Mutual fund schemes suggested by experts

After the recent categorisation of MF schemes as mandated by SEBI, there is a lot of confusion among investors as to whether they should continue with the earlier investments or revamp them altogether. I had written about some funds you can consider for your long term MF portfolio. Recently I got to hear the views of some experts about the MF schemes of their choice.

As I have already written about the considerations in choosing an MF scheme for the long term, I will not repeat them here. The funds suggested below are from experts appearing in CNBC TV18 programs and have a long pedigree. The basis of selection was long term performance and this will typically be 10 years and above. So without any further ado, here is the list of funds :-

  • In the large cap space consider the following funds:
    • ICICI Focused Blue chip fund
    • ICICI Nifty Next 50 fund
    • ABSL Front line equity fund
  • In the multi cap space consider the following funds:
    • ABSL Equity fund
    • SBI Multi cap fund
  • In the small cap space consider the following funds:
    • Reliance Small cap fund
    • DSP Small cap fund
    • SBI Small cap fund
  • If you are looking at hybrid funds for lower volatility consider these:
    • HDFC Balanced fund
    • ICICI Balanced Advantage fund

In order to build a portfolio of 3-4 funds you can just select one from each of these categories and start investing in them regularly.

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FIRE considerations – parents and children

What are the most important considerations for you when you are planning to FIRE? For sure, your lifestyle and expected longevity are two most important considerations but there are a few others which are paramount. These relate to your parents and children. Let us address both of these in the current post.

If you are thinking of FIRE today or in the next 2-3 years, you are probably 50 plus now. It is quite possible that your parents are around still and that is a great thing. Fortunately my parents are both living but I know many of my friends who have lost either one or both parents. Given what our parents mean to us, we would all want them to live as long as possible. In several cases, they will be living on their own. Now the issue is this – when they retired 20-30 years back, the corpus they had would have been sufficient to generate enough income but it is woefully inadequate today. My father retired in 1990 and at that time he only had about 10 lacs as a corpus. It seems impossible today, but it was true then. Now those were the days of 12 % interest rates, so 10 lacs would give you an amount of 10000 per month. In 1990 it was still possible to live reasonably well with that amount if you had your own house. However, it was soon to become difficult.

Fortunately, I passed out of IIMC in 1988 and started working so I could contribute to the family finances. Over a period of time, the inflation increased the expenses considerably and the interest rates generally went down. If you look at the situation today, the costs are at a level of 4 lacs annually, even though they live in a fairly simple fashion. Their original 10 lacs is only fetching 75000 Rs today. Thankfully my sister, who is a Doctor in UK and I are able bridge the gap. How did it affect my FIRE considerations?

Well, for my parents the situation was simple. I know that I need to contribute some amount regularly over a long period of time. I therefore just add this amount to my own monthly expenses and look at the total amount. So, If I am contributing 2 lacs and my own expenses are 10 lacs in a year, then I need to plan for 12 lacs.

As far as children go the issues are a little different. If you are doing FIRE at 50, it is possible that your children are still in college. I am saying this as most people will marry around 30 years and have their first child around 32 years or so. Therefore when you FIRE at 50, your child will probably be just starting college. In my case when I FIREd in 2015 start, my daughter was in her third year of Engineering and my son was only in his first year of his 5 year dual degree course. The overall expenses annually for them were in the range of 6 lacs and it was increasing at the rate of 15 %.

I had the following strategies to deal with the situation:-

  • I needed to fund the Graduation expenses of my children and had told them that if they wanted to do an MBA then it would have to be through an Education loan.
  • For the immediate next year, I put some money in FD in their accounts so that they would mature in time for their semester fees.
  • I also started my Consultancy services which resulted in some active income. To the extent possible, I used the money to create new FD’s with the same strategy as before. This meant, I always had enough money kept away for paying the fees for the next 2 semesters.
  • In 2016 when Rinki passed out of BITS and joined XLRI, we decided to take a loan of 12 lacs whereas the 2 year fees were in the range of 23 lacs.
  • Over the next 2 years we actually used only 6 lacs of that loan as I was able to fund the rest of the money through my Active income.
  • Now she has completed XLRI and will be joining her job in June.
  • My son has now completed 4 years and I will have to pay 2 more semesters, each to the tune of 2 lacs or so. As before, this money is arranged for.

So what is the bottom line? When we talk of FIRE, it has to take into account the situation of your parents and children. In all likelihood, you will have to contribute financially to your parents, assuming they are not staying with you. Build this into your monthly expense estimates and deploy your corpus in a manner so that you are getting this amount in a regular manner. For your children, their regular expenses can be catered through your monthly expenses. However, Education expenses in college are a different story altogether and you need to handle it differently.

Take care of both of these and you are ready to FIRE.

A TOI article on FIRE

As most of the readers will know, the acronym FIRE is for Financial Independence Retire Early. This is a very commonplace jargon in the US and is becoming popular here too. I was recently approached by a journalist from TOI who wanted to discuss my journey in this as she was writing an article on this.

For those who have not read it, click on this link to read the article. I found the article to be interesting though the writer has not addressed some important issues. In fact the How to part of the article is directly taken from our conversation.

If you go through the comments you will see that many of them are overly negative. That is really unwarranted as it is possible to achieve FIRE without compromising on things such as your old parents and well being of your children.

I will address this in the next post.

A real life case study on retirement corpus deployment

Of late, I have been getting several requests from people about how to structure their retirement corpus to get a certain amount of income every month for lifetime. I was however, quite surprised to get a request last week – the person said that he had 3 crores and was willing to deploy it as per my suggestions and wanted to check how much he could spend per year, if he had a lifetime of another 30 years.

So let us see this from a very basic retirement maths perspective first:-

  • We will assume that the corpus is deployed so that the real rate of return is Zero. This essentially means that the returns from the portfolio will match inflation.
  • In this scenario his overall costs over 30 years will be 30X ( assuming he spends @X each year ) and the limiting condition is 30X = 3 crores. This means X=10 lacs
  • Going by this he can definitely spend an inflation adjusted amount of 10 lacs today.
  • Note that he will not have any issues with this strategy as even very conservative investments are likely to match inflation. He can put money in PPF, Debt funds, VVY, SCSS etc and still be able to achieve this.

Let us extend the logic a little further and see if we can do better in some way. We will try to structure the portfolio in a manner suggested below:-

  • Try to earn money in the first decade through debt investment returns. We will aim to earn 12 lacs in the first year to take care of the inflation within the decade. This is how it can be done:
    • 60 lacs in VVY and SCSS (for the couple) will yield 4.8 lacs a year.
    • 60 lacs in Debt funds will yield 4.8 lacs a year. This can be FMP type of funds where you use the capital gains for your expenses.
    • 20 lacs in IndiGrid InvIT which is likely to give 2.4 lacs a year.
    • 10 lacs in a liquid fund to cater for any financial emergency situation.
  • Put 1 crore in an MF portfolio over a period of time. This can be through STP of 1 lac per month for 100 months.
  • Put 50 lacs in stocks over a period of time. This should be based on markets and in the interim period the money can be kept in a Liquid fund.
  • At the end of the first decade, continue with the Debt plan as before. You will now be spending about 25 lacs per year and half of it is generated from Debt portfolio.
  • The MF will grow to about 1.6 crores by this time and stocks to 80 lacs. Set up a SWP from your MF to get 13 lacs every year @ 1 lac plus every month.
  • In the third and final decade, your MF portfolio and Stock portfolio will be enough to take care of your expenses @50 lacs a year.

Finally, what if you want to spend more now and taper off your expenses as time goes by? Many may want to travel around the world in their first decade and reduce it over time. In this case let us assume you need an average expenses of 15 lacs  in decade 1, 20 lacs in decade 2 and 30 lacs in decade 3. How do you cater to these?

  • Put 1 crore in Liquid funds and spend from it for the first 10 years. The amount earned through interest will enable you to do this.
  • Put 50 lacs in Debt funds, 1 crore in MF and 50 lacs in stocks.
  • After 10 years the Debt funds will grow to about 1 crore, MF to about 1.6 crores and Stocks to about 80 lacs. I have assumed staggered investments and conservative returns to make this a very safe plan.
  • In decade 2 spend from the Debt portfolio and do SWP from MF portfolio.
  • In decade 3 use MF and stock portfolio.

So to answer the question of the person, he can even spend 15 lacs per year with a 3 crore corpus as long as it is structured properly. In terms of withdrawal rate this is a 5% but it should work quite well.

I hope this has proved to be useful to most of you and you can structure your portfolios in a similar manner to maximise your spending power.

A long term MF portfolio in the changed regime

As I have said before, I support the initiative taken by SEBI in reducing the clutter of the MF space. The definitions of fund types as well as the regulation on what kind of companies they can invest in the different schemes lends a lot of transparency. In this post let me try and outline an MF portfolio which may be suitable for most investors.

In conceiving this portfolio I have looked at a time horizon of 20 years. This is the kind of time frame where you can take certain amount of volatility in your stride and benefit from the long term India growth story. The types of funds and the possible schemes that one can look at investing are given below. Note that you can mostly look at Direct schemes in order to keep the expenses low. There is really no point in giving off 1 % or more in expenses annually, over such a long time period.

Without much more ado then here are my suggestions:-

  • Large cap funds can have 20 % of your portfolio. Choose from below 
    • ICICI Blue chip fund
    • SBI Blue chip fund
    • Nifty ETF funds
  • Multi cap funds can have 20 % of your portfolio. Choose from below
    • DSP opportunity fund
    • HDFC Capital Builder fund
    • Mirae India Equity fund
  • Mid/Small cap funds can have 30 % of your portfolio. Choose from below
    • HDFC Small cap fund
    • L & T Emerging business fund
    • DSP Small cap fund
  • Tax Savings funds are only if you need to use them to exhaust your 80 C section. In case you have enough to invest otherwise do not go for these. Choose from below
    • IDFC Tax Advantage fund
    • ABSL Tax Relief-96 fund
  • Thematic funds are for the more risk oriented investors. Choose from below
    • IDFC Infra fund
    • Mirae Consumer fund
    • ABSL GenNext fund

Note that while I have suggested some allocation here, how much you should invest in each depends on your stage of life and also investment horizon. For example if your risk appetite is low then go light on the Mid/Small cap category and definitely avoid thematic funds. On the other hand a person with good understanding of the markets and high risk appetite can invest significantly in these two categories.

The good thing is all fund houses are giving you an opportunity to exit the current holdings. How do you go about this and recast your MF portfolio along with investing well for the future? I will cover this in my next post.

Looking at fixed income? Consider this investment

In my blog one of the most common queries I get from retired investors and ones planning to be in the FI state , is where one should invest for fixed income. This is expected in the current scenario as most of the Debt investments suffer from some lacuna or the other. Fixed deposit returns are low with inefficient tax treatment, PPF is a great long term product but not for regular income before 15 years, Debt funds are not giving great returns and you need to hold on for 3 years to get indexation benefits.

So, if you have a reasonable sum of money and are looking to put it somewhere for regular income, what are your options? A year back one could have looked at Arbitrage funds or Balanced funds but with the LTCG taxation on equity this does not seem a good idea. Tax free Bonds are not being issued right now and when they are the interest rates will probably be only in the range of 7.5 % to 8 %. In the present scenario one product which can be quite useful to investors is InvIT that is Infrastructure Investment Trusts.

What are InvIT’s? They are instruments for infrastructure developers to raise capital. For investors, InvITs provide (1) an opportunity to invest in a de-risked portfolio of operating infrastructure assets for a superior risk-adjusted return, (2) potential of growth via acquisitions. In simple words these funds take over the significant loans for large Power, Road and other infra projects. The return to the investors are in the form of interest payments, dividends declared, buy back of units and capital appreciation.

Are these Equity or Debt investments? Well, a bit of both really. The revenues are linked to the performance of companies that these trusts invest in so there is an equity nature. At the same time InvIT’s receive annuity from the companies they invest in, which is more like fixed income. As of now there are only two InvIT’s that were floated in the markets in 2017. IRB was for the Road companies and IndiGrid was for the Power companies. The ticket size for investment was 10 lacs for both of these and they were over subscribed. IRB was priced at 102 Rs and IndiGrid at 100 Rs per unit.

If we look at the performance of these companies in terms of their share prices then they are a disappointment. IRB is languishing at 86 Rs and IndiGrid is at 96 Rs. However, the more important parameter is the DPU or Distribution per unit which is something similar to a quarterly interest payment by these trusts. Both the trusts have paid this in a regular manner and in the last quarter the amounts were 3 Rs per unit for them.

I am having 10206 units of IndiGrid and have had overall DPU of 9.56 Rs in the 10 month period of operation over the last FY. The guidance for current FY is 12 Rs. Of course since most of this is interest payment, it will be taxable. In addition these can also offer some dividends which will be tax free in the hands of the investors.

Should you invest in these? Well, if you are a retired person in lower tax brackets then these do seem rather attractive at 12 % returns. Even in the 10 % tax bracket this makes a lot of sense. I think it will be ideal to buy a combination of IRB and IndiGrid. Remember the first is riskier as it depends on toll revenues. If you want to play safe just go for IndiGrid. The ticket size is 5 lac Rs and if you invest around 20 lacs you will be getting an average interest of 20000 per month. It can take care of a fair part of your household expenses. Do remember though that these are unlikely to appreciate much in share value and will not be very liquid so selling them can prove to be a challenge.

On the balance though these are doing rather nicely from the viewpoint of fixed income. I wish I had invested 2-3 times of what I actually did in the IPO and I have definite plans to put in my next 5-10 lacs there when some of my Debt investments mature.

Financial independence is central to living life in your terms

Over the course of the past 3 years or so when I have been writing my blog, several people have asked me as to why I focus so much on financial independence ( FI ) as a goal when most people automatically keep working till they cannot do so. In some posts I have explained as to why FI is an imperative, even if you want to continue in your present job or profession and retire normally. However, the most important idea of being in an FI state is that it gives you the ability and confidence to live life in your terms.

What do I mean by living life in your terms? It simply means that you are able to do the things you want to do without having to worry about the financial impact of them on your future well being. There are only two conditions where this is possible. Firstly, you can inherit a lot of money and secondly, you work towards and attain an FI state on your own steam. Remember, in your life the terms are set by you, so it is not necessary that they will align with other people. For one person it may be the ability to stay in a huge mansion with all amenities, for another it can be the flexibility to travel as and when he wants and for a third it may be playing the stock market with some capital without the fear of losing it. Let me give you some more examples of what you may be able to do in the FI state – these are real life happenings with people who I know.

  • A couple in their 40’s take 2 vacations outside India every year because there is just too much to see and they have the cushion of FI.
  • A man who is a car enthusiast has bought a luxury car recently surprising many of his friends and family. He said that he wanted to buy it for about 2 decades but was able to do it when he understood that he was in an FI state.
  • A batch mate of mine who is a Banker, left his job and started to do workshops on personal finance as it has been his passion for a very long time.
  • A lady who has been a lawyer for 3 decades was able to switch to taking cases free for the poor when she realised she was well over the FI line.

I can go on with more examples but I think the point is made. Whatever your terms are, you need to be in an FI state to live life with those. Most of us work because we need to earn certain amount of money, for now and for the future. While we are doing that, we are unable to live life in terms of what we want – it can be a money issue or a time issue or both. Once you are in the FI state you will be able to reorganise your life in a way so as to do these things in a manner that fulfils your aspirations. To me, that is the essence of living – yes, there are times when you live for responsibilities and need to compromise on your personal aspirations but that is surely not a desirable state.

Coming to my personal example, what does being in the FI state mean for me? Also, to respond to the curiosity of many people, what do I do now and what do I plan to do in the future? Let me try and address it here :-

  • I do some Consultancy work if it is of interest to me. As I do not depend on the money from it to fund my lifestyle, the flexibility of choice is great.
  • As many of you know, I write this blog and am advising several people who seek me out. I have also made Holistic life and Financial plans for a few people who have reached out to me. Note that this is not my profession in any manner.
  • I have been involved very closely with the education of my children and that is coming to an end now. Interaction with many IIM and B school aspirants through public sites is something I am passionate about. I am also part of the admission panel for IIM Calcutta.
  • Conducting high end Consulting workshops for corporate organisations is something I love to do and will expand it significantly this year.
  • Travel has been a passion for me since long and I am able to do it much more now. In the last year and quarter we have been to Kumarokom, Araku valley, Italy, Goa ( twice ), Konkan beaches, Durgapur, Ayodhya hills, Khajuraho and are now planning a short trip to Bali.
  • Sports is another passion I have and I am really happy to be able to watch almost anything I want to nowadays. Looking forward to the FIFA world cup.
  • I am toying with the idea of writing a book. Something may or may not come out of it but I will make a fairly serious attempt this year.
  • I am also keen to explore the idea of forming a venture. The ideas for it are crystallised now and I will be looking for some founder partners soon.

When I measure all of the above against what I could have done as a CEO in a regular corporate job, I must say that I find this infinitely more preferable. The bottom line however is that I am able to do this only because of my FI state.

What is your ideal existence in life? If you are already having it in your current job or profession, great !! If it is very different from what you are currently doing then you need to think seriously about being in the FI state so that you can live in your terms.

After all you have only one life to live !!