Tips

• Is bear market time to pause\stop SIP

SIP is systematic "buy" of MF. Bear market provides opportunity to "buy" MF unit at lower price (means good buy).

Pausing SIP in bear market is denying cheap buy of MF, why would an investor do it?

So, SIP should not be paused\stopped in bear market.

The bear market provides the opportunity to lower the average cost of "buy".

The problem arises when the investor stops SIPs in a market downturn, thereby losing the advantages of buying units at low NAVs and cost-averaging benefits.

It is, therefore, wise not to get carried away with market fluctuations in a few years, and stick to SIP investments, as equity fund investing is a longer term game.

• How SIP generates returns and what should be SIP long term time-frame

SIP is systematic investment happening at regular interval (usually monthly) accumulating market volatility, highs and lows over long term and accumulating averaged cost MF "buy"

This averaged cost "buy" being systematic and long term market upwards movement generates the returns.

The key to SIP is long term investment.

The long term investment could be linked to one cycle of economy usually 6-8 years covering market volatility, highs and lows.

So, SIP long term investment is marked as 6-8 years.

• What to do with non-performing fund SIP

The answer to this is "what defines non-performing fund"

Let's walk through attributes of non-performing fund.

1. Comparing with correct benchmark

2. Comparing against correct peers

3. Comparing the fall in rating by VR or Money Control

4. 1 year fall is may not be termed as non-performance

5. Consistent 2-3 downward trajectory is non-performing or trails of ups and downs - against the Market & Peers

Now, What to do with non-performing fund SIP

1. Stop the SIP for non-performing fund

2. Identify another fund (existing fund in portfolio or new fund) or asset for future investment

3. Start redeeming non-performing fund units as soon as they start becoming lock-free and invest in another fund or asset

This could be achieved by SIP strategy redemption or lumpsum

Evaluation applicable redemption tax and redeem within limits of tax free redemption and invest in another fund or asset

4. Instead of hanging on to a bad selection, it makes sense to switch the money to an investment you feel comfortable with, through systematic redemption and reinvestment in a tax-efficient manner, and for simplifying your existing portfolio.

5. However, before redemption, be sure that you're comparing them to an appropriate benchmark index and industry peers.

• How-To exit from equity near retirement

Suppose I have invested for 30yrs and have 5 more years for retirement, then how to avoid a 30% fall in the final year as that will hurt the corpus badly.

Let's analyze

1. Fixed income assets are better within 5 years of retirement, but actually under perform the inflation rate during our long retired life of 20+ years.

2. Some savers are lucky to have income streams like pension or rental income that are reasonably inflation-linked.

3. Retirement preparation battle has to be fought on two fronts -

a) A source of steady guaranteed income for basic expenses during retirement, and

b) A long-term investment for protection against inflation during our retired life.

How-To build equity corpus for retirement

1. A young investor should firstly strive to build a retirement corpus of 25 (or even 30) times his estimated annual retirement expenses through long-term SIPs of diversified equity funds during 30-35 years of his earning life.

2. Thereafter, he should endeavor to maintain this corpus in a "safer" Balanced equity fund well before his retirement age, so that he can then apply the 4% withdrawal rule comfortably during the entire 30+ years of his retired life.

3. The basic assumptions in the 4% withdrawal rule are 7% min. CAGR from the retirement corpus and 3% max. inflation rate on a long-term basis.

4. In India's context, being a vibrant developing economy, we can safely tweak the assumptions as 12-13% min. CAGR and 5-7% max. inflation rate on a 30-yr long-term basis

Golden Point

1. For an investor who is able to achieve 25x corpus target at any age, the 4% withdrawal rule starts working fine thereafter too.

Now, How-To exit from equity near retirement

1. To avoid erosion due to volatility, for fulfilling pre-defined goals prior to your retirement period, you should redeem earmarked equity funds (otherwise the more risky ones) before 3-5 years and place the proceeds in a fixed income product, say a flexi-deposit bank account, for meeting the goals.

earmarked - designate (funds or resources) for a particular purpose

2. Similarly, before 1-2 years of your retirement, an amount equal to 25 times of estimated annual retirement expenses, should be invested in a Balanced equity fund, to work as your perpetual retirement corpus, by redeeming more equity funds from your current portfolio to that extent, and which will take care of both debt and equity allocations for income and growth simultaneously.

3. Thereafter, any surplus equity funds, can be redeemed for investing in an ELSS fund, for tax savings, or in a Multicap fund.

4. For availing full LTCG tax benefits, equity redemptions, or switches, should be spread over a few years.

5. After retirement, annual withdrawal of 4-5% from the Balanced equity fund can be done for meeting regular expenses, while the fund continues to grow by the power of compounding.

6. As the 4%-5% withdrawal rule presupposes that your retirement corpus would be in a position to maintain this differential between its annual earnings and inflation rate at all times, hence the necessity to invest in a Balanced equity fund, instead of a pure debt fund, as it succeeds in doing precisely so over the long-term.

7. The typical 4% rule recommends that a retiree annually spend a fixed, real amount equal to 4% of his initial wealth, and rebalance the remainder of his money in a 60%-40% mix of stocks and bonds (like, say, a Balanced equity fund) throughout a 30-year retirement period.

8. The 4% rule will give you a greater chance of not running out of your money and it’s valid for 25+ year periods.

9. The way the 4% rule works is that you start by withdrawing 4% out of your portfolio in the first year.

10. The way the 4% rule works is that you start by withdrawing 4% out of your portfolio in the first year.

11. For instance, if you start by withdrawing, say, 4 lakh out of your wealth of 1 crore in the first year when inflation is 7%, then in the second year you withdraw 4 lakh + 7% (i.e. 28,000)= 4,28,000.

12. Every year thereafter, you keep adjusting the previous year’s withdrawal amount by the relevant inflation rate.

13. The 4% rule is only a guideline, so if your equity portfolio performs better than expected, then you can spend more ( i.e. even 6-6.5% as queried by you).

14. Needless to mention here that in case there is a sustained multi-year bear market, when your portfolio value drops considerably, a cut back on such withdrawals may be required.

15. The Multicap fund can be used for out-of-the-way expenses, as well as "unsystematic" investments at your convenience, for finally bequeathing a healthy corpus to your near and dear ones!

16. A Multicap - Balanced equity fund combo is a simpler retirement investment strategy, to take care of growth, debt-equity asset allocations, a rebalancing mechanism if markets run up, and continuing to remain invested in equity in a lesser risky manner after retirement too.

• Small Cap or Multi Cap Mutual Funds

1. For long-term regular investment in a small-cap fund, always select one with high star rating and high mid/long-term returns, which indicate a proven track record and performance history.

2. While it is factually true that smallcap funds have given higher returns over 10+ years, making them obvious investment choices for an aggressive investor, opting for top-rated multicap funds, would suit lesser aggressive investors better.

3. A good multi-cap fund amply allows flexibility in the fund management process, through its in-built mandate, which is helpful in long-term wealth creation.

4. A multi-cap fund is able to cushion itself better by realigning its portfolio rapidly to changing markets, or redemption pressure, as it can suitably pick from a variety of stocks, with its fund manager's deft ability and track record.

5. While aggressive investors may feel that they can build a better portfolio on their own with small-cap (and sectoral) funds, multi-cap funds make an equally excellent investment option with lesser risk.

• Adding More Equity Mutual Funds in Portfolio

1. If an investor already has SIPs in multiple MFs, he shouldn't add more new funds to invest his "long-term money", but increase his SIPs in existing funds instead.

2. Before doing so, he should review his existing portfolio structure to simplify it, goalwise and riskwise.

3. A Balanced fund (neutral cap bias), a Multicap fund (mid cap bias) and an ELSS fund (large cap bias) should suffice as a long-term portfolio, with periodic reviews and rebalancing.

4. The primary investment objective of a regular young earner and breadwinner should be to build a fund portfolio that is inflation-beating, clutter-free, and multiplies his regular savings by power of compounding.

5. It should allow him free mindspace and time to focus on his own career/vocation for his own advancement, to increase his investing potential further during his earning years, for a richer retired life.

• Mutual Funds ratings significance

1. Fund ratings are typically based on past performance, judged on objective quantifiable factors, mostly on risk-adjusted basis, although they do not give any opinion about future risks.

2. Therefore, most fund ratings should be used as starting point and not the only benchmark.

3. However, if ratings have gone down continuously over all quarters of a year, as compared to their peer schemes, review to weed them out (no point in re-balancing them like stock averaging) for better funds from its peers, within your overall asset allocation and risk profile.

4. Please keep in mind that:-

a) Performance slippage of most funds is gradual.

b) Any rating system avoids radical changes by considering the long-term history of funds.

c) A fund can turn mediocre, with no performance guarantee, being market-related in nature.

d) Fund rating is a relative tool, showing market navigation of a fund to give a return higher than others in its category, even if it is negative at times.

5. After using fund ratings as a starting point, any slippage or upgrade helps to monitor the fund's performance.

• Diversification Caution

1. Over-diversification can harm a portfolio due to:

a) Chance of it spreading too thin,

b) Assets which may not perform well, or even perform poorly,

c) Good performance of some of the other assets being neutralized too.

2. Among funds, aim for diversifying by:

a) Fund structure - large, mid, small, multi caps, diversified;

b) Investment style - growth, value, sectoral, thematic;

c) Risk profile - high, medium, low.

3. Don’t invest in more than 6-8 equity funds, because monitoring them will be a challenge, and avoid duplication.

4. Diversification can also be achieved by investing in a mix of equity, debt, gold, money market and real estate funds.

5. In a diversified portfolio, laggards average out gains of outperformers.

6. But in an over-diversified portfolio, out-performance of winners may get severely pulled down by laggards.

7. So excessive diversification can actually "diworsify" a good portfolio!

• Debt Liquid Mutual Fund Vs Bank Savings Account Deposit

1. A Liquid fund scores over a bank's savings account on all fronts except the cheque facility.

2. Currently, savings account interest rate is around 4% while the returns on a liquid fund is 7-9%, which is still 5-6% post-tax even at 30% tax rate.

3. You can invest in a liquid fund for a few days or months and withdraw from it daily, or even fully, like savings account, without any exit load.

4. As a liquid fund is related to short-term market rates, it is not totally interest risk-free, hence the change in daily NAV, unlike a more constant savings account rate.

5. However, a liquid fund prevents credit risk to your money by investing it only in superior creditworthy debt instruments of upto 91 days maturity.

6. Most of the AMCs who have their own Apps are also offering online facility for handling your daily needs through liquid funds.

7. For a new investor, KYC compliance will be required, and this too is being offered by several AMCs online!

• MFs - "RISKS", "LIMITATIONS" AND "REAL BENEFITS"

Being equity-linked and service-driven, MFs also have their own "risks" and "limitations" leading to "under-performance" at times.

1. Risks with MFs investments are:-

a) Market-related due to macro-economic factors,

b) Company-related due to negative news and performance,

c) Interest-related, especially in debt funds, due to unanticipated rate fluctuations, and

d) Credit-related due to corporate defaults and delays in payment obligations.

2. Limitations with MF investments are:-

a) Money-related due to mandate of deploying limited amounts and ratios in chosen stocks as per investment objective,

b) Review-related due to adjustment of variations for optimizing returns,

c) Fund manager-related due to his own investment style as well as the leeway given by the fund house,

d) Expense-related due to statutory caps on expenses during launches as well as operations, and

e) Returns-related due to various auto-balancing and less-risk mechanisms of fund houses introduced from time to time.

3. Keeping them in view, the "real benefits" of investing in Equity MFs are:-

a) Professional management of our investments, purchased at a price paid through a capped expense ratio, saving our valuable time and effort for utilizing them elsewhere,

b) Scope of deploying our limited amount of hard-earned money in a basket of companies' stocks in a regular systematic way,

c) Creating a diversified equity portfolio, thereby reducing risk of capital erosion to a great extent, by avoiding self-inflicted unsystematic risk,

d) Liquidity of our money by easily selling MFs units at ongoing NAV,

e) Freedom of choice by "switching" our MFs suiting our individual needs and risk appetite, and

f) Safety of our investor rights through Sebi's regulated environment.

• Long-term wealth creation Mantra

1. Re-balance in "good" times.

2. Invest in "bad" times.

3. SIP in "good + bad" times.

• Multicap MF Vs separate Large, Mid, Small cap MF

If you are able to spot a wise fund manager, it is good to put your money in a multi-cap fund. At times, your portfolio will require rebalancing. Markets are cyclical between their components. Sometimes large caps do well, sometimes mid caps and sometimes small caps. When the markets correct, small caps crumble and midcaps struggle but large caps prove to be more resilient. If you have a multi-cap fund, you will have exposure to companies of different sizes and you will be reasonably diversified with simplicity.

Three years ago, if you had invested a third of your money in large cap, mid cap and small cap, your small cap money would have doubled and your large cap money would have gone up 1.5 times. This will tempt you to invest in mid/small caps. But when 2008 happened, the mid/small cap funds went down by 70-80%. The large cap funds, on the other hand, went down by 40-45%, losing you less money.

If you are able to spot a good fund manager, give your money to a multi-cap fund. If you choose to invest in a mid/small cap fund you have to rebalance yourself or invest through the lean times as well as times of plenty. If you want to be an aggressive investor, have an allocation to small and mid cap funds. But be prepared to absorb the extreme volatility that you will see here. For most ordinary investors who are seeking diversification with simplicity, multi-cap is the way to go.

1. Long-term wealth creation happens when the fund management process has flexibility, which a good multi-cap fund amply allows through its in-built mandate.

2. Though a few funds do indicate their allocation to large, mid and small cap stocks, mostly they are indistinguishable from a regular diversified fund.

3. A multi-cap fund is also able to cushion itself better by realigning its portfolio rapidly to benefit from the changing market mood, or to bear redemption pressure as it is likely to be more liquid.

4. As a multi-cap fund can pick from a much larger population of stocks, its fund manager's deft ability to select stocks is crucial to its success, and investing in it is akin to investing on the fund manager's capabilities and his track record.

5. While investors with a large corpus at their disposal may feel that they can build a better portfolio on their own, multi-cap funds make an excellent investment option for investors with a smaller allocation.

Another thing which would matter is that whether it is an accumulated portfolio or a building portfolio where you would continue to contribute.

If it is a building portfolio and you would continue to contribute, then I think you should continue with your investment in midcaps.

But if it is an accumulated portfolio where you won't be contributing any further, then it would be better to simplify things and invest in multicap funds.

• Asset Allocation

Basically, there are two major types of financial investments, equity and fixed income (deposits, bonds, etc.).

Equity has higher potential gains and more risk, while fixed income has lower but less volatile gains. Depending on your preference, you should invest in equity and fixed income in a certain ratio. This ratio is called asset allocation.

• Asset Rebalancing

Over time, equity and fixed income gain at different rates, thus changing the asset allocation away from what you want. Shifting money between the two to restore that allocation is called asset rebalancing. That's all there is to it.

Asset rebalancing means that instead of seeing the equity-vs-fixed question as a black-vs-white binary choice, you should be seeing it as a shade of grey. Once every year or so, you could 'rebalance' your portfolio. What this means is that if the actual balance has veered away from your desired one, you should shift money from one to the other in order to attain that percentage again.

When equity is growing faster than fixed income-which is what you would expect most of the time-you would periodically sell some equity investments and invest the money in fixed income so that the balance would be restored. When equity starts lagging, you periodically sell some of your fixed income and move it into equity. This implements beautifully, the basic idea of booking profits and investing in the beaten down asset. Inevitably, things revert to a mean, and that means that when equity starts lagging, you have taken out some of your profits into a safe asset.

Why does this work? The two types of financial assets--equity and debt--are not just different, but complementary. There are just three ways that an investment can make money. One, by lending money to someone who pays interest on it, be it a business or a government. Two, by becoming a part owner of a business, as in having a share in it. And three, by buying something that becomes more valuable, like gold or real estate or indeed, any possession.

It turns out that the best way to protect as well as take advantage of all this is to decide upon a percentage balance between equity and debt and stick to it by periodically shifting money away from the one which becomes high and to the one that becomes low.

The effect is almost magical. Volatility, the bugbear of equity investing, is damped down and returns are hardly affected. And yet, this sounds like hard work to implement. Not just that, starting this year, it's also not very tax efficient either. Earlier, selling off equity investments that had been held for more than a year was tax-free. Now, there is a 10 per cent tax. Which means that switching in and out will reduce the money that you have.

The best solution to that has always been hybrid equity-debt funds. Because the switching between equity and debt happens in the fund, there is no tax incidence until you actually withdraw the money to use it. Moreover, the recent formalisation by the regulator SEBI in the categories of mutual funds has meant that there are now a number of well-defined types of hybrid funds that are available to suit different types of equity-debt allocations. Major ones are Equity Savings, Balanced, Conservative, and Aggressive funds. I'll discuss the pros and cons of each in details, but each is an excellent way to automatically add asset rebalancing to your investments.

It would now be better for a senior citizen to reduce rebalancing on his own, by opting for Hybrid Aggressive equity funds, and redeem his monthly needs from them.

3. Reasons for this approach are:-

a) Reduces active monitoring of corpus

b) Avoids taxable churning in rebalancing

c) Optimizing fund manager's acumen

d) Overcomes impact of market cycles

e) Lesser risk-taking with increasing age

f) Avoiding crowd psychology sways

g) Single automatic asset reallocation

h) Stable income and long-term growth

i) Inflation-beating investment returns

j) Eliminates defective decisions

k) Removes greed in twilight years and

l) Builds a perpetual retirement corpus.

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