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!

Mutual Fund

Fund Review: Aditya Birla Sun Life Pure Value fund

Decision to buy and continue to hold your fund investment depends a lot on the fund but a lot more on an individual.

Recently a friend of mine asked me to suggest if he should continue his SIPs in Aditya Birla Sun Life Pure value fund. His expectation was to get the answer in simple Yes or No. In his view, how the fund is performing vs benchmark as well as vs Peers should drive this answer. He was up for a surprise when I quizzed him on various parameters. It took him sometime to appreciate the exercise but in the end we both came out wiser than before so time well invested. I think we all have similar questions and queries about our investments and if we want to turn ourselves into a long-term investor this might help you.

Me: Why have you invested in the mentioned fund?

Friend: When I was searching for investments in 2016, This fund has the great return over last 2 years ~50% returns YoY. Most of the magazines and newspaper talked about this fund. Even the fund manager was in lime light and featured in Top fund managers on the street. I really wanted to participate in this fund to get handsome returns, I have been investing in SIP in this fund for last 3 years, which is long time horizon, and my investments as not grown at all in fact the portfolio returns are in loss. That’s why I am asking for help

“Isn’t it true for most of the investors today that the only thing matters is the returns on investment and they do not care for the rest?”

Me: Do you know what is value fund and why they had the stellar performance in 2014-2016?

Friend: No

Me: Each sector/ segment in market follows the cycle from overvalued position to undervalued and then probably back to overvalued. Value funds seek to generate long-term capital appreciation by investing in stocks that are trading for less than their intrinsic value – stocks that the market is undervaluing or out of favor. Cycle typically takes 3-7 years to turn and it stays sideways for most of the time in between. This means that only once in few years you will have stellar performance like you had in 2014 (+99% in a year), which will make up for the years of investments.

Also, it is important to understand that which segment contributing to the fund performance as it will give us the glimpse of the risk characteristics of the fund. In case of ABSL Pure Value fund, fund is heavily invested (60%+) in Mid & Small cap stocks most of the time. This means that there will be period of large gains as well as large losses compare to the fund investing in predominantly Large cap stocks. Below chart should help you visualize the return characteristics of Large cap vs Mid Cap Index returns.

Large cap vs Mid cap

Friend: So, are you suggesting that I should continue to hold on to this fund?

Me: No, I am just making you aware of the characteristics of the fund. The decision to hold or sell the fund will completely depends on three main parameters:

  1. Risk appetite: If you are OK to see your investments in negative and still hold on to them for long term
  2. Risk capacity: If the returns does not come for 3-5 years at all or the returns are negative does it impact your financial well-being or compromise your goals
  3. Personal behavior: Will you be happy to see X returns on your investments and not worry about the other funds returning more than X to jump on it.

Based on these three things you should buy the right fund.

Friend: How should I select the best fund or Is ABSL Pure Value is still a good fund?

Me: The one thing I learned over a last decade of investment experience is that there is no one fund which is best. You need to identify the fund which is closer to your own behavior and secondly which is more consistent in its performance than outperforming the other funds.

I have written about understanding our own behavior in terms of risk appetite and capacity, please review the same. Though about selecting a consistent good fund can be done in below manner.

Step 1: Identify the category of funds which you want to invest in for equity funds, there are below categories in terms of increasing risk profile.

Large Cap/ Large & Mid Cap, ELSS, Multi Cap/ *Value/ Mid Cap/ Small Cap/ Sector & Thematic funds

Step 2: Rank the funds in the same category based on various important parameters and calculate the overall rank by adding all the ranks. Sort them from lowest to highest Overall rank.

Value Funds Review.png

This is a good starting filter to select a good fund. As this will help you find a consistent good fund. Though it is based on historic measures and will keep on changing every year. You can continue to review your funds using this metric and make sure your fund stays within the top 5 categories.

Friend: ABSL Pure Value is in bottom five funds. Does it mean I should sell it?

Me: It means that the fund is not the best performing in its category at present as well as it is not consistent in its performance. Over a long run you might be better of in this fund for few years but that means you should be ready to see wild swings in your portfolio. If you want to opt for consistency and downside protection (Lower value of Max Drawdown MDD) then yes, you can sell it to buy a better fund in this category. Make sure you are aiming for long horizon and the fund category aligns with your risk appetite.

Going forward make sure you always buy the fund not just on the basis of recent returns but also knowing their risk profile and consistency.

Friend: Thank you so much, this has been so helpful. I will make sure to get into any fund after understanding their full characteristics such that my risk profile aligns with the fund and not just the recent past returns.

Me: Happy Investing!!