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.

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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.

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.

MF portfolio realignment – my plan

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

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

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

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

How do I plan to go about it? I have a feeling that next few weeks may be the best chance if Nifty goes to 9300 etc. Once the quarterly results  are through and the global geopolitical situation worsens, our markets are very likely to down to 8500 or even below that on the Nifty. Once I sell all my disposable MF, I will just be in cash and wait for the right opportunity.

What will I be buying with the cash I get? Well, one option is to invest in some of the stocks I had outlined in the earlier post. I am sure that if I buy these at Nifty levels of 8500 I will definitely see significant returns over the next 3 years etc. Another option will be to space out the stocks and invest in my 4 MF’s .

Unless the NIfty shows a rising trend due to a strong quarterly results, I am finally ready to pull the trigger on this. Even if it keeps rising, I will still sell when it reaches 9300, as I do not believe that is a value at which the Nifty can sustain itself.

Equity MF buying in 2017 – which ones to buy?

As I discussed in an earlier post, equity is an asset class which will probably perform the best in 2017. While I think it is a good idea to have both an MF and stocks portfolio, for most investors an MF portfolio will be a good place to start. In any case, I think most of my readers are having an MF portfolio and will definitely like to continue the same in 2017.

In this post, let me share the names of a few top funds in different categories which will make a great deal of investment sense in 2017. There are two important things to note here. Firstly, do not get swayed into buying MF through all kinds of statistical analysis and tools. These methods are amateurish even though I daresay they are sincere. Like every industry, the MF industry has professionals who are knowledgeable and neutral. It is very logical to go with their recommendations, reinventing the wheel has always been a rather poor idea. The funds suggested in this post are taken from the TV program “Investors Guide”. Secondly do not change your portfolio just because these funds are not there in it. There are several good MF schemes from different fund houses and changes should only be done when your annual review has shown some funds in your portfolio to be performing poorly. For new MF investors, I think it will make a lot of sense to pick some funds out of the ones mentioned in this post.

Coming to the fund categories, let us start with the multi-cap category. You must have this in your portfolio even if you are having only one category. Based on performance and potential, the following funds are recommended ones :-

  • ICICI Value Discovery fund
  • Franklin India High Growth companies fund
  • Birla Sun Life Equity fund
  • SBI Magnum Multi-cap fund

It will be important to have the mid-cap category fund in your portfolio too as these are the potential large caps of the future. Recommended funds in this category are :-

  • Mirae Asset Emerging Blue chip fund
  • Principal Emerging Blue Chip fund
  • UTI Mid-cap fund
  • Franklin India Prima fund

You also need to have the small cap category fund in your portfolio as, despite the risks, these are likely to reward you substantially in the future. Recommended funds are :-

  • DSP BR Micro cap fund
  • Franklin India Smaller Companies fund
  • Reliance Small cap fund
  • SBI Mid and Small cap fund

Finally the large cap category is important as it is likely to do well in 2017 and it provides some stability to your portfolio. Recommended funds in this category are :-

  • Mirae Asset India Opportunities fund
  • SBI Blue Chip fund
  • Birla Sun Life top 100 fund
  • Quantum Long Term Equity fund

For a good long term MF portfolio you just need to pick a fund from each category and invest in them regularly. You can decide on your allocation based on your risk taking ability, but even if you allocate 25 % of your money to each category, you will be fine.

Should you do SIP – not in general and in 2017 it will be a particularly bad idea. I will explain how you can invest in your portfolio in the next post.