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The Mutual Fund Show: How To Invest Across Different Age Groups

Interview with Shalina Dhawan, Amit Bivalkar Jul 16, 2019

The Mutual Fund Show: How To Invest Across Different Age Groups

by Yash Upadhyaya

Published at on 13th July 2019

Original Post with Interview

One of the most common mistakes investors make while picking mutual fund schemes is looking at their past returns.

If investors aged between 25 and 35 years start investing in equity markets now, they would ideally put a significant portion of their savings in large-cap funds. That’s because large caps outperformed the benchmark and the mid- and small-cap peers over the last one-and-half years. Financial advisers, however, don’t recommend this.

“Assuming you are a young investor (around 25 years) and do not have too much dependency, you could look at investing as much as 90 percent of your portfolio in equity and the balance in debt,” said Amit Bivalkar, director at Sapient Wealth Advisors & Brokers. Of the 90 percent, young investors can look at allocating half in multi-cap funds and another half in mid-cap funds, he said on BloombergQuint’s weekly series The Mutual Fund Show.

Shalini Dhawan, co-founder and director at Plan Ahead Wealth Advisors, said for investors aged 35-45 years, the risk-taking ability tends to reduce due to expenses such as kids’ education, EMI on home loans, among others. “In this case, it’s advisable to have a 60:40 kind of allocation to equity and debt.”

Also, investors shouldn’t completely overlook the mid- and small-cap funds. Investors can put part of their savings in mid- and small-cap schemes given the attractive valuations, but the investment horizon needs to be at least five-seven years, they said.

Here are the edited excerpts of the interview:

What should an early-stage investor do when he is starting to accumulate or is in the accumulation phase?

Shalini Dhawan: I think what we find from the experience is that a lot of people are actually investing in mutual funds for the first time. So, from the experience I would say that one of the things we try to do is to get them very comfortable with the mutual fund investing experience. So even though one would say that someone is 25 and started his first job etc. and technically could be investing aggressively like say in an equity mutual fund or an equity-oriented mutual fund. Then a good place to start with is probably just try a disciplined investment via an SIP into a liquid fund or a debt fund just to purely establish comfort and investor confidence. I think that’s the first part for a very early investor.

But you would presume that the equity to debt ratio should still be in favor of equities?

Dhawan: Yes. Let’s assume that one is a young investor around 25 and doesn’t really have too much dependency. In that case, you could actually look at if you actually had Rs 100 you could actually look at being aggressive because you could technically give your investments a very long time to fructify. So, like a 70:30 portfolio could be something to look at.


You recommend within this equity and debt portfolio as well to have certain allocations in multi-cap fund, mid-cap fund, small-cap fund. Interestingly for the early-stage investor you are not recommending large-cap fund at all.

Dhawan: That has a bit of an overlay on the multi-cap already having large-cap, mid- cap and a small-cap exposure. So, we are getting that flavour there anyway. We have also seen that large caps have some kind of underperformance that we have seen, which probably the multi cap already has that kind of an exposure. So, it will be a duplication. If you take a multi cap and put say Rs 20-25 of your money there, take a mid cap and put Rs 20 of your money there and probably start with Rs 5-10 in a small cap. Again, knowing that in mid and small cap, like we have seen over the last couple of years also has not necessarily been the best performers. I am just placing myself who is an early investor, I will be a little worried to see that. But I think when we are talking about this, we are also talking about a five-seven year horizon at least. So, I think these would be the bifurcations.

So, why 90:10 equity debt? What’s within that bucket and how will you bifurcate it?

Amit Bivalkar: Typically, 10-15 years ago, had you seen an investor who was between 25-35 years, he was thinking of buying a house, looking of buying a car or may be an international holiday once in five years. Today, because of Uber and Ola, kids are not thinking of buying a car. For home, they say that they can rent on a 2 percent yield which is better than paying EMIs. So, they have completely different viewpoint on what we as advisors started 20 years ago. As investors change, you should change your viewpoint according to the investor. In a 25-35-year period, you should have your mediclaim and term plan being done at the fullest because it is available for cheap at that age. Once you are through with it, whether you buy house or car, your term plan and mediclaim are sorted. If you want five-10-year kind of plan, the problem is insurance comes with a tagline of a plan while mutual funds come with tagline of a goal. If I say this is your plan, then he will continue for five-ten years. As we say that you start small in a corporate house and you grow to a bigger position and corner office, we give examples of small cap to mid cap and to large cap to multi cap. If you give time to an organisation, you will get the benefits of moving up the corporate ladder. If you give time to your investments, you will see multi-folding and compounding for the long term. And therefore, higher allocation to equity because he is willing to take more risk as age is on his side. And therefore, 90 percent into equity and 10 percent in debt.


If there is an early-stage investor in the accumulation stage but not into 25-35 age bracket, would the allocation still remain same for first time investors?

Bivalkar: More important is the end-goal point in terms of years. How many years are you away from your goal? It doesn’t matter if you are 25 or 75 years of age. We have clients at 75 and they say they want to put 100 percent in equity and when I ask why then they say it is inheritance money and it will stay for 20 years. So, why to put in debt?


For people in the 35-45 age bracket, your allocation changes to 70:30 from 90:10?

Bivalkar: In 35-45, you are settled with kids and looking at preservation of capital. You are not the same 24-year-old who will stay up all night and party. So, you will plan for the next 15 years of your life like your kids going out for education to a different country and there you have Rs 40-50 lakh per year expense. So, you can’t be a cowboy having a large mid-cap exposure there and waiting for 10 more years to make it grow. So, you need some base or foundation to prepare for the next three-four years down the the line and therefore the 30 percent allocation to debt. 70 percent can still be in equity out of which 50 percent can go to large caps and 20 percent can go to mid caps. Large cap is simple. We have EPFO money pouring into Nifty. You have Rs 1 lakh crore which goes into Nifty now. You will see only Nifty stocks going up as you have a tonne of money, that liquidity/demand is following too little stocks. So, if you have large caps at that stage of life for the next 10 years, the index might give you returns but the alpha might not be produced by multi-cap funds and therefore the large cap allocation. You will smooch and mirror the index more rather than doing higher weights on any of your own research stocks, therefore the large caps. Mid cap is a kicker on what you want to do in equity and the balance goes into debt.


You are advocating 60:40. Why so?

Dhawan: Typically, people in 35-45 year age group in urban cities have a lot of EMIs which is a big outflow on their net worth balance sheets. There is a lot of shorter term demands each year on their money in terms of changes in schooling, kids going to college, parents’ medication. So, the 35-45 age bracket is the ‘sandwich generation’ which has to take care of both generations. Our experience shows that shorter term demands or draw-downs on a portfolio seems to be a little higher and therefor a bit more conservative. We have also seen people moving to entrepreneurship, sabbaticals, double incomes becoming single income, people wanting to take a break from careers or change careers. There are some filters which make us go to 60:40. If you have ticked off some of your goals, we do have people in the 45-year age group who have 70:30 too. It is a function of the draw-downs on what your portfolio would need over the next couple of years. We need more predictability and more conservatism.


If somebody has moved from double income to single income, wouldn’t you have allocation towards a category which could give you higher returns?

 Dhawan: Not necessarily. Lifestyle expenses don’t adjust when your income is halved. So, that takes a lot of time. So, we cannot go aggressive and have a situation where portfolio is dented because your underlying stocks are going through a business cycle and also have the same level of expenses and half the income. So, the equations don’t match.

What about post-retirement plans?

Bivalkar: This is a normal Indian investor who is post 60 years of age and starts thinking of retirement when he is 55. Till that time, he is paying EMIs, his kids are getting married. At 60, he may be thinking of distributing his wealth on himself. So, they might do a Kesari tours or Veena World trip every year. So, they require predictability in terms of income every year. We advise that if you can do a systematic withdrawal plan from the debt corpus you have made, a typical calculation is that on a Rs 1 crore corpus which you have made, you can get Rs 50,000-52,000 per month for life at 5.5-6 percent kind of return. So, not to take extra risk in debt. Be on the liquid or ultra-short-term fund or even a low-duration fund and you can still make the 5.5-6 percent per year. Since you are doing a SWP, it becomes a tax effective element because you pay only 2-3 percent on the withdrawal amounts as it is on a free-flow basis. Therefore, SWP from a debt fund. For inheritance part, which everybody wants to give, most of the people think that the third house which they have bought for their grandson, they can sell it and make it into a cash investment rather than a tangible investment. For that, you need to have an equity portion which will take care of inflation, medical expenses as well as inheritance. You can put 30 percent there in equity as you will have five-seven years of horizon and 70 percent stays in debt where you withdraw on yourself. For the first time, you start spending on your own at the age of 60. Till that time, you were doing it for your family.


Do you have any thoughts?

 Dhawan: We also suggest SWP. Investors can make different buckets. Sometimes they want something which is aggressive and save for their children or grandchildren, so they can segregate and run that more aggressively and have safer, more conservative portfolio that they can run for mimicking your salary income which you were used to till you were 60 and just the absence of it not being there and that level of comfort that you can actually draw out from a SWP. Also, most people are wary of the fact that their capital should remain and they should be using the interest that is in a way addressed by using a careful withdrawal strategy to ensure capital protection part of it.

Bivalkar: On a hybrid model of 70 percent debt and 30 percent equity, if you assume a 6 percent return on debt then you are doing 4.2 percent because of 70 percent allocation to debt, and if you assume 30 percent equity at 12 percent then you are at 3.6 percent on equity. So, blended yield of the portfolio is still at 7.5-7.8 percent post tax which is still better than an FD on a post-tax return basis. If you take this combination and invest for five-10 years, then you can still make more money than an FD and still your capital will be at the same level after 10 years.


Is it a good time to buy in mid- and small-cap funds, predominantly the small cap funds?

Bivalkar: It is very difficult to mimic success. So, looking at league tables two years ago and saying that mid caps and small caps are the best ideas, people have gone and put money looking at the historical returns. So, these league tables keep on changing on asset classes as well as within the asset class on various caps. It is not that every small cap becomes a mid cap, then a large cap and then a multi cap. If you look at an ETF which is a select mid-cap ETF, it is in the top 30 mid caps out of 150. That has delivered a better return than the mid-cap index itself. You might have such strategies where you will have some of the mid caps which, over long period of time, deliver a higher alpha than large-cap funds. It is very difficult for large caps to now outperform the benchmark because you have a TRI (Total Return Index) on the benchmark, too. On a valuation basis, mid and small caps are better. Within mid and small caps, what do we pick is an important question. You can do an SIP into a mid- and small-caps if your horizon is five-seven years. If you have that then you will make money. So, on a valuation basis, mid and small caps are cheap. If you have that horizon of five-seven years, starting a mid and small-cap at any point of time does not make any difference. That end point of seven-10 years will make a difference on mid cap and small caps.


Why do you have a seven-plus year of horizon for investment in mid caps?

Dhawan: The seven-year horizon is more related to business cycles and most mid caps or small cap companies will have their own mix of business cycles. When we suggest small caps and mid caps, it is more about valuations. If you are buying something, are you buying it reasonably enough? Is there potential for upside?

It is not that you will take entire Rs 100 and put it in a mid cap. That would simply go against putting all your eggs in one basket. It would be a part of the mix of your portfolio. There will be mid and there will be small as well. The returns could come earlier as well.

Bivalkar: For mid and small caps, you need to be more patient. If you are not patient, you will become a patient because of the returns offered and volatility they offer.

Dhawan: Like we have been seeing for the last two years. When we suggest something to an investor and if he is looking at the last two years’ data, there would be some skepticism that it has not done well. So, patience is necessary.


Is CPSE ETF advisable to look at if it gives tax benefits?

Dhawan: When investors are looking at the CPSE ETF, you have to look at options as an investor. The CPSE ETF has a smaller universe. It is more concentrated and therefore, one needs to understand the risk on underlying stocks is higher as compared to another ELSS (Equity Linked Savings Schemes) which could be more diversified. You are taking a sector and a thematic call and therefore you have to be comfortable on the return potential and track record shown so far. The government ownership doesn’t mean that performance will be superlative. Tax benefits are one part of it but if you are doing equity-oriented product then the tax benefits should not overshadow your assessment of return potential because you are also locked in for three years.



Bivalkar: I have one problem with the system; how will you make more money? If there are more shares in the market or if there are less shares in the market? So, the government is looking at divestment and is looking at CPSE, you are issuing more shares in the market. Will that make you grow rich or will that make you grow poor? So, I have a different view on divestment that the government wants to sell off and hence they want somebody to buy and hence if I give them a tax break then somebody will be more than willing to buy. That cannot be the logic of buying into a CPSE ETF.


If the CPSE ETF by itself is not a bad instrument and if it is giving a tax benefit, then should that be viewed positively?

Bivalkar: With Rs 1.5 lakh worth of tax benefit you save Rs 45,000 worth of tax over a 12-month period that translates to Rs 3,800 a month and which is Rs 120 a day. Can we do a better investment and save more than Rs 120 a day. I think that’s possible not in as gentle way as Shalini said but I think the jury is not out, and you should wait and not hurry to recommend CPSE ETF.


Yes let’s see when it comes, I mean it was an interesting announcement in the budget and a lot of people wrote to us about whether benefits could help?

Bivalkar: From the budget announcement, people have not noticed that in the highest-income bracket, your long-term capital gains and short-term capital gains also have been affected because of the surcharge. So, your short-term now is standing out at 21.37 percent and your long-term actually has gone up to 14 percent so that will move many of the investors from growth to dividend options in mutual fund because that is at 10 percent now. So, I think it will be a change you can see in most of the portfolios now.

A few recommendations: Pick up any one of these and explain why you like them: In the multi-cap capacity you have HDFC Equity, PPFAS Long-Term Equity; in mid-cap, Franklin India Prima Fund; in small-cap, HDFC Small Cap Fund and in Index, IDFC Nifty Fund; internationally—Franklin India Feeder and Franklin US Opportunities Fund.

Dhawan: Let me pick up the international because I think that’s not spoken or not known much. One of the merits in suggesting Franklin Feeder or an international fund is that when investors are looking at mutual funds and let’s say they have invested for a couple of years, they are still not achieving geographical diversification. All their money, whether it is in a PPF or in Employee Provident Fund or in mutual funds are not really achieving geographical diversification. So, for true diversification I think adding an international fund does have its standard zone merit and hopefully the negative correlation in the U.S. market versus India market should probably help buffer in some sense when markets are on the downtrend on the India side and hopefully that’s not the case with any other international fund that you choose. That kind of helps the diversification bit in the portfolio.

Bivalkar: I think dollar asset is something one needs to look at in the portfolio. It’s not only about your child going to the U.S. to study but it’s also about you going to the U.S. for a vacation. If you have a dollar asset that will definitely help. I completely agree, you need to have a dollar asset in your portfolio. The percentile might change with the portfolio but you need to do something about it.

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