Investment strategy | Fund allocation
What do you think of the recent market correction? With life unchanged for SIP investors, should they supplement their portfolios despite the current downturn?
Everyone should top up every year or whenever someone’s income increases or your savings increase. Many investors set up their SIPs by researching recent past performance. This is still the case for most new investors and small cap funds that have fallen the most, but the lesson here is that despite the relatively higher 7% drop in the past three months, we will still be sitting on a gain of nearly 30%. Investors should just keep calm and invest more as they can and they shouldn’t try to increase it in any market related way and make sure they don’t need of that money for a few years.
In these uncertain times where raw inflation and geopolitical crises are taking their toll, are you sticking with the safest ones, i.e. do you have a higher allocation to largecaps? It’s not easy trying to change the allocation from time to time, but are you safer there than in the wider markets?
No it’s an exercise in futility because every time you try and attempt that with an allocation that would be relatively stable or more secure in fact I noticed that largecaps were the most vulnerable because FIIs are selling and that their mainstay is largecaps. So that’s where we saw the biggest drop. Large mid or small caps turn out to be relatively more stable at some point and we haven’t seen the carnage in small caps, at least in the overall holdings that mutual funds hold. You should therefore not try to attempt this fine adjustment of the distribution. The whole idea of SIP is that one has to choose carefully to start with or someone has to guide an investor into the right vehicle, which may not happen on a large scale. If someone is a first time investor and someone 40 years old should always start with something that has a large fixed income allocation because all the long term stories and it’s all good but when you’re faced with at a 20% drop in your investment in a short time, it’s quite annoying. So choose your vehicle carefully to start with and this is only necessary for the first two, three years.
Once the investor gets acclimated he understands that this is the way of the market and it will always be like this and that is why it turns out to be a higher compound vehicle because it will not be a smooth line all the time. time.
Another thing is that we don’t find too many investors disappointed with the decline as their SIP scale as reported by AMFI is much lower. Many of the new platforms that have sprung up accept SIPs, but they have given the choice to pick a date that investors like and technically they are not flagged as SIPs. We only learned about this recently when Parag Parikh stopped taking money from this fund, but continued to take money from the SIP and many investors stopped entering the fund. Then they found out that they were actually registered as a one-time investment, but not declared as a SIP to the fund company. Thus, the scale of regular investment in Indian mutual funds is much higher than reported.
What do you think is the real SIP number? If you put it all together, is that almost double what the AMFI number is?
No, it will be around 15-20%, but it will continue to increase if not corrected and must be considered in terms of monthly influx which is not SIP. Thus, SIP reports could be increased by 10-15%.
How do we approach the debt for the next 12, 18 months?
After Franklin, after the big shakeup that we saw, because of the big fear that debt funds created and investors experienced, they got stuck. Luckily, most investors were able to recover almost all of their money and it didn’t turn out to be disappointing, but it did scare people off a lot. I do not invest in debt funds.
However, this cannot be ruled out given the economic turmoil we are seeing and the scale of issues that may arise on the solvency front may not be very high as Indian companies are much less leveraged today. But I don’t think it’s worth it. Interest rates can move and over the past six years I have seen that. Before that, I had never seen such a situation. Most investors, most bond fund managers used to think in a standard way. Everyone will think the same way and it will eventually materialize.
90% of fund managers will think that interest rates are likely to go up or down and they will. For the past five or six years, most of them have been wrong. Much of the surprise fixed income managers have experienced has caught them by surprise, hurting investors in the short to medium term. We see massive flows moving from one fund to another because, as most funds are open ended, people make up for their losses and move on.
Investors should keep it very simple and keep it very safe. Do not assume a degree of anxiety with the fixed income fund and limit yourself to short-term funds and choose funds appropriately and ignore the rest. There is not a very strong case for long term fixed income investments today. If so, one must seek out the appropriate fixed term plan as it presents itself, but why does anyone today lock themselves into relatively low interest rates if is there a chance that it could increase?
What about buying into an hedge fund in this type of environment? Volatility is back. It’s not a one-sided market, it won’t be like a crazy bull market of 2021. Does it make sense to move into an arbitrage fund? The whole debt proposition was a 7-8% security yield which, in a sense, was insured. Which category do you think can give you that kind of promise?
The arbitrage yield should be a benchmark for a liquid fund. They turn out to be reasonably correct as they were able to generate somewhere close to what liquid funds generate. The big advantage is that arbitration is done on two fronts. One is tax arbitrage. If you have invested in cash for the preferential tax treatment, you must hold it for three years. In arbitrage funds, one can keep it for one year and they are eligible for 10% tax on gains. In less than a year, that’s 15% short-term capital gains tax because technically or tax-wise it’s treated like equity.
In this sense, it is worth for any large investor who wants to keep a large sum of money waiting for an investment or an expense or whatever to actually invest in arbitrage funds for this reason . Don’t expect anything substantial from these due to the sheer size of the arbitrage fund and also due to the increasing use of technology to arbitrate and by their very design they cannibalize themselves. Arbitrage is killed, but extreme volatility can create such a situation and that’s why these funds are able to create reasonably closed returns – sometimes a little more and sometimes a little less than liquid funds. They are attractive for tax efficiency.
What would be the ideal strategy? Do you know any investors who are looking for some sort of diversification? They are uncomfortable buying stocks at high valuations with a time horizon of three to five years. For long-term wealth creation, are balanced funds the way to go?
No. We should be a little more conservative. Maybe go for a balanced advantage or the equity savings fund because the idea should be to beat inflation and maybe a bit more, but you may not be with the balance fund.
A balanced fund actually tends to what used to be the balanced fund. I’m referring to an aggressive hybrid fund because we don’t have too many attractive balanced fund options because everyone has launched a balance advantage and Sebi doesn’t allow you to launch a balanced fund as well as a balanced advantage. Balanced funds, by design or definition, are offered as being 50% equity and 50% debt. If we had too many attractive options, it would have been worth it. Old balance funds are no good, and they tend to look almost like equity funds. Be more conservative, opt for a balanced advantage fund or an equity savings fund.
How should one consider an appropriate allocation in categories such as stocks, mutual funds, gold, real estate and deposits?
I didn’t believe in gold, but there might be a small case that shouldn’t be a big allocation to gold, stocks and debt. It all depends on your ability to take the big things in your stride and also when do you need the money? If you need your money, whatever part of it, over the next three years, keep it in fixed income and keep it very conservatively. Don’t try to maximize returns on fixed income investments.
One should not invest in fixed income securities in order to maximize returns. Just think about reasonable returns, maximized returns and nothing else when choosing a fixed income fund. I would like to share a thought that every investor should be very serious about. Never invest in the best performing bond fund in the category. It’s an outlier for a reason and the risk will visit once in a while and it will be very scary.