Has your MF investment worked out?

To begin with, my apologies to all my readers, many of who have enquired of me as to why I was not writing in my blog, for my long absence from the blog. It was caused by a random occurrence of several factors – a couple of trips abroad, some mentoring work for B school students, my son’s starting of his professional career, my parents visiting Hyderabad etc. Let us see whether I am able to keep up this new resolution !!

Let me take up something which a lot of people have been asking me for much of this year. Has it been beneficial to invest in Equity MF over the years? Many people had started the MF investments through SIP, being lured or convinced by agents or advisors, thinking that an annualized return of 12-15 % on an average was a given. Yes, it was understood that equity as an asset class will be having the ups and downs, but over the long run it was kind of given to undestand your money will double every 6 years. A lot of financial planning for most people have been based on this premise over the last 10 years and it is a good time to take stock of how things have panned out.

As I have been dealing with equity for nearly a quarter of a century now, I probably have a lot of knowledge and experience to speak somewhat definiteively of this. In January 2008, Nifty scaled 6000 for the first time before the now famous crash of that year. Even if we assume that Nifty will reach 12000 in January 2020 ( a fairly tall order some may say, though I am hopeful), it would have only doubled in 12 years. This is a return of only 6 % as opposed to the 12 % that most investors have been sold into. Even if you looked at a supposedly stodgy product such as PPF, you would have earned nearly 8 %. More importantly, if you had planned some goal for 15 years in 2010, you are now probably faced with the prospect of being way short of your goal. This is fine if you have 20 plus years of your career left but for people in their 40’s and 50’s this is a fairly tough situation. People who are interested in financial independence and looking at doing different things will now need to re-evaluate their options.

Does this mean that the MF investment has been wrong? Not at all – equity as an asset class is really the only sensible way to beat inflation in a country like India and MF is a good vehicle for this. Also, though Nifty returns are only 6 % annually, most of us invested in well managed active funds and these returns are somewhat better, though nowhere near the 12-15 % that were touted without any real sense. With the changes in MF categories by SEBI, it may also make more sense to stick to funds that invest in the top 150 or 200 companies, unless you have a lot of time on your hands. Finally, do not put all your eggs in one basket, invest in fixed income products and other instruments that can serve as a hedge and provide you stable returns even if unglamorous.

The above is all very fine for people starting now but what of people who have been investing for long and have now not got enough in their kitty for their goals? They will definitely need to work out different strategies – I will take up one case study from a person who wanted some advice from me recently.

Bottom line – MF investments are good for your financial life but you need to do these by being more aware of it as compared to before. The old method of deciding on a SIP amount and letting it be in the auto mode will not work any more.

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Building an equity MF portfolio in new FY

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

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

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

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

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

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

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

Strategies for your MF portfolio

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

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

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

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

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

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

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

Happy Dussehra to all my readers and their families.

Look at these MF schemes for great risk adjusted returns

We are passing through rather interesting times in the Indian economy and markets. The rise in the indices have had investors thinking as to whether it will be a good idea to keep buying as of now. By all conceivable logic, there is a correction round the corner. Is it likely to be momentary or very deep? We can only speculate in an intelligent manner.

In my opinion, it does not really matter much if there is a correction soon. Nifty will probably find support at 10800 plus levels and that is something none of us expected a couple of months back. In the scenario I see unfolding, we are very much in a structural bull run and corrections are going to be price based rather than time based. To that extent you need not really change your investment plans a great deal.

What about people who are starting off building a MF portfolio or ones who want to realign their portfolio to better funds, taking advantage of the current highs? Which funds should we bet on for the next 15 years or more? I gathered some inputs from experts managing HNI money and this is what they had to say:-

  • A good fund manager has generated 4-5 % alpha over the indices in the past 2 decades. For this reason avoid Index ETF in our markets right now.
  • There may well be a structural bull run in our markets over the next 10-15 years.
  • Multi cap funds will be the best suited for this time frame but look at other categories like large cap and mid/small caps too.

So which are the funds to bet on? Here are a few for you to consider:-

  • ICICI Focused Blue chip
  • Kotak Select Focus
  • Reliance Vision
  • SBI Pharma
  • Kotak 50
  • Franklin High growth
  • MOST 25
  • MOST 35
  • ICICI Value Discovery

You will not find many of your known funds here, but then these are futuristic in their likely performance. Go with them if you are willing to take some risks for potential higher returns.

However, if your existing funds are doing well, do not change for the sake of change.

Nifty at life time highs – should you cash out your large cap MF’s ?

For some time now Nifty is going great guns and is at a  life time high. Whenever such an occurrence takes place , there is a chance of some correction in the immediate future. This is probably the reason why I have got a lot of messages asking me as to whether it will be a good idea to sell the entire MF portfolio, be in cash and again buy the MFs once the markets seem to have finished the correction.

First things first – your MF portfolio will probably have large cap, mid cap, multi cap and small cap funds in it. Note that Nifty is the benchmark index only for large cap funds and therefore, it makes little sense to be thinking of selling the other types of funds that you hold. As you will see the NAV’s of several of these funds are well below what they were in January and the SIP’s you made in those are probably running at a loss for 2017 investments. So the issue really is this – now that Nifty has crossed 11500, is it a good time to sell your large cap funds and make money, maybe invest in a lump sum when the market inevitably goes down at some point?

Is it possible that you will make money in the short run through this approach? The answer to that is “yes”. Is it therefore a good idea? The answer to this is clearly a “no”. in order to understand why this is so, you need to understand how MF works in the first place. The fund manager has a certain amount of money available and he is buying stocks with it. These set of stocks for a particular scheme will keep changing. The fund manager is doing these changes and you pay him for that very reason. Now if the markets are going down the fund manager may selectively sell some stocks and buy others. As such the scheme you sell and the one you buy are fundamentally different. If you are in the scheme as part of your long term goals then it makes absolutely no sense to sell off the schemes when the markets are at highs. For all you know your fund manager is taking the appropriate decisions by selling some stocks at their highs and buying others which still have a lot of value in them. Do not try to second guess a person who is professionally trained and does this for a living. Just because you can play around with spreadsheets and calculators does not make you competent to take such decisions.

Now what if these funds are not part of your long term portfolio? Well, if you are to sell them anyway then you might as well sell when they are at their highest or near it. In that case my recommendation would be to sell NOW. Yes Nifty can still go to 11700 plus this year and maybe even 12000, but those are fraught with uncertainties. You might as well sell off now and wait for a 5 % drop or more to buy funds that you want to be in for the long term. As I said before with the same fund it does not make sense to change but if you are changing your fund you might as well look at a better entry point.

What if your investments are in Regular schemes and you want to shift to Direct schemes? The same logic will hold – sell NOW and buy after a while.

Over the years I have invested in several schemes and have now reduced it to 5 only. The current market gives me a great chance to clean up my portfolio, in terms of the large cap funds which I am presently not investing in. How do I intend to do it? Read the future posts or the earlier ones in the blog to find out.

Mayhem in Small caps – How did your MF schemes fare?

While the sheer number of investors who diligently invest in MF schemes as part of their investment goals have reached great levels and continue to rise rapidly, several of them are unaware of the details and nuances of the dynamics of investments. Many think that MF investments are a one way street, where you will pretty much have unidirectional growth. Some group of investor’s think that they should choose the MF scheme purely based on recent returns and not look at anything else. This resulted in great subscriptions to the mid cap and small cap funds over the last 2 years. In 2018 the fall has been brutal and have shocked many investors.

In the past few months I have received innumerable queries along these lines – is it a good idea to redeem these funds now, should we stop investing in these, what is the future outlook and so on. While I will take stock of the mid cap mutual fund schemes I have in my portfolio in this post and answer these questions, let us first try and get some facts straight about the more popular mid cap funds I hold.

  • DSP Blackrock Small Cap Fund
    • 52 week high NAV of 73.41 Rs was reached on Jan 9th, 2018.
    • Current NAV is 59.22 Rs, so the fall from peak has been nearly 20 %.
    • Returns of 6 months and 3 months are negative, and fairly high at that.
    • 2, 3 and 5 year XIRR stand at 9.2 %, 11.3 % and 33.3 %
    • Clearly a fund that has not been managed well and done much worse than small cap index in this year, which is down by 17 % YTD.
    • Moreover, Nifty Smallcap 100 has shown better growth in terms of XIRR in the 2 year period at 25 %
  • Franklin India Smaller Companies Fund
    • 52 week high NAV of 64.78 Rs was reached on Jan 9th, 2018.
    • Current NAV is 57.75 Rs, so the fall from peak has been nearly 11 %.
    • Returns of 6 months and 3 months are negative for the fund.
    • 2, 3 and 5 year XIRR stand at 12.2 %, 13.2 % and 30.2 %
    • Clearly a fund that has  been managed well and done better than the small cap index in this year, which is down by 17 % YTD.
    • Howver, Nifty Smallcap 100 has shown better growth in terms of XIRR in the 2 year and 3 year periods at 25 % and 31.6 %.
  • ICICI Prudential Small cap fund
    • 52 week high NAV of 31.01 Rs was reached on Jan 24, 2018.
    • Current NAV is 25.91 Rs, so the fall from peak has been nearly 16 %.
    • Returns of 6 months and 3 months are significantly negative for the fund.
    • 2, 3 and 5 year XIRR stand at 9 %, 7.5 % and 17.4 %
    • Clearly a fund that has not been managed well and done almost as bad as the small cap index in this year, which is down by 17 % YTD.
    • Moreover, Nifty Smallcap 100 has shown better growth in terms of XIRR in the 2 year and 3 year periods at 25 % and 31.6 %.

It is clear from the above that the DSP BR and Franklin  funds are relatively better  managed funds here, and the ICICI fund is struggling big time. If I want to have just one small cap fund in my current portfolio then it will be the Franklin fund.

What should I do with the other funds and what will be your best strategy? Firstly, do not act in haste, even if the figures may be telling you to get out of some fund. Secondly, understand that when the market falls as a whole, the large caps recover faster, the mid caps follow later and small caps are the last . We have to give time for this. Thirdly, due to the SEBI classification, many small cap funds have had to churn their portfolio quickly and this has resulted in some exaggerated poor returns in some of them. Based on these parameters here is what you should do:-

  • Do a similar analysis as I have done here to identify which of your small cap funds you want to keep and what will you ideally discard.
  • Keep a close eye on how the Nifty small cap 100 index is doing and what is your fund performance relative to that.
  • I expect the index to do more in the next couple of months, so there is very likely to be a recovery in the NAV values.
  • Once the index turns around, look to sell off the funds you want to discard at one go. From then on invest through targeted buying in the fund which you have decided to keep.

In the small cap fund space there are clearly laggards and  terrible laggards – you must be with the better options out of a universal set of bad ones.

Any way you look at it, your long term portfolio has taken a hit and you can only hope that in the long run you will recoup some of these losses.

Mid cap MF’s – have your schemes suffered badly from the carnage?

While the sheer number of investors who diligently invest in MF schemes as part of their investment goals have reached great levels and continue to rise rapidly, several of them are unaware of the details and nuances of the dynamics of investments. Many think that MF investments are a one way street, where you will pretty much have unidirectional growth. Some group of investor’s think that they should choose the MF scheme purely based on recent returns and not look at anything else. This resulted in great subscriptions to the mid cap and small cap funds over the last 2 years. In 2018 the fall has been brutal and have shocked many investors.

In the past few months I have received innumerable queries along these lines – is it a good idea to redeem these funds now, should we stop investing in these, what is the future outlook and so on. While I will take stock of the mid cap mutual fund schemes I have in my portfolio in this post and answer these questions, let us first try and get some facts straight about the more popular mid cap funds I hold.

  • HDFC Mid cap opportunities fund
    • 52 week high NAV of 61.38 Rs was reached on Jan 9th, 2018.
    • Current NAV is 58.40 Rs, so the fall from peak has been nearly 5 %.
    • Returns of 6 months and 3 months are positive, though low ones.
    • 2, 3 and 5 year XIRR stand at 15.4 %, 13.5 % and 29.1 %
    • Clearly a fund that has been managed well and done much better than mid cap index in this year, which is down by 8 % YTD.
    • However, Nifty Midcap 100 has shown better growth in terms of XIRR in the 2 year and 3 year periods at 29.2 % and 37.5 %.
  • IDFC Multi cap fund ( Earlier known as IDFC Premier Equity Fund )
    • 52 week high NAV of 100.34 Rs was reached on Jan 8th, 2018.
    • Current NAV is 97.67 Rs, so the fall from peak has been nearly 2.5 %.
    • Returns of 6 months and 3 months are positive, though low ones.
    • 2, 3 and 5 year XIRR stand at 12.8 %, 8.8 % and 22.6 %
    • Clearly a fund that has been managed well and done much better than mid cap index in this year, which is down by 8 % YTD.
    • However, Nifty Midcap 100 has shown much better growth in terms of XIRR in the 2 year and 3 year periods at 29.2 % and 37.5 %.
  • Sundaram Mid cap fund 
    • 52 week high NAV of 552.84 Rs was reached on Jan 15th, 2018.
    • Current NAV is 494.75 Rs, so the fall from peak has been nearly 10.5 %.
    • Returns of 6 months and 3 months are negative for the fund.
    • 2, 3 and 5 year XIRR stand at 12.4 %, 10.8 % and 27.9 %
    • Clearly a fund that has not been managed well and done almost as bad as the mid cap index in this year, which is down by 8 % YTD.
    • Moreover, Nifty Midcap 100 has shown better growth in terms of XIRR in the 2 year and 3 year periods at 29.2 % and 37.5 %.

It is clear from the above that the HDFC fund is the best managed one here, the IDFC fund is a middling one and the Sundaram fund is really struggling. If I want to have just one mid cap fund in my current portfolio then it will be the HDFC fund.

What should I do with the other funds and what will be your best strategy? Firstly, do not act in haste, even if the figures may be telling you to get out of some fund. Secondly, understand that when the market falls as a whole, the large caps recover faster and the mid caps follow slowly. We have to give time for this. Thirdly, due to the SEBI classification, many mid cap funds have had to churn their portfolio quickly and this has resulted in some exaggerated poor returns in some of them. Based on these parameters here is what you should do:-

  • Do a similar analysis as I have done here to identify which of your mid cap funds you want to keep and what will you ideally discard.
  • Keep a close eye on how the Nifty mid cap 100 index is doing and what is your fund performance relative to that.
  • I expect the index to do more in the next couple of months, so there is very likely to be a recovery in the NAV values.
  • Once the index turns around, look to sell off the funds you want to discard at one go. From then on invest through targeted buying in the fund which you have decided to keep.

In the mid cap fund space there are clearly leaders and laggards – you must be with the leaders and get out of the laggards.

Watch out my post on the Small cap funds where the goings on have been even more interesting !!