Investment Objectives & Advice

The most critical part of investment journey!

let me share a story, I have come across recently, to set the tone of today’s topic.

Jack Bogle was talking about “Buy & Hold” to some investment advisers, and one adviser complained, “I tell my investors to do this, and the next year, they ask what should they do, and I say, do nothing, and the third year, I say do nothing. The investor says, ‘Every year, you tell me to do nothing. What do I need you for?’ And I told them ‘You need me to keep you from doing anything.'”

Over the years, I have shared cases and my pertinent advise to specific queries. One such case was in 2019, I wrote my view and analysis for the Aditya Birla Sun Life Pure value fund. After the discussion, the investor has paused his SIPs in the fund and moved the new money to a better risk aligned fund for himself. As I suggested him to not sell off the current investments at the bottom of the cycle. He held on and today after 2 more years of wait, they fund has delivered a great return (Details below). He is happy now and Ok for him to make the exit as well.

Source: Morningstar India as of Aug 31, 2021

In a similar instance, last year lot of people hit me with the questions about the future of ICICI Prudential Equity & Debt fund. They tried to pick me on this fund for its underperformance as the fund category (Aggressive Hybrid Fund) is widely recommended by me and this specific fund was also part of my shortlist of funds to be in my portfolio (When I replaced my HDFC Hybrid Equity Fund after 10+ years of holding). One year since then, The fund has came back with roaring returns and my two cents of analysis are vindicated again. In below table, You will see that the fund has +10% outperformance vs the Category & ~20% outperformance vs the Index on YTD basis.

Source: Morningstar India as of Aug 31, 2021

The reason, I brought these two cases back to light due to my recent conversation with a friend about “What should he do for his underperforming fund?“. I have often given the specific advise but realized that a generic checklist would be a better solution and can be applied by the wider population. If the fund has been underperforming, Analyze the reason of the underperformance:

  1. Is it driven by the style or category being out of favor? or
  2. There has been any change in the fundamental attributes of the fund? or
  3. The fund manager has been changed and causing the rejig of portfolio? or
  4. etc.. etc..

If the change is cyclical in nature, you might be better of waiting for cycle to turn and then move out at the top of the cycle. Though when fund starts to perform back, you might forget that you wanted to move out of this fund therefore make a record of it for a 6monthly review. If the changes are permanent in nature, like heavy loss of AUM, loss of star fund manager or substantial increase of TER etc. You should plan your exit in optimal manner, check the exit load implications as well as the tax treatment of the accumulated capital gains. If you can not determine the reason of underperformance, do not hesitate and speak with a competent financial advisor who can help you with the process. Any good advisor would be worth the fee they would charge.

Lastly, If you hate the periods of underperformance than it is an apt situation to explore the passive funds to get the closer to index performance. This would not only eliminate the anxiety of the underperformance but also take away the effort in fund review/ selection. Let me leave you with these lines from the Netflix series “THE CROWN” as it reflects the most critical part of investment journey “Buy & Do nothing” unless the reason to sell is one from the list.

To do nothing is the hardest job of all. And it will take every ounce of energy that you have. To be impartial is not natural, not human.

Happy Investing!

Investment Objectives & Advice

Path to Financial Independence: 10th year anniversary

“Remember to celebrate the milestones as you prepare for the road ahead.” – Nelson Mandela

In 2011, I first thought about the financial independence and wrote in Path to Financial Independence almost 10 years back. Even though my calculations of numbers were basic but I was thinking correctly about the issue & steps to resolve it. As the time passed, I get more and more organized as well as closer to my financial independence goal. Retire early or not, The Financial Independence continues to be main focus for me [#FIRE].

One major shortcoming of my basic calculations were the under appreciation for the impact of inflation, I am not talking about the normal reported inflation but the personal inflation. Common inflation would be 6-8% annually but personal inflation or what we call Lifestyle creep is much higher. In my bachelor life, My monthly expenses were 15-20k as most resources were funded by 4-5 people staying together. Post marriage they jumped by >100% as you need to bear the whole expenses at your end. There are other expenses, which increase due to upgrade of lifestyle like moving from bike to car, travelling by Flights vs. Trains etc. [Check my detailed article on Lifestyle inflation]

At the end of 2020 (Year in Review), I had accumulated the 27x portfolio [Currently ~33x] to my current expenses. By traditional benchmarks/ thumb rules, this milestone could be termed as Financial Independence milestone but as I explained in the analysis for a friend that it might not be sufficient for sure. In last 10years, my portfolio has grown by 41x at a compounded rate of growth of 47%. As I am slowing transitioning from the Phase 1 to Phase 2 of wealth cycle, The primary factor of the growth has been the increase in income & corresponding increase in savings. Now the growth in portfolio is increasingly driven by returns, 2020 growth by returns was > the overall absolute growth in any of the years from 2012-2017. Think & understand this point better as per your position in the wealth cycle.

41x Portfolio Growth in 10 Years

In the last 10 years, There have been many lessons for improving the returns, which I plan to leverage in the next decade. The most important lesson among all is the concept of less is more. Earlier in my investing journey, I invested into various stocks & mutual funds. Tried chasing returns and did it successfully too. As your portfolio size start increasing, it is much more efficient to be a buy & hold investor. When you have higher churn rate in portfolio, you need to worry about the cost of transaction, exit loads, Tax implications. for e.g. you identify the opportunistic equity investment of 25% return in a year with INR 100k investment you book a profit of INR 25k next year (No capital gain tax) but if portfolio size is INR 1mm then INR 250k would mean INR 15k as capital gain tax. Higher churn also means more number of decisions to be taken, which in turn increases the probability of wrong calls. Below are the steps to be taken to improve your long term returns with lower churn:

5 lenses to identify the right investment portfolio
  1. The portfolio design should satisfy each of the five requirements in terms of returns, risks, liquidity, tax and your time horizon. It is a crime to invest your 1year ahead required money in equity like risky product as well as keeping all your 15-20 year far goal in 100% debt
  2. Buy right products in your core portfolio with relevant diversification as no one asset class would continue to be the lead return generating
  3. Diversification do not mean that you end up buying lots of funds or stocks. Simplification is as important as diversification.
  4. Do not sell your investments unless it meets one of the criteria flagged in when to sell your investments

I am quite hopeful, that the simple portfolio of just 5-6 funds can serve the most needs of an investor. As I am getting closer to my financial independence goal, I am helping more and more people to start their journey in more structured manner. I learned the process by hit & trial, started with zero inheritance and if I can do it, I am sure most of you can do it as well with little help & determination.

May this independence day brings you the aspiration to achieve your financial independence as well.

Happy Independence Day & Happy Investing!