The Mutual Fund Show: Invest Simple For Better Returns

Cut the clutter, streamline your portfolio and keep it simple, analysts recommend

<div class="paragraphs"><p>(Source:&nbsp;<a href=";utm_medium=referral&amp;utm_content=creditCopyText">AbsolutVision</a> on <a href=";utm_medium=referral&amp;utm_content=creditCopyText">Unsplash</a>)</p></div>
(Source: AbsolutVision on Unsplash)

Simpler and disciplined investments can help portfolios perform well over a period of time, according to wealth advisers Kirtan Shah and Ashish Shanker.

Charting out his investment plans, Kirtan Shah of Credence Wealth Advisors said he wants continue his existing asset allocation strategy this year to beat the uncertainties.

"As an aggressive investor probably largely what I do is very simple, I have 70% equity, 20% debt, and I have a 10% tactical allocation that I keep doing depending on what I believe will probably work in the near-term," he told BQ Prime's Niraj Shah.

Ashish Shanker of Motilal Oswal Private Wealth also shared his strategy and said aggressive investors can allocate 60-80% of their portfolio to equity while debt could be around 20-40%.

Shah recommended investing in large, mid as well as small caps, with weightage tweaked according to the investors' backgrounds and how they intend to invest.

On fixed income, Shah recommended investors have a debt allocation, he said this can be used as a source of capital to invest in equity markets when they are down.

"I do liquid, I do credit and I do long term. So, I do all three and in my opinion that also does not hamper my opportunity costs versus equity, and I always have debt allocation available if at all the market falls and I want to reallocate my portfolio. I use this liquid cash to go out and buy equity at lower levels," he said

Watch the full show here:

Ashish, tell us about the mutual fund investment practice that you have either imbibed, already there and continuing or freshly imbibing in your practice?

Ashish Shanker: Let me start with something that I intend to accelerate this year or start. See what happens is over time, and I am sure this happens to a lot of investors, you tend to collect a lot of funds in your portfolio. I mean, over time, someone gives you a recommendation or there is a new launch, you end up investing in too many schemes. So, what I am going to start doing this year is cut the clutter.

I want to streamline my portfolio to ensure that eventually I have probably five or six schemes because I strongly believe, and this is what we advise our clients to do as well, less is more, simple is beautiful and if you cut the clutter, you are basically making a portfolio efficient and giving it wings to beat the market.

We do this portfolio review on a regular basis and often find most customer portfolios have over 10-12 sometimes, 15-20 schemes and if you actually do a pass through, you will figure that indirectly directly, you end up holding for 400-500 stocks and essentially what you are doing is you are making a portfolio really inefficient and beating the index then becomes extremely difficult, which is the whole objective of building an active fund portfolio.

So, this year, I am going to start by beginning to trim my portfolio and ensuring that I come to five or six schemes, which is difficult, but I will try to get there by the end of the year.

Are these schemes going to be of a particular segment or nature, I mean, how are we breaking it up because a lot of people talk about also having a bit of debt this time around in 2023 because debt is now, with the rates are, a proper option. So, I am just trying to understand how you are doing this?

Ashish Shanker: Personally, I am an all-equity guy and I want to continue doing, continue having you know, close to 100% of my long-term allocation into equity funds.

All my contingency money is either in savings bank account, so that I can access it very quickly, or some amount is in liquid funds. That's the only debt I have. Yes, of course as an employee, I do have my employee provident fund as well, which I consider as long-term debt, but I pretty much have close to 98-99% of my portfolio in equities.

Of course, everybody's risk temperament and ability to stomach volatility differs but I agree with you Niraj, that this year fixed income is looking pretty attractive, with yields having gone up and when we actually talk to clients and we advise portfolios, we find that debt has become quite attractive and incrementally money is flowing into fixed income.

Kirtan, one practice that you are continuing, or you are starting afresh in your mutual fund investing.

Kirtan Shah: Niraj, I think there is nothing new that I really intend to do in 2023. I think the easier and the simpler you keep your investments or your investing patterns or styles and the more you continue and give it the discipline, I think that is how the portfolio's want to do well over the period of time.  

At the top of my list of things that I really want to continue is to make sure that I follow my asset allocation strategy. I think you know, all of us here will agree that how it is so difficult to understand what is going to work next year. Who could really fathom that gold will do the kind of movement it did in 2022 or even for that matter as a sector what PSU ended up doing. So, it is going to be difficult for most of us, and specifically for retail investors to be able to figure out which asset class and which sector will outperform the next year.

So, ideally with myself and as an advice, I am a strict follower of asset allocation and I suggest that most people who are not very professional and don't do investing professionally should maintain asset allocation. As an aggressive investor probably largely what I do is very simple, I have 70% equity, 20% debt, and I have a 10% tactical allocation that I keep doing depending on what I believe will probably work in the near-term. For example, the current 10% is largely skewed towards China because I think that is one place, given my risk profile and the ability, I think I should be able to make some alpha out of that tactical allocation.

So largely 70% equity, 20% debt and 10% tactical and also while I do equity, again I follow the same principle that I don't know what is going to work the next year, will it be large-cap, mid-cap, small-cap? So largely I have allocation to all three and I believe, of course you might want to tweak, what weightage do you really want to give to a large-cap, mid-cap or small-cap depending on the backgrounds and how do you intend to invest, but largely as allocation to all three and that's what I do.

In terms of all three, how are you segregating this allocation with them? If you had the liberty to name some funds that you are looking at, the percentages may vary, but just the names will be helpful.

Kirtan Shah: I think from a large-cap perspective, because of the value style and little international exposure that PPFAS brings in, that is what I look at from a large-cap perspective, the PPFAS flexi-cap, for mid-cap I do Kotak Emerging and small-cap is SBI.

Kirtan, you were also talking about either continuing or expanding the bucketing option in fixed income. Talk to us about it.

Kirtan Shah: There are a lot of people who largely only want to do equities because they understand how investing is to be done and with respect to their backgrounds. But a bigger challenge that I have seen while I meet investors is that every time there is probably a fall in the market and everybody in the ecosystem knows that you want to invest more money, but you never really have that extra cash to put it.

So, one of the major reasons why I have a little like debt allocation is for me to be able to use that cash when the market falls which typically otherwise becomes impossible because you are almost generally always invested.

Also, another problem that I see in the fixed income space is there a lot of us you know, end up doing everything in liquid or end up doing everything in one category because we don't pay so much attention to fixed income like we do to equities for whatever reason that may be. What I do on the equity side of the portfolio to try and make sure that I don't lose out on the opportunity in the larger scheme of things.

I bucket that into three: liquidity, core and tactical. What that typically means is because I am aggressive, for me, core and tactical are both going to be aggressive. But let’s say there is somebody who is a moderate or conservative investor, who would not want to take a lot of risk on the core and might want to take small risks on the tactical portfolio but because I am aggressive what I am typically doing is I am invested across the curve. Because you mine data for the last five years, 10 years, 15 years, and you would know that the best debt allocation in terms of risk-return has always worked out to be spread across the curve.

So, I do liquid, I do credit and I do long term. So, I do all three and in my opinion that also does not hamper my opportunity costs versus equity, and I always have debt allocation available if at all the market falls and I want to reallocate my portfolio. I use this liquid cash to go out and buy equity at lower levels.

The names I believe are HDFC Liquid Fund on the liquid side, Credit Risk Fund from ICICI and Nippon India Nivesh Lakshya Fund?

Kirtan Shah: Correct. Again, like I said, what is happening in the long-term space if I were to start talking about Nippon India Nivesh Lakshya first, a lot of these funds were theoretically, the durations are supposed to be extremely high, but a lot of these funds unfortunately don't have high durations in the real world.

So, it's very tricky to just go by the name and then invest because you are assuming that by the name, that category should have a long duration but most of them don't have long durations. I think this is one of the only funds who actually make sure that the duration of the portfolio is actually long, and I don't see a reason why or probably the way I look at it.

I love the way ICICI plays with credit largely, specifically to do with the concentration to each sector or concentration to each company that they are given is very manageable and I think that's the best way to be able to play credit because you don't want to get stuck in a concentration race and if something goes wrong with that corporate tomorrow, I think the hit on the NAV is going to be too large.

So, they actually do credit is because today again, you go back and check how credit risk funds have done in the market and surprise, the credit risk funds are majority AAA portfolio, ideally where they should be lower than AAA, but most of them are at AAA portfolio because nobody wants to go out and take risk in the market. So, both of these funds are true to label in my opinion and it satisfies the risk that I am okay to take and hence both of them. 

Ashish, I was looking at what you were thinking of, amongst things that you are thinking of starting from an asset allocators' perspective and create an investment charter. Now talk to us a bit about this.

Ashish Shanker: So, this has been my experience personally as well as while dealing with clients that 90% of the outcomes on portfolios are behavioural. When I say that what happens is, it's very easy to say that I will invest when the markets fall, but you saw what happened during the pandemic, markets fell 40% and clients froze. A lot of people got scared and you know, we didn't see so much of the flows. But similarly, when markets are flying and you are feeling very good about markets, and obviously at that time valuations are expensive, you tend to end up over investing in equities.

As Kirtan mentioned, even in fixed income, what happens is when the returns are looking very good, they are normally looking good when the interest rates have come off. You have mark-to-market gains and at that point in time people end up investing for a long duration.

So, our biggest or my biggest learning over the last 25 years of being in wealth management is that if you can manage the behavioural side of investors, 80-90% of your battle is won.

So, one of the great hacks to ensure that behaviorally you stick to your plan is writing down that plan. We have a concept called investment charter, now someone else could call it by some other name but essentially, it's a document where you write down how your portfolio will be managed from a longer-term perspective. And it's not that it is cast in stone, keep refining it based on your experiences and your behaviour. But at some point, in time, you will get a reasonable sense of how you think your portfolio should be managed and what kind of risks you can stomach along the investment journey.

So simple things like Kirtan mentioned, let's say, if you are an aggressive investor, you could say that my portfolio will oscillate between 60 to 80% in equity. Similarly, you could say that debt could be between 20 to 40% of the portfolio.

Now, typically, why a range is because as an aggressive investor as well, if markets have run up and done extremely well, you could set some valuation parameters, where you feel that you should actually be a little under allocated to equities, and vice versa. Let's say you hit the pandemic and markets have sold off 40%. Now instead of trying to predict when the market will sell-off or what will happen to markets, you say that if that event happens, I will do this. So, you can take some money off debt and put it in equities.

Similarly in debt, I like what Kirtan said, you know, if let's say 30 to 40% of your portfolio is getting allocated in debt, 20% you can do in long duration, 20% you can do in short duration. So, you are not taking any interest rate risk, but based on how markets move even within debt, you can veer more towards duration when interest rates go up and vice versa and you can also model in let's say, some gold in the portfolio.

Gold is typically an insurance and a protection on the portfolio, and I always tell investors on a lighter note that you should have whatever allocation you feel is appropriate my view is you should have between 10 to 20% otherwise it doesn't move the needle. But you should have allocation in gold, and you should pray that it doesn't work because if that part of the portfolio is working, which means there's a crisis somewhere in the globe, and the rest of your portfolio is under stress. But even if gold doesn't work and doesn't do well for you, you should be happy because you know, the rest of your portfolio will be fine. So, I think the investment charter is a very important document.

I actually urge and advise all families to do it and actually over time you should share it with your spouse and involve them in the portfolio review process, so that you also create a situation where you know, if you are unable to manage the portfolio, you know, there is awareness amongst other family members. So, this is something which I genuinely believe if someone has not done, anytime is a good time to start.

So basic asset allocation documentation what you will do if something happens in each asset class, and similarly how often do you rebalance. I prefer a yearly rebalance. But you know with time with your advisor, you can figure out what works for you.

Kirtan, it's a very practical advice which you are giving, just topping up SIPs at every fall?

Kirtan Shah: Niraj, like you rightly said this advice is more from a viewer perspective, of course, because we as market participants understand this and have digested this so much. But the problem is that while somebody is doing an SIP, you know, while they agree, they understand behaviorally they are in sync with you that the reason why they are doing SIPs is because they are not going to be able to time the market and the advantage that probably a systematic investment brings is to make sure that you are just doing it irrespective what the market levels are.

But I don't know, to my surprise, I see a lot of investors who really end up doing the complete opposite is when markets start becoming slightly more volatile, they have the question whether the SIP should really be continued, or should they pause or what should they do. If you look at some basic data points that we have looked at, for the last 20 years, out of the 20 years, 19 years the market has given more than 20% movement every year if you look at the top and the bottom for that year, and that's the kind of volatility that the markets have 19 out of 20 years and that's huge. 20% is huge year on year.

So, if SIP is going to help you solve that problem, because you are never going to be able to time it right, why stop it when the times are volatile, because that's the original reason why you are going with a disciplined investment like that and also because like I said, there is this 20% movement from top to bottom in 19 out of the last 20 years.

I am sure you will always get an opportunity and a 5% fall or a 10% fall to top it up and add more money, because it's a no-brainer where we have seen every three or five-year block markets have been doing well. They'd be better off when forming a higher top. Then whenever you get an opportunity of 5-10% fall why would you not want to top it up.

Like Ashish also made a mention that even during Corona market fell, but people didn't invest more money and that's the logic. So, the debt allocation is to make sure that they have the money to invest and then you educate them that every 5% or 10% for you to top it up. So that practically money is made available, and they are educated enough to invest more.

I think this is something that I really want to preach and continue that they should try and top up at every fall because as a long-term investor, probably these 5%, 10% falls that you are topping up are going to be the biggest alpha generators than anything else.

Ashish, the final point and which is a bucket for charity.

Ashish Shanker: So, this is something that I have been thinking about for a long time and all of us want to do good, but sometimes we don't know how or sometimes we get so consumed by our work that this year I decided, and this is something that I would like to start you know, 20% of my incremental savings, I want to put it as an SIP in an equity fund, and market this money for charity, and this will be a charity which will be close to my heart.

I would like to invest in education for underprivileged kids, but the larger point is, you know, I am sure all of us want to donate to good causes. Now, if you can pencil that into, I mean, if you have reached a certain corpus in life and you want to pencil that into your plan, then I feel it makes sense to demarcate a certain percentage of your savings and you know, create a separate bucket, so that it becomes sustainable over time. So that's something that I wish to start.