambuja
    • Kansai Nerolac / Asian Paints / Berger Paints
  • Auto companies
    • TVS Motors / HeroMotocorp
    • Maruti / M & M
  • Pharma companies
    • Cipla / Lupin / DRL
    • Shilpa Medicare
    • Ajanta / Granules / Aurobindo
  • FMCG
    • Marico / Dabur
    • HUL / ITC
  • Engineering
    • L & T
    • BHEL / BEML
  • IT Services
    • Infosys / TCS
    • Hexaware / KPIT / Mindtree

Avoid Telecom companies and also any other businesses which are cyclical in nature like Sugar and other agro based ones.

Once you have the above framework, all you need to do is to get a low cost Demat account where you can buy stocks without paying high brokerage or annual charges. Based on how much money you have, decide on a quarterly allocation of funds and start buying based on the right time. Remember, you always buy in small lots and check the DMA figures to make sure there is some basic logic to the price. Also, do not go overboard on the number of stocks. You should buy from each of the above but not more than 2/3 from each of them.

Let me give a typical portfolio created out of this strategy :-

  • HDFC Bank
  • SBI
  • Federal Bank
  • Indiabulls Housing Finance
  • Kansai Nerolac
  • Ultratech Cement
  • TVS Motors
  • Maruti
  • Cipla
  • Shipa Medicare
  • Marico
  • ITC
  • L & T
  • BEML
  • Infosys
  • Mindtree

These 16 stocks should be a good one to go with, though you can definitely change some as per your personal preferences. For example, you can replace Maruti by M & M and Mindtree by Hexaware and ITC by HUL and the basic nature of the portfolio will not be altered. Try to have only about 16-20 stocks as with any more you will be spreading the portfolio too thin. In any case, you will review the portfolio once every year and can replace some stocks if you are not happy with their performance.

What should be the investment in this portfolio. It can be anything really but I think you need to invest about 25-50 K in every stock for it to be meaningful. Ideally you should build up this portfolio between now and 2019 end. So we are talking about 4-8 lacs over the next 15 months. If you do not have these resources, you can still build a portfolio with above logic but lesser number of stocks. Put in 1-2 lacs in about 4-8 stocks to start with and you can keep adding more as and when you get money available.

Now to the million Dollar question – how will this portfolio perform in the long run? Well, though it is difficult to predict equity performance over any duration, for 10 years it becomes a little easier. At a conservative estimate this portfolio, with a thorough annual review and change, should deliver at least 15 % annual growth. So a 8 lac portfolio will become about 32 lacs in 10 years. You can therefore assume a multiple of 4 to your invested amount. 

This is a great time to build a portfolio by investing in good stocks. If you have a goal in 10 years time of 40 lacs, just build a portfolio of 10 lacs with these stocks and let the markets do the rest. If you are just starting off and can invest only 2 lacs over the next year then do so – maybe in 10 years you can buy a car of your choice.

I hope to see you getting started today so that you reap the benefits in 2019 !!

Building a stock portfolio with expert recommendations

The past few months have been very interesting ones for the Indian markets. Most people will agree that the valuations of a large number of stocks were stretched and unsustainable, so the correction, though brutal, have had the benefits of bringing down the markets to levels where one can look at investing. The mid cap and the small cap space may well witness more pains, even though the large caps seem to have stabilised for now. The quarterly results were largely good, though not spectacular, and with the festive season falling in Q3 it can be expected that the current quarter results will be good. Is this the time to build a portfolio for the future then?

In my opinion, if you do not have a stock portfolio now, it is a good time to start building one. Several stocks are available at attractive prices and present a great opportunity of handsome gains between this Diwali and the next. The important thing is to pick the right stocks so that the portfolio is a high performance one. In this regard it is best to go with professional recommendations, even though you must do your due diligence to ensure you are comfortable with the stock in your portfolio and are broadly aware of the risks that are associated with the stock.

I have been following a lot of recommendations over the last 2 weeks and have come up with this selection from different experts, both from Fund houses and brokerage houses:-

  • Birla Cable
  • Engineers India
  • Escorts
  • Federal Bank
  • Heidelberg Cement
  • Hindustan Oil Exploration 
  • Himadri Speciality Chemicals
  • ICICI Bank
  • L & T Finance Holdings 
  • NALCO
  • NBCC
  • Petronet LNG
  • Sonata Soft
  • South Indian Bank

You can start investing in these with the basic rules in place – buy in small lots, stagger your purchases, be aware of important events such as state election results, be in cash to take advantage of sudden market changes etc. If you have 5 lacs plus to invest, you can look at the next 4-5 months to put your money in. With a lower amount, look at the next 2-3 months and invest in fewer stocks, not the whole lot.

A disclaimer here will be in order – I have a few of these stocks and am actively considering the option of adding the rest to my secondary portfolio between now and end of the year.

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.

My current stock portfolio – the best by value

When you have a portfolio for the length of time I have had, the best stocks either by value or by overall returns keep changing. Within that you will have spectacular successes and abysmal failures at different points in time. However, in the long term there will be some stocks that form the bulk of your portfolio and these are normally also the ones providing you with your best returns.

Based on the current market turmoil, I wanted to take stock of my stock portfolio and it was interesting to see that, though depleted in value, several of the stocks that have done well by me earlier are still holding fort. The ones I am talking about here are all above 3 lacs in value right now. It was of course a lot more earlier and can be so again.

So here are the stocks in terms of percentage of portfolio as well as the return multiple :-

  • Maruti – 5.4 % of current portfolio value and multiple of 10 times.
  • Infosys – 5.1 % of current portfolio value and multiple of 3.3 times.
  • TVS Motors – 4.35 % of current portfolio value and multiple of 11 times.
  • M & M – 4.33 % of current portfolio value and multiple of 5.2 times.
  • Mindtree – 4.15 % of current portfolio value and multiple of 6.5 times.
  • HUL – 3.85 % of current portfolio value and multiple of 7.6 times.
  • Bata – 3.8 % of current portfolio value and multiple of 10.6 times. 
  • L & T – 3.45 % of current portfolio value and multiple of 95 times. 
  • ICICI Bank – 3.23 % of current portfolio value and multiple of 3.5 times.
  • ITC – 3 % of current portfolio value and multiple of 2.85 times.
  • TCS – 2.81 % of current portfolio value and multiple of 9.5 times.
  • DRL – 2.61 % of current portfolio value and multiple of 4.8 times.
  • PVR – 2.43 % of current portfolio value and multiple of 7.5 times.
  • Hind Zinc – 2.43 % of current portfolio value and multiple of 5.2 times.

The important thing to note here is that these are good businesses, I bought them over a period of time and have held onto them for a long time now. As an example, I bought L & T through convertible debentures, way back in 1992, and it has paid me handsomely. Note also that the above stocks constitute about 50 % of my portfolio value currently. 

I think this is good evidence that building a long term  portfolio with stocks of good companies is one of the best ways to make your money work. Importantly, all these companies pay good dividends and that serves me well as part of my passive income.

So far so good – but are these also giving the best returns? Not necessarily as I will show you in the next post.

My stock purchases – update #3

October has been a really bad month for the markets and what is more it came after a terrible September too. Like many other investors my equity portfolio, be it stocks or MF has taken a very bad hit. As far as my primary portfolio goes I am not too worried about it as that is a long term one and, even at my current stage in life, I can afford not to draw money form it for the next 10 years or so. I do need to review and quite possibly rationalise some holdings but that can wait for better days.

A lot of my current focus has been on my secondary portfolio – the one where I want to invest about 8 lacs and am hoping to see it grow to about 20 lacs in 10 years. In my two previous posts I had given some details about the stocks I am planning to buy and also a snapshot of it. From now on I will do a post every 10 days or so where I will talk mostly about the changes to it and the new purchases. Readers who are interested in following this series should make an effort at reading my 2 earlier updates for better clarity.

So here are some updates to my portfolio :-

  • I have started buying HDFC Bank and Indusind Bank as of yesterday. Though I am a little wary of banking as a sector, these banks should do well over the period that I have in mind.
  • As usual, I buy in small lots so it is 10 stocks per share that I have begun with.
  • Added some more of my earlier purchases this week as follows:-
    • Tata Motors
    • Intense Technologies
    • BEML
    • BHEL
    • Indiabulls Housing Finance
    • Yes Bank
  • As of now my total invested amount is 5.1 lacs and the portfolio is still in deep red.
  • My top holdings are Tata Motors and Intense Technologies. Together they make up 30 % of my portfolio in terms of invested amount.
  • These are also resulting in most of the portfolio losses currently but I am not too concerned about it as I think they will be on the upswing soon.

What do I look to buy with the 3 lacs I will put into my portfolio still? Well, in this market there are many options but I will largely stick to the 20 odd stocks I have bought so far. In these Banks, NBFCs and some of the other large caps can prove beneficial.

Should you be buying in this market when there is every possibility of further cuts over the next few months or so? Yes, definitely – you are getting Yes Bank at 180, Tata Motors at 170 and many others are attractive in terms of prices. Buying stocks now or at least investing in MFs is the best decision you can make for your money.

As for my portfolio, my prediction is it will be in the green by the time 2019 is here.