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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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.

Financial independence or retirement – A template

I have been asked by many readers as to how they should be organizing their money in retirement so as to get a regular income that stands the test of inflation over a long period. In recent times I am also asked the same question by people who want to be financially independent at an earlier age and are keen to set up a passive income stream that will last their lifetime. The interesting aspect to be noted here is that the solutions are pretty much the same, though the amount of corpus will necessarily differ.

Let me explain this a little. The whole idea of retirement, early or at 55/60 years, is to get some cash inflow from the money you have invested in different financial instruments or in other assets such as a house etc. This cash inflow should be able to take care of the cash outflows that your aspired lifestyle requires. Assuming that most people retire at 60 and can expect to live till 85 in today’s context, their corpus needs to last them 25 years. Now if you decided to take an early retirement at 45 then your corpus will need to last you 40 years. The key to this is also whether you are earning any active income in early retirement. For example, many of us earn some income through consultancy or other means and this will help. However, for the purpose of this post, let us assume that a person takes an early retirement at 45 and expects to live till 85.

At a very basic level you need to understand the following calculation:-

  • Assume an expense of 10 lacs per year at present without accommodation and any children related expenses.
  • For a period of 40 years assume zero real rate of return – this means your corpus invested in various instruments will grow at the same rate as inflation.
  • With the above assumption in place the required corpus is simply a producr of your annual expenses and the number of years. In this particular instance it will be equal to 10 lacs x 40 or 4 crores.
  • So if you are 45 years old and have an amount more than 4 crores and are unlikely to spend more than 10 lacs annually, you can take an early retirement.

What if you do not have this amount but are still interested in retiring earlier than the normal age anyway? Well, there are a few alternatives you can consider in the above example that we are dealing with :-

  • If you work for another 5 years the amount of money needed annually will grow to 13.38 lacs due to 6 % inflation and the amount needed will be 4.68 crores for 35 years. This may sound fantastic but is true – reason is your money is growing for less years and your expenses have increased.
  • Take this futher to 10 years working. Now your expenses annually will be 17.91 lacs and corpus needed for 30 years is 5.37 crores.
  • Before you are worried with these figures let me also give you the good news. Suppose you are 45 and had a current portfolio of 3.2 crores. Now you cannot retire at 45 but decide to work 5 years more. At 10 % growth in 5 years your portfolio value will be 5.15 crores.
  • With a time period of 10 years the portfolio will amount to 8.3 crores.
  • Bottom line is you can retire quite peacefully in either 5 years or 10 years.
  • Apart from working longer there are two more strategies you can look at – one is to believe that your expenses will reduce when you retire. In my experience this is rather tough to achieve and therefore you should ideally not aim for this.
  • The final one is to generate a real rate of return for your portfolio. This will ensure you need a corpus less than 4 crores to begin with. If you deploy your money well, this should be quite possible to achieve.

Let us take the limiting condition where you do have 4 crores and need to deploy it in a fashion so as to last for 40 years. For the sake of simnplicity I will assume that expenses double on an average every decade. In effect you spend 20 lacs per year in decade 2 etc. In such a situation how should you deploy your money? But before we get there let us see the cash outflows and strategy of withdrawal.

  • You need 1 crore in the first decade – this should be largely from interest from PPF/VVY/SCSS  or capital gains from debt funds.
  • Your 2 crores in the second decade should largely be funded by redeeming your Debt investments.
  • Your 4 crores in decade 3 will be mostly through SWP from Mutual funds.
  • Your 8 crores in the final decade will be through redeeming both MF and stocks.

Finally let us talk of the allocation now :-

  • 60 lacs for you and your spouse in VVY and SCSS, 40 lacs in PPF.
  • 1 crore in Debt funds so that you get returns of roughly 8 lacs a year.
  • With the above 2 crores your first decade cash flows are assured.
  • In the second decade you can redeem the debt investments and still have enough surplus to take care of some indulgences.
  • Out of the original 4 crores, put 1.5 crores in equity MF and 50 lacs in Blue chip stocks which are likely to give stable returns.
  • Your MF portfolio will grow to 10 crores in 20 years even at 10 % returns.
  • Spend 4 crores out of this in decade 3 and let the rest be invested.
  • In decade 4 you will have much more than 8 crores in MF itself.
  • Your stocks are really a bonus – leave it as your legacy by donating it to worthy causes.

So when do you want to retire and will you have enough when you do? I think this post has provided a good template for this. Apply it to your own situation and see how it wotks out for you.

Retirement corpus structuring – A Reader query

From time to time I get queries from my Blog readers that will resonate with the larger investor community. One such query was sent by a reader recently after he read my recent posts on retirement corpus structuring. I wanted to address it as a post here.

His query was as follows:-

Taking portfolio 1 as the base, if a person retiring this year from a private firm, has a house to live and corpus of around 2 crore in the following manner –
Debt portfolio – 50 lakhs in EPF, 10 lakhs gratuity, 20 lakhs PPF, 25 lakhs from LIC (maturing in 2022, premiums paid) and 10 lakhs in liquid funds/FDs for emergencies.
equity – 60 lakhs in Mutual funds and 25 lakhs in Shares. How should the corpus be structured to provide regular income in retirement, taking care of inflation?
Let me only try to do a structuring of corpus here as I have already explained the broad principles in the earlier posts. The assumptions are a current annual expenditure of 7 lacs per year, life expectancy is another 30 years and expenditure being double and 4 times in the next 2 decades respectively.
Without further ado, let me give my suggestions now :-
  • Take the 60 lacs from PF and gratuity and put in in Vaya Vandana Yojana and Senior Citizen Saving Scheme. This will have to be done by the investor and his spouse separately. This will give 4.8 lacs per year as interest.
  • Use 20 lacs PPF to withdraw 2.2 lacs every year for the first 10 years. Along with the interest, this will take care of the 7 lacs needed in the first decade.
  • When the LIC money becomes available, invest it in equity balanced funds. This will amount to 50 lacs by 2028, assuming a return of 12 % annually.
  • In decade 2 the average expenses will be 14 lacs. This will be funded through:-
    • 4.8 lacs will be available as before.
    • 50 lacs from Balanced fund will be redeemed @ 5 lacs per year.
    • 60 lacs MF will become 1.8 crores in 10 years with a return of 12 % annually. Take 40 lacs and put it in some hybrid fund such as MIP or Equity Savings Funds. 4.2 lacs each year can be used for the remainder of 14 lac expenditure.
  • In deccade 3 the average expenses will be 28 lacs. This will be funded through:-
    • Stocks which will reach a value of 1.93 crores in 20 years
    • MF which will reach a value of 4.34 crores in 10 years from 1.4 crores base.

So at the end of 3 decades the couple will still have some amount left, which can last them a few more years. It is highly improbable that they will live beyond 95 years, so it is a very safe plan.

I hope the plan addresses the issue at hand. In case there are any queries on this, I will be happy to address the same.

Some real life portfolios in retirement

In the several posts I have written on retirement here, I have tried to give both my personal examples as well as those of others. Many readers who are considering retirement want to know if the money they have as corpus will be enough. Some think they have adequate money but are not sure of how to deploy it optimally. In this post let me give 3 examples of real life portfolios from retired people.

Before getting into the actual portfolios, it will be important to understand the pre-requisites, in order to be able to go for retirement in financial terms. These are :-

  • You should have a place to live in. This can be either your own house or a rented one where you are covering the rent from what you get as rent of your house elsewhere. This is important as rent is inflationary and must be taken care of.
  • All your major life goals should be over. Even if some goals such as children’s marriage are pending, you have separate funds for those.
  • You have an ongoing Health insurance that you will continue with. Get this before you and your wife cross 50 years, they get very expensive afterwards.
  • Your children are taking care of themselves in terms of financial expenses.
  • You may still be earning some active income through use of your time but that is not considered in these portfolios.

Portfolio # 1:

This is the simplest portfolio I have seen with hardly any real risk and yet catering to almost any future eventuality.

  • Tax free bonds of 1 crore invested in 2013 with an interest rate of 9 %. This yields an income of 9 lacs every year till 2028.
  • PPF corpus of 40 lacs and contribution of 1.5 lacs every year till 2028. This will grow to more than 1 crore in 2028.
  • Emergency funds of 10 lacs in Liquid funds.
  • MF portfolio of 20 lacs and stock portfolio of 10 lacs now.

The couple have expenses of about 7 lacs per year and stay at their own home. They put 1.5 lacs in PPF every year and pay no taxes. In 2028 they can use the money from Tax free bond principal to invest in Debt or hybrid funds. At this time they will start using the PPF amount for the next 10 years. Note that this is also tax free. By 2038 their MF and stock portfolio should grow to 2 crores plus even with a modest return of 11 % or so. With another 2 crores from Debt funds they should have enough for the last phase of their life.

Portfolio #2:

This is slightly more complex as equity and debt are both used. Let us first see the deployment here and we will then look at withdrawal.

  • 1 crore in PPF as the couple were not salaried people and invested in PPF regularly over a long period.
  • 50 lacs in various types of Debt funds at current market value.
  • 40 lacs in equity MF and 10 lacs in stocks at current market value.

Assuming 30 years of retired life and an expense of 8 lacs per year in the first decade, this is how the couple have decided to go about it.

  • Withdraw from PPF to the tune of 10 lacs for the first 10 years. This will still leave enough money after 10 years in the account.
  • The 50 lacs Debt fund will grow to about 1.1 crores in 10 years. This along with the remaining amount in PPF will serve expenses of second decade.
  • The Equity portfolio of 50 lacs will grow to 3.36 crores in 20 years. This should see the couple through the third decade, even though the expenses by now are about 32 lacs per year.

Portfolio #3:

As a final portfolio, let us look into a more complex situation. Here, the resource base is larger and the expenses are also significantly higher. 

  • Two PPF accounts of 50 lacs and 10 lacs in current value.
  • Tax free bonds of 24 lacs, maturing in 2028
  • Equity Mutual funds of 50 lacs paying dividend of 3 lacs a year
  • Equity Mutual funds of 50 lacs with growth option
  • Stock portfolio of 1 crore with annual dividend of 3 lacs
  • Debt funds of 1 crore with LTCG of 8 lacs every year

Assuming the current decade expenses will be 12 lacs at an average, 15 lacs in the next decade and 25 lacs in the last one, how should things be structured?

  • Current passive income from interest and Dividends is 8 lacs. Another 8 lacs is from LTCG of Debt funds maturing every year.
  • In the first decade the PPF accounts will be funded to the tune of 3 lacs every year.
  • In decade 2, PPF can be used for withdrawal. The two accounts will suffice for these 10 years even without any fresh contributions.
  • For the last decade stocks and MF can be redeemed to fund expenses.

So there you have it – while 1.5 crores plus is quite enough for expenses of 8-9 lacs in a year, if you want to spend more then you should look at higher corpus. But the real lesson is in the deployment of corpus and withdrawal strategies.

Will be happy to answer questions on this.

How to realign your MF portfolio

In several of my earlier blog posts, I have covered practically all aspects of MF investments and you should be in good shape if you are starting off to create a MF portfolio from scratch. However, as some readers reminded me, most of us are already having an MF portfolio and some of us are having SIP investments in several funds. Different portfolios for different goals can also lead to people holding more funds than is either necessary or desirable.

The good thing is you can realign your portfolio and get into a logical allocation quite easily. As I have covered the basic logic of my suggested portfolio structure and SIP / one time investments I will not repeat them in this post. You can read these posts here and here. In this post I will outline a simple method by which you can realign your portfolio.

Step 1 : Be clear about your intended portfolio structure:

  • For the long term you need just 4 funds – a large cap fund, a mid cap fund, a multi cap fund and a small cap fund. If you want to hedge your bets you can add an International fund, mainly US based.
  • You do not need to have any Balanced funds, Sector funds or Thematic funds.
  • Always go for Direct funds as the lower cost will enhance your returns significantly over the long run.
  • Remember you need only 1 portfolio for all your goals and not a separate one for each goal.

Step 2: Map your current portfolio to the above portfolio structure:

  • Check if the funds you hold are aligned to the above portfolio. If not then discard them logically from your portfolio.
  • For the aligned funds, check if they are suitable for your portfolio. Read about how to select funds here. If any of the funds are not suitable then discard these.
  • We will decide what to do with the discarded funds later on.

Step 3: Get to your new portfolio structure:

  • Take whatever you have got from step 2 and add other funds based on the portfolio structure and the selection method.
  • Now you have s set of 4-5 funds in your portfolio. In all of these your investment value is either zero or equal to the earlier investment, in case you are retaining any of your earlier funds.

Step 4: Decide on your investment amount per month:

  • To begin with use a SIP calculator to check what should be your monthly investment. You can take any rate of return between 10 and 15 % based on your comfort level.
  • You can start by putting equal amounts in all 4-5 funds. However, if you prefer a fund type over another then you can tweak with the monthly SIP amounts. It does not matter a great deal, as long as you have got the portfolio correct.
  • Increase the SIP amount every year based on the availability of extra money to invest.

Step 5: Redeem the discarded funds at the right time and invest into your new portfolio:

  • Redeem your discarded funds at a time when it seems right. There is no exact formula but you can observe the trends and take a call. For example, if the Nifty reaches a level between 10800 and 11000 now it will be a good time to redeem the funds that you do not want to be in any more.
  • There is no rush in this, your investments are growing even if you have discarded the funds logically from your portfolio. Once you have redeemed the funds be in cash or keep the money in a liquid fund, till it is time to buy.
  • Invest the above money through one time purchases of the funds in your new portfolio at an appropriate time.

As you can see from here realignment of the portfolio is a fairly simple exercise, once you are clear about the mechanism. If you feel that you need to do it, the right time to start is NOW. In case you are not invested in the right funds then any further investment in them is completely senseless.

In case you have any questions on realigning your portfolio, comment on this post and I will be happy to clarify.

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