An aggressive MF portfolio for 2017

Last year I had posted a few MF portfolios based on the risk taking ability of individual investors. With the changing political situation in the country, India is likely to be looked at favourably by the FII brigade once more as it offers the best growth possibility among the Emerging market economies. Chinese market offers better valuation right now but the focus is currently on growth and this is provided by India.

If you are an investor who is willing to take some risks in order to get higher rewards, the following MF portfolio may be the right one for you. This is suggested by an Analyst in the TV program of CNBC. The reason I am writing this post is because I agree with the choice of the funds. This portfolio will be specifically suited for goals in the next 10 years or so, though any greater duration will obviously work too.

The funds along with a short reason for selection are as follows:-

  • Birla Sun Life Equity fund : It is a steady large cap fund and has done quite well over the years. This fund provides stability to the portfolio.
  • Kotak Select Focus fund : Great stock picking ability of the fund manager over time.
  • DSP Small & Mid cap Fund : Stellar returns over long period and the potential of such stocks doing well going forward.
  • L & T Infrastructure Fund : Though Infra stocks have been poor performers this is all set to change based on the budget and development agenda. A risk worth taking.
  • ICICI Banking & Financial Services fund : Clear growth industry of the future.

Once again, evaluate your risk taking profile before investing in these funds. However, the rewards can potentially be great and you may reach your goal much sooner than you have planned. If possible, buy these using market levels of Indices but, if you are uncomfortable doing so, do it through the plain vanilla SIP.

I will write a post on another MF portfolio with lower levels of risk soon.


Timeshare – the pros and cons

There are very few products which cause as much debate as Timeshare – maybe in the financial products world you can find an analogy with ULIP or LIC policies !! Let me try to describe in this post what Timeshare is and whether it is an investment that is worth considering. Before starting off let me state upfront that this will potentially be of use to people who are fond of travel and want to holiday at least 1-2 weeks in a year.

The basic concept of Timeshare is simple – a company builds a resort with different types of unit sizes and sells it to the public at large, normally in a minimum lot of 1 week. There is an initial price you pay depending on the unit size and the season of your week. Typical unit sizes are Studio, 1 bedroom and 2 bedroom. The seasons are Red, White and Blue in the decreasing order of popularity. The price will obviously be the highest for a 2BR unit week in the Red season etc. When you buy the Timeshare week, it entitles you to using that week for a period of time in the future, normally 25 years or 33 years.

Apart from the one time costs, there is a annual maintenance charge that you will need to pay for the entire duration of the agreement. For a top end Timeshare company such as Mahindra or Karma Resorts, a studio apartment in the Red week can cost as much as 5 lacs plus along with an AMC of about 20000 per year. That will seem like a whole lot of money and rightly so. Let us see what you get in return.

  • You can use your week at your home resort every year. This can be in the week you own or some other week which is available.
  • If your company has other resorts in the country or outside it then you will be able to use your week in those too, subject to availability.
  • It is possible to exchange your week for going to a resort not owned by your company. This can be done by becoming a member of RCI and paying some exchange fee. So you may own a week in Mahindra Manali and may be able to exchange it through RCI for a resort in Canada or Australia. There are RCI fees and exchange fees for foreign resorts are about 9500 but on the whole, it opens up the whole world for you.
  • The quality of the resorts from good companies are top notch. These are 4 or 5 star properties and spending a week with your family there will be worthwhile. The units normally have cooking arrangements so it is possible to economize a bit on eating out during the period of your vacation.
  • Note that this is very different from the normal travel we do which is 2-3 days at one place and spent largely on sight seeing. 
  • The very nature of Timeshare ensures you need to plan ahead – this is helpful in creating your own plans and the family can look forward to the vacations with a sense of excitement.
  • You need not go every year and can club two weeks if you want to take a longer holiday but in a more infrequent fashion.
  • In case you prefer shorter holidays it is possible to opt for RCI points, where you can choose the number of days and exchange accordingly.

So what are the cons apart from the obvious expense issue? Well, for one this is only suited to people and families who are keen on vacations in a regular manner. If you do not enjoy travel then this is likely to prove not very useful for you. Also, if you want to view things through the financial prism always, then you will find this to be expensive. A back of the envelope calculation will show the following:-

  • 500000 a year can earn about 35000 in conservative instruments.
  • With AMC, RCI and exchange fees you are spending another 35000 a year.
  • In today’s rates even the best resorts in India can be hired for a week at cheaper rates. However, this may well change quite soon.

The point however is flexibility that you get with these memberships. For example, you can get a bonus week in Bali for a 2 Bedroom unit at 20000. Just imagine the cost of a 6 member family going for a week there. There are other benefits such as cruise vacations which turn out to be a lot cheaper than it would otherwise.

At the end of the day it is not a financial issue but a lifestyle issue. The benefit of a high end vacation, year after year, when your family has growing children cannot be overstated. They will have a great time with Games, swimming pool and other activities. We found it quite safe to leave them in the resorts when they were a little grown up.

Will I recommend a Timeshare from a good company – absolutely. I do not think their can be a better investment for your travel and lifestyle needs.


Balanced funds vs Diversified equity funds

While I have always felt that this is really not even a debate, there are many readers who really think that it is possible to get better returns from a Balanced funds as compared to a diversified equity fund. Well, that will be a great thing if it were true. After all, the holy grail of all investors is to have a product which reduces risks and gives you similar or better returns than the riskier counterparts !!

Instead of getting into the past histories and data, let me try tackling this issue with a simple example. Assume the following scenario:-

  • You are investing in a balanced fund X and a pure equity fund Y simultaneously.
  • Fund house and manager are the same and you do it for a period of 10 years.
  • For Balanced fund 65 % is in equity, the rest is in debt.
  • As the FM is the same, the portfolio invested in is also the same. So if your investment is 10000 Rs a month, 6500 Rs will go to equity.
  • Let us assume a return of 12 % in equity and 9 % in debt over the 10 year period. These are logically conservative but will serve to illustrate the point.
  • Corpus reached for pure equity fund Y in 10 years will be 23.23 lacs.
  • Blended rate of return for fund X is 65 % of 12 % + 35 % of 9 % or 10.95 %.
  • Corpus reached for Balanced fund X in 10 years will be 21.83 lacs.

Note that I have assumed a high rate for debt and a relatively low rate for equity returns. If you increase this difference the performance gap will be more obvious. So, if this is the case why is it that some Balanced funds have better returns? The answers can be again arrived at if you think a little objectively:-

  1. The FM of a Balanced fund may take lower risks with the portfolio. This has more to do with the nature and mandate of these funds.
  2. The above will help in a market not doing well but equally it will under perform quite a bit in a bull market.
  3. In a bear market the riskier stocks can get battered quite badly. As such the recovery for these will also take much longer. Again the risk is on 100 % of the portfolio as opposed to the Balanced fund where the risk is on 65 % only.

However, this does not say anything favourable for the Balanced funds. You might as well invest whatever you want to in Debt instruments and the rest in Equity. That is a more logical way of doing it without getting into the hybrid instruments. You should only look at Balanced funds in the situations I have stated in the last post.

Imagine this too – with declining rates and improving equity markets it is quite possible to have equity returns at 15 % and debt returns at 8 %. In this scenario you will get a blended rate of 12.55 % which is about 2.5 % less than the pure equity fund rate.

Of course, at the end of the day it is your money and your plan.

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.

Financial independence is an imperative

Last week I got talking to an old friend of mine about the budget and the conversation soon turned to financial independence. Fortunately for both of us, we are financially independent though still actively earning though activities we love to do. I wanted to capture the summary of our conversation as I think it will help many readers of the blog.

In very simple terms, financial independence is a state where you do not need to work actively for generating an income. Note that this does not mean you should not be working – you may well do so and earn money out of such work. However, even if you were not working in a similar manner you would still be able to lead the life that you wanted to. So, contrary to what many people think, financial independence is not synonymous with early retirement. Of course, you better not think of early retirement unless you are financially independent but that is as far as it goes. You can be in a FI state and continue with your job and business for as long as you want. In my personal situation I am in a state of FI but I do take up consultancy assignments that are of interest to me. What I earn through this is either invested or used for charitable causes that are dear to me. However, I do not depend on this income to fund the lifestyle I have decided to have, now or in the future.

Many people ask me whether it is necessary for them to get to the FI state if their plan is to work till 60 or more. Surely you need to be FI only when you are no longer having an active income? This is unfortunately a fallacy and you need to understand this well. Let us look at some of the things that may create the need for being in an FI state as early as you can:-

  • You may be in a job or career that you do not like much. Your being in an FI state will enable you to look at options in a much bolder way.
  • There may be a passion you have which you want to convert into a business. Once you are in an FI state you will be able to take a plunge in a much easier manner.
  • In the private sector today job losses are an unfortunate reality. Your ability to cope with such a mishap is significantly more when you are in an FI state.
  • If something were to happen to you, the family is covered by insurance. It will however be a much better situation if you are in the FI state. Think of this as the ultimate insurance option that you can gift your family.

Now that we have established that being in an FI state is an imperative, let us see how we can get there. I will take an example of a person with a family of 4. Ravi is 40 years old with 2 children of 12 years. His details are as follows, to arrive at his FI figure.

  • Current expenses are 10 lacs per year. When his children go to an Engineering college it will go up to 18 lacs per year.
  • After they pass out the expenses will be 8 lacs per year.
  • All of the above are expenses in the current terms.
  • For being FI today Ravi needs 6 years @ 10 lacs, 4 years @ 18 lacs and finally 30 years @ 8 lacs. Here it is assumed that Ravi and his wife will live till they are 80.
  • So for Ravi to be in the FI state today he needs 3.72 crores in current money.
  • Now, Ravi may have about 2 crores totally, including his current value of PF accrued. This means he will need to accumulate an additional 1.72 crores to be in an FI state.


You can go ahead and calculate your FI number, compare it with your present portfolio and see how you are doing. Based on this you can then figure out a way to bridge the gap. If the figure appears large do not despair. The example given is a worst case scenario, assuming zero real rate of returns. If there is a 2 % real rate of return, the calculations change dramatically.

Financial independence is an imperative for all of us, irrespective of our life situation or for how long we want to work. In simple terms you will be able to enjoy a significantly richer and fuller life when you are in an FI state.

A vacation in the Rann of Kutch

The regular readers of my blog would have observed that I have written very few posts in the month of February. The reason for it is mainly that I have been away for a vacation and then a trip to Bangalore after my return from Kuwait. A lot has happened in the market in between but, while I do want to write about it in the next couple of days, this post is about the wonderful vacation that we had in the Rann of Kutch.

I have always been fascinated by the Rann of Kurch and the idea of a vast expanse of wilderness with salt encrusted barren land. Kutch is not an easy region to travel to with children, so despite my interest in the area, it somehow never happened till now. However, with the children in college and me just back from Kuwait, an advertisement for the ongoing Rann Utsav was enough to get us going. Fortunately, in this day and age, things can be done rather easily online. It took us just a couple of hours one evening to book a package at Rann Utsav, book tickets from Hyderabad to Ahmedabad by Indigo and arrange a hotel in Bhuj for overnight stay.

A little about the Rann Utsav – it was started about 8 years back by the Government of Gujarat for 3 days and it has now become a 100 day affair with an outsourced travel company running it with regulation from Gujarat tourism. They have created an entire tent city in a place called Dordho which is the entry point to the White desert. While you can stay at a couple of other tent resorts, my recommendation will be to go with Rann Utsav as the arrangements and infrastructure created are definitely world class. I have traveled a lot within India and outside it and have rarely seen anything that can match it. The tent city has 3 types of tents at different price points. If you are not too concerned on the price go for the Premium European tents, they are great value.The food is part of the package and is great to taste and with fabulous variety. We got sort of a crash course on Gujarati cuisine over the 3 days we were in the tent city.

Coming to the trip itself – day 1 was mostly spent in getting to Bhuj from Hyderabad. We took an early morning flight out of Hyderabad, got onto a Volvo bus from Paldi bus stand and reached Bhuj about 4:30 in the afternoon. There wasn’t much time to do anything in Bhuj, we just walked around a bit and had dinner at a fairly nice restaurant. Day 2 was when we transited to the Tent city from the pickup point near the station. The arrangements were very professional – a tent with a waiting area, refreshments being served while waiting and in the bus, a fairly smart and articulate guide and in general great customer service. The trip to the tent city took about 90 minutes and the check in was rather smooth. Each cluster has 30 tents and our cluster manager was a friendly person with a lot of information about the region and it’s culture. The tent was quite comfortable with nice sitting and sleeping arrangements and washroom. It does get fairly hot in the afternoon so the AC was actually put to good use. The highlight of the day was travel to the White desert by a Camel cart. It was the first time for me and I was able to clear up my eternal wonder about how Camels get down and up – in simple terms they have two joints in their long legs unlike the one that we have. The sunset at the White desert was spoilt a bit by the clouds but the overall experience was quite magical. It was definitely one of the better sunsets that I have witnessed. The dinner was an epicurean delight and the cultural program rounded off a great day of superb experiences.

The next day morning we were again back at the white desert, this time to witness the sunrise. The clouds present made sure the sun played truant again but when it did come in view it was a glorious site to behold. Just being part of such a spectacle in the middle of nowhere, fills you with a sense of wonder about nature. The vast expanse of land covered by the white salt crystals is really an unique setting created by a natural event. In the evening we went to Kali Dungar, which is the highest point in the Kutch region. The place had some nice viewpoints and the sunset was nice, though not as scintillating as the one we experienced at the white desert. The views from the top of the hill are pretty nice and I was amazed to see a body of water which was actually the backwaters of the Arabian Sea. Would have loved to go down there but it seemed an impossibility in the time we had.

After a sumptuous breakfast the next day, it was time for us to leave the Tent city and do some sightseeing in Bhuj. Our first stop was the magnificent Swami Narayan Temple created in white marble. The original temple was pretty much destroyed in the 2001 earthquake that struck Bhuj and the current one was built at a cost of 100 crores by 2008. We next went to the Parag Mahal and Aiina Mahal Palaces. Apart from the physical presence, which has seen a fair bit of destruction in the earthquake, what fascinated me was the belongings of the erstwhile Bhuj dynasty that gives a good idea about the life and times of them. It is also historically significant – the last ruler was in power only for a couple of months before he signed the instrument of accession to become part of India.

After saying good bye to the Rann Utsav people at the railway station, we came back to the hotel where we had stayed the first night. Lipi and I debated a bit as to whether visiting the Mandvi beach was worthwhile by paying the 2000 Rs the travel guy wanted. However, the fact that we may not get a chance to visit the region again won the day and we went off to see the beach. In retrospect I was glad that we decided to go. I have seen many better beaches but rarely one that is so happening in terms of the people and the sheer variety of things to do. Just being part of it and having pani-puri and sugarcane juice while seeing the sun setting in it’s own leisurely way was again an unique experience. This time the sunset was captured in full, both in our memories as well in the camera. The day ended with us having an authentic South Indian dinner in Bhuj, something that most South Indians would find difficult to believe.

The last day was spent in travel, first to Ahmedabad by bus and later to Hyderabad by air. I was quite impressed by the Ahmedabad airport and the number of people waiting for flights there. Overall it was a great trip and very different from anything else I have done. If you have not been there, my recommendation will be that you do. The Rann Utsav is normally from November middle to February last week. If you book in advance you may be able to get dates which are full moon days.

For the financially minded the total cost of the trip came to about 70000 Rs, half of which was the package at the Rann Utsav. For most people, the gateway will be Ahmedabad and you will need to factor in the flight cost.

In terms of experiences though, the trip was priceless for me. Travel to such unique places, reading a good book, watching a great play or movie and sports events are really what make life truly worth living for. Everything else is just existence and not living in the true sense of the word.


Your MF investments – Time to take stock

I am quite sure this post will have many people unhappy, but it is important to understand the impact that many investor portfolios have now had, due to the continuous sell off in the markets. Given that there seems to be no real slow down in the carnage and even the 7000 levels of Nifty not looking safe, it is high time that investors take stock of their MF portfolios that they have built assiduously through the SIP mode over the years.

To start with you can do this exercise for your portfolio:-

  1. Look at the current XIRR as of today and if possible plot the XIRR over the last few months. You would probably see that, even for the best of funds, the XIRR would have come down from 15-18 % to a figure of 7-8%.
  2. If your fund selection was not good to begin with the situation will be much worse.
  3. In case of the investments of 2014 April to about 2015 August, the investments made through SIP or otherwise are likely to be in the deep red.
  4. Understand one thing clearly – it does not matter what time or price you bought your units, what matters now is only the value of your portfolio.
  5. Recalculate your SIP amount for the goals with current portfolio value as the base and 10 % XIRR. You may be surprised to see how much more SIP you need to do in order to reach your earlier goals.

The whole idea of investors doing well when the markets tank in a disastrous manner is unfortunately only true for new investors. For all long term investors a brutal cut in the markets will only result in serious destruction of wealth. This is more worrisome for people who have their financial goals coming up in the next 2-3 years. However, even for those who have a long term horizon of 15 years or so, the current destruction of their portfolio definitely has a serious impact on the amount of corpus they will end up with.

Based on the above, what should be the strategy for the current year as well as going forward? For starters we need to recognize the problem for what it is, not be lured by 15-18 % tax free returns on equity – life unfortunately, is not so simple. Next we must have a debt portfolio as a hedge so that we do not indulge in distress selling. Thirdly, it may be prudent to clean up your portfolio of unwanted funds, while you can.

Let me get into the details of such strategies in the next post.