Investment Objectives & Advice

Buy, Sell or Hold?

In last 2 weeks, Nifty has corrected by ~10%. It is not the extent of correction but the speed of correction, which made many people raise the age-old question: Buy, Sell or Hold. Some of the possible thoughts popping in head can be as below:

  1. If the market start gaining the lost ground, we might miss the opportunity to buy cheaper
  2. If its going to fall more, I should wait and buy cheaper
  3. If the fall is going to be deep, should I sell the current holding and later on buy cheaper

This is also not the first time, when people asked me this question and I am sure it won’t be their last. The trouble is that everyone wants an answer as yes or no, very rare ones want to understand how to reach that decision for himself. if you are in the rare ones, you might gain some insight from the below approach else you can stop reading here itself.

The query for buy, sell or hold emerges from two angles: When you gauge that the market levels are dislocated vs your perceived value or you are sitting on losses in your portfolio (I have not seen any people asking should I sell, while sitting on 15%+ annualized returns). I have earlier covered in quite a detail about “When to sell your investments”, main points as below:

  1. When you require the cash for planned expenditure or emergency expenditure
  2. When you are optimizing for taxes: Managing the capital gain tax or Harvesting the tax loss
  3. When you made the wrong investments and you want to correct those
  4. When market levels are not in the correct valuation zone

If you want to sell because of the fourth reason, then don’t just sell it yet and probe further. The better question is “Do I need more or less equity holding in my portfolio vs the current holding” or even better will be to understand “How much Equity should I hold?”. Let me explain, why this is a better question with two examples:

Example 1: A 30 years old person in a stable job, significant corpus and no loans has all his portfolio in fixed deposits. Should he buy more equity, the answer in most cases will be yes though if he is new to equity that it might be suggested to start gradually and may be with a Dynamic Asset Allocation funds or Hybrid aggressive funds. Example 2:  Another 30 years old person in a business with irregular cash flow, significant corpus and have some business loans, has all his portfolio in equity funds. Should he sell equity, the answer in most cases will be yes though how much is still to be addressed.

How much equity should you hold depends upon for major parameters, below is my rough calculation:

{Risk appetite (0-25%) + Risk capacity (0-25%) + Market valuation levels (0-50%)} * Investment horizon (0 to 1)

Higher the risk appetite & capacity, more allocation to equity and depending on your time horizon short, medium and long. Market valuations should drive the other 50% allocation, which you can measure based on your barometer of choice my choice is Valuation index. Therefore, even if you have a higher risk appetite, capacity and markets are cheap for goals due next 1-2 years, you should have 0 equity allocation. Market valuations are just part of equity allocations required and not the only factor.

How should you calculate your equity allocation?

  1. You can check the risk appetite based on 5 simple questions and multiply your sore with 5%.
  2. You can calculate your rick capacity based on the 7 main parameter and multiply your score with 5%
  3. Lastly Market valuations can be accessed based on VI (5-1), 5 is cheap in green zone and 1 in case of red color. Multiply that with 10%

VI Index

Based on these parameters you get the % allocation to equities, now for the investment horizon you should multiply with a factor for 10 yrs far goal assume its one and for 1 year down the road its just 0.1.

Let’s take an example of Nikhil, a 35 yrs old, investing for his retirement 20 years down the line. His risk appetite is moderate 2.5, risk capacity is 3 and based on above chart the market valuation levels are at 2. His equity allocation should be 47.5% {(2.5 *5% + 3*5% + 2*10%) *1}. Now if the current equity holding is less than 47.5%, he should invest more and in vice versa situation sell some equities. If it’s closer to 47.5%, then just Hold. Follow this during the re-balance once or twice a year can make you a much better investor in long term and taking emotions completely out of picture.

Do let me know, how much equity should you hold and are you going to buy, sell and hold in the comments section or mail us.

Investment Objectives & Advice

Three M’s of Personal Finance

The Japanese concept of lean manufacturing includes the process to eliminate the waste, which are Muda, Mura & Muri (3M’s). Muda refers to process or activities that don’t add value. It increases the cost or delay the required results. Mura is a type of waste caused by lack of planning, which results in defects or fail to meet the requirements. Muri, is the 3rd category of waste, results due to over complicated process or unskilled executor/ worker. This concept is so powerful that it would be a crime for not to apply in managing your portfolio. Let me try to share some of the real life examples of such waste, I find in portfolios.

Muda/ Non Value add Component of Portfolio: A friend wanted to start investing in equity markets using mutual funds. He was suggested to start the SIP in “HDFC Retirement Savings – Equity (G)” for long term equity investments, which he did. Let’s understand the mandate & characteristics of this fund. “The total assets of the Equity Plan will be primarily invested in Equity and Equity related instruments (80-100%). However, the Equity Plan provides for flexibility to invest in debt instruments and money market instruments (0-20%)”.

 It is benchmarked to Nifty 500 TRI which is justified given it will act as a multi-cap fund and the 0-20% exposure in debt is non value add and can be managed with other debt options separately. This fund has the expense ratio of 2.58%. Should we not replace the same with a pure Multi-cap fund from same AMC say HDFC Equity (G), which is also benchmarked to Nifty 500 TRI but with an expense ratio of 1.71%? If you argue about having debt component then HDFC Hybrid Equity (G) fund with 65-80% equity & Debt of 20-35% also with expense ratio of 1.71?

Now you might say, why I am so concerned about this 0.87% difference in the expense ratio? Let me help you visualize that over a long term 20yrs, INR 5,000 SIP @8% will create a corpus of 29.64lacs. If we reduce our returns by 0.87%, then @7.13% the accumulated corpus will only be 26.62lacs. The difference of INR 3 lacs, this is not too small. Imagine if SIP is for INR 50,000, the difference will be whopping INR 3million. Therefore, one must know what he is paying for the product/ service and the value he is getting out of that product/ service.

Mura/ Defects due to lack of planning: This is the most common one, Lot of people invest without a plan. They do not know there required asset allocation, they would not rebalance the portfolio based on market changes and target goal date and most importantly they would not know how to time the market, still most of them would want to do so. Let me explain it with one of the challenges faced by my friend.

He has been a long-term disciplined investor in HDFC Mid Cap Opportunities fund to accumulate the corpus for his kid’s marriage. In his 8 years of investment journey he garnered fabulous 22%+ XIRR, this has got in his head & created a bias that he can time the market and get huge returns. 2-3yrs prior to his goal, he skipped the advice to move his investment into debt products in step wise manner. He over smarted, thinking he would get at least 8-10% returns on his mid cap fund, hence he stopped his new investment and didn’t change the allocation towards debt fund. Unfortunately, that year Mid cap funds corrected by -11% and he saw the decline in his accumulated large corpus. Annual review has helped him correct his mistake and extra cash flow gave him cushion to overcome it, but you might not be that lucky.

There it is extremely important to stick to plan for your goals, if you are ahead of your goal then you can use the extra cash to create your tactical portfolio but DO NOT DEVIATE DRASTICALLY FROM A PLANNED CORE PORTFOLIO!

Muri/ Complex Portfolio or Lack of skill: Lot of people ask the question, Should I hire a financial planner? I think the below metrics can help you make that decision. Each task required certain amount of Skill and time to get done. If I have the skill to manage my portfolio but no time to do so, I would still struggle to manage my portfolio effectively. If I don’t have the skill but have time on hand, you can acquire the skill to manage the portfolio but progress will be slow and path will be long depending on your dedication to learn and execute effectively. For a successful DIY investing you should have both the Skill & the Time to do so. if both are missing, please hire a financial adviser without fail.

Skill TIme Metrics

In my experience, I met lot of people who don’t have skill and spend lot of time in investing but end up losing without even noticing. For e.g buying lot of endowment policies (or large premium policies) for assured tax-free returns or Day trading in market and netting only sub 6% return post tax and transaction costs. If you do not know, how much effective overall return you made last year, it simply means you lack at least one of the required parameter. Address it before it’s too late.

Fix these wastage in your portfolio & you will gain much more than you expect along with peace of mind. Happy Investing!