How To Examine Your Mutual Fund Portfolio To Get Maximum Benefits? | The Mutual Fund Show
Category
🗞
NewsTranscript
00:00Hi, thanks so much for joining in.
00:09You're watching The Mutual Fund Show on NDTV Profit, and my name is Alex Mathew.
00:14This show gets you actionable insight on everything mutual fund related.
00:18And that is particularly useful on a day like today where you're seeing sharp cracks across
00:23the board in the equity markets.
00:26Joining me to talk about two very important subjects.
00:29I have Jigar Patel, who's the principal officer at Neuron Wealth Advisors, and Mrin Agarwal,
00:34who's a financial educator, and in fact, the founder of FinSafe India.
00:40Thank you so much to the both of you for joining in.
00:42You know, incidentally, I chose the topic for today, not knowing that there would be
00:48a sharp selling across the board.
00:51But despite what we're seeing on the screen, it's still a great time to take stock.
00:58I decided to talk about the health of your mutual fund portfolio, and most retail investors
01:03have their portfolios in mutual funds.
01:07And I asked each of you to come up with five ways or five checkpoints that you can use
01:14to ensure the health of the portfolio.
01:17I will come to you first, Mrin, on what you've selected, and we'll go pointwise to talk about
01:22each of them.
01:23So you've first talked about performance relative to the benchmark and category average,
01:30and you've also talked about tracking error for passive.
01:33Why is this the first point to bear in mind?
01:36Well, you know, since we're looking at an existing portfolio, I would say that, of course,
01:43it's important to track performance.
01:45And again, I think, you know, the five points that I have given are in conjunction.
01:50It's not like one can only track performance and nothing else to ensure good health of
01:55the portfolio.
01:56But certainly, yes, performance is a very big parameter that needs to be tracked by
02:02individuals to ensure that their portfolios are actually outperforming benchmarks and
02:08the category averages, you know, just so that they're able to meet their financial goals
02:13finally.
02:15I'll come to you next, Jigar, you've talked about goal tracking.
02:21And I would assume whether or not your portfolio is geared towards meeting the goal.
02:27So adjusting the selection of funds to match the goals that you've set, I'm guessing in
02:33terms of duration.
02:35Is this what you meant?
02:36Yeah, usually what I believe is money or wealth that we have, it is not an end, but it is
02:43a means to an end.
02:44So when you invest in mutual funds, you always have a goal in mind.
02:49It may be, of course, duration is one part of it, but you always need to track how closer
02:54you are to achieving that goal.
02:57If you are closer to it or if you're very short of it, you can think about whether this
03:02mutual fund is a good fit in my portfolio.
03:05So I think that's the reason I have goal tracking as the number one reason to check the health
03:13of the portfolio.
03:14You've both talked about asset allocation as a second point.
03:18I'll come to you first, Mrin.
03:20On a day like today, it's particularly important to talk about this because you have a sharp
03:25and sudden crack.
03:26And this is something that we've been warning our viewers about consistently over the past
03:31several weeks, that perhaps in certain pockets of the equity market, you have a bit of a
03:38stretched valuation situation happening.
03:42Is this a great opportunity to look at asset allocation and to review?
03:46Well, I mean, as far as reviewing of portfolios is concerned, typically I recommend that people
03:54do it once in a year and stick at that because every time there is a market movement, I don't
04:01think that it's going to be feasible for people to look at their asset allocation.
04:06And it also might lead to some major reactions as well.
04:09But yes, asset allocation is really important just to check whether you are invested in
04:15line with your risk profile.
04:17And I think a lot of portfolios have seen this, where you started with 30% equity allocation
04:23and that's maybe gone up to 40, 50%.
04:26And I think one of the things to really check is, is that the sort of allocation that you
04:32want to maintain and if it's gone up, what do you want to do about it?
04:39So I think, you know, really, as Jigar also mentioned, that the basis of any portfolio
04:45is to really meet financial goals.
04:48And it's very important that we don't get driven away by market movements and look at,
04:55you know, and all of this stems from the risks that you're willing to take.
04:58So really looking at whether what I have allocated is going to help me achieve my goals.
05:05And if it is really overstepped in some form, then what are the various actions that need
05:10to be taken to come back?
05:11Because all the studies do show us that 94% of the performance of our portfolio is actually
05:18driven by asset allocation, and only 6% is driven by the actual security selection.
05:24That's a fair point.
05:25But having said that, there is also, you know, there is a way to measure this.
05:31Of course, you look at your portfolio and you see that if there is a significant deviation
05:35from the asset allocation that you've selected, Jigar, then you should correct it.
05:41Even if equity is gone from 70% to 75 or 80%, would you say that a 5 percentage point deviation
05:48is appropriate to look at?
05:50Or should you wait till it gets worse than that?
05:53When you say 5%, it is actually 10% because it can go to minus 5 to plus 5, right?
06:00So it's always going to be, you have to take a judgement.
06:03I think 5% is a good barometer.
06:06If it is plus or minus 5 above that, you have to do something about it.
06:12It is possible that your situation may have changed, your risk profile may have changed,
06:16but it will not change significantly within a short period of time.
06:20If it has been meant to, like, for example, you receive a really good bonus or something else.
06:25So it may change, your risk profile may change, you may decide, okay, I want to take a little
06:30bit higher risk or I want to change my strategic allocation, but that would become the technical
06:35kind of allocation if you want to take certain benefits from it.
06:38But I agree with Marin and you as well that rebalancing has to happen once a year at least
06:45or at least at a major life event changes.
06:50Again, 5%, I think it's a 5% range, plus and minus 5% is a really, I think, decent range
06:57to track and do the rebalancing.
07:01And I would think that it's a mathematical formula that won't lead you wrong because
07:07invariably a 5 percentage point or more deviation would entail that either the equity markets
07:13have outperformed or they've underperformed.
07:15And in that situation, you're either buying low or you're selling high.
07:20Let's talk about the third point, Marin, that you've mentioned and it's related to the earlier
07:24point, but I think there's a nuance that you want to talk about here, which is to do with
07:29diversification. And I think that's important to talk about within the equity portfolio
07:34as well, because I think a lot of people have perhaps allocated too far into small caps
07:40and you're seeing a little bit of a crack in certain pockets today.
07:47Absolutely, you know, a lot of times these days I see that, you know, there's this trend
07:54to follow what has done well in the last six months.
07:56And what that's really leading to is concentration risk, right?
08:01So there's a concentration in specific stocks and specific sectors.
08:05That's, of course, leading to a lot of overlap.
08:08And I think one of the things that's very important to remember is that every six months,
08:13the best performing asset class or the subcategory is going to change.
08:18And hence, it's very important to be well diversified, not only between asset classes.
08:25So that means between debt, equity and gold, between market caps, which is large cap,
08:29mid cap, small cap, and also within fund houses.
08:33You know, Alex, many times I come across portfolios where, for example, people have
08:38diversified between large, mid and small cap, but they have done it all with the same
08:42fund. And the idea of diversifying, you know, within fund houses is also because you get
08:48a different style of management, a different set of stocks that the fund house has high
08:53conviction on. So I think, you know, diversification is not just, you know, putting debt,
08:58equity and gold. It is much more than that.
09:01And I and, you know, again, even with people doing passive funds, I have seen people
09:06having three nifty fifty funds, which is really not going to give you diversification.
09:12Of course, there's this whole big trend towards factor funds at this point in time.
09:16So again, is that factor fund really giving you the diversification?
09:20For example, if, you know, you're choosing a NSE 500 Momentum 50 fund, for example, is
09:25it really giving you diversification?
09:27Or, for example, I know that I did this last time in your show where we were talking
09:33about NSE 500 and how 73 percent of concentration is in large cap stocks.
09:38Is it, you know, these are the things that one really needs to go deep into to see that
09:42am I truly diversified in my portfolio?
09:46That's a fair point. Jigar, the next point that you've talked about is risk adjusted
09:51return. And I guess this is similar to what Mrin was talking about, to say you need to,
09:58of course, have a benchmark in terms of how much you're gaining and how much the
10:03potential for gain is, but also be aware of the kind of risk that you're taking.
10:08Completely, I think risk management is the most important.
10:11People always concentrate on the return maximization, but minimizing risk, actually
10:18increasing the risk adjusted return is really critical.
10:21It may be, it could be having the same risk, getting a higher return.
10:27And if the returns are the same, how can someone can reduce the risk?
10:31Because if the market goes down, let's say 25 percent, it takes 33 percent of growth
10:38to even it out.
10:39So that being said, if you can minimize the risk, if you can minimize the drawdown in
10:44the portfolio, that would increase the probability of beating other funds as well.
10:51So risk adjusted return for me is one of the very good, important criteria when you're
10:57evaluating the height of portfolio.
11:00Mrin, you've mentioned this as your fourth point.
11:02And is there a way to measure that in your portfolio risk?
11:05You both essentially picking the same things.
11:08I'm not surprised, really.
11:09But is there a way to measure risk overall in your portfolio, particularly do with
11:13equity? So I think, you know what, one of the things that I know it's not very easy
11:21to really measure it other than to really say that, OK, I've got this much exposure to
11:25equity. And so that is the amount of risk that my portfolio carries.
11:30But I think, you know, something that's very important at this point in time is to
11:34actually see whether the risk that is taken is in line with the investment time frame.
11:41And today, of course, we're seeing this whole overexposure into small caps.
11:45Very often I hear people saying that, you know, in two, three years I can make like
11:49this 15, 20 percent sort of a return in small caps.
11:53So I think I think, you know, it's really important to check whether where you have
11:58invested, is it actually the risk that you've taken?
12:02Is it actually in line with the recommended time frame?
12:07Jigar, just a follow up on the risk bit, you know, a lot is said and I know that you as
12:14in you, as in the advisor community, look at various ratios for the DIY investor,
12:20though, and looking at various platforms available where you can read these ratios.
12:25Do you pay attention to that?
12:27Is that something that you would recommend?
12:29Of course, I think there is a couple of ratios that people there's a sharp ratios and
12:35there's also a sorting ratio, there's a drawdown ratio.
12:38There are two, three ratios.
12:39If an investor can just take a look at it, that helps them to better understand the risk.
12:45Fair point. All right. So that's the point that I was trying to get across.
12:48Of course, we will do a separate show at a later date to talk about each of these ratios
12:53we have in the past, but we will do it again.
12:56The last two points, Jigar, that you mentioned are more or less the same.
12:59So I'm going to ask you to club them.
13:00You've talked about absolute and rolling return compared with the category average as
13:04well as to the benchmark return.
13:07Obviously, these are going to be very important to take.
13:08But would this fit in your once in a year kind of a time frame?
13:13And I think this is a very important point to make, because last week at the end of the
13:17week, we did a show where we talked about the top 10 mutual fund houses by assets
13:22under management and equity.
13:24And we spoke about the top three performers in each of those mutual fund houses.
13:28And what we essentially found is that there are similarities that can be drawn.
13:33But for some fund houses, and I will name Axis Mutual Fund here, their top performers
13:40were the large and mid cap, whereas most others saw either sectoral or thematic or a
13:44mid cap or a small cap fund.
13:46And what was pointed out at the time was that they are now probably going to see green
13:52shoots in the funds that they operate in because of the way that they manage their
13:56funds. Is this what you want to talk about?
14:00Here, what happens is people, when they invest, they only invest based on how much
14:05return they have generated, any fund has generated.
14:07So what happens is, yes, because of the higher ranking, people and investors will go,
14:13OK, because this fund has performed well, let's invest in that.
14:18But it's not only the absolute return, you also have to look at the rolling return as
14:21well. And whether is it a one kind of event or is it consistently this fund is beating
14:27the benchmark or beating the category average, that is also needs to be looked at.
14:32So that's why I have those two, comparing with the benchmark and comparing with the
14:37category average, both on absolute basis as well as rolling return basis is important.
14:43And you will also see a very different picture being presented.
14:48What we interestingly found is that 14 out of 30 of the schemes of those 10 mutual fund
14:54houses were sectoral or thematic.
14:56And that's likely because of outperformance over the last one and a half years of a
15:01particular theme, whereas a rolling return will give you a perspective of more, you know,
15:06a more regular outperformance or a more regular performance.
15:11Let's talk about your last point, Mrin, and you've talked about cost and which is an
15:17important point to make cost and liquidity, of course, because that is deductible from
15:23the kind of returns that you would normally get and people don't pay too much
15:26attention to this. Yeah, so actually, you know what, I wanted to talk about two things
15:32here. One, you know, where liquidity is concerned more with respect to debt funds.
15:38You know, so again, if you are going for funds with riskier profiles, you know, the
15:43liquidity could be an issue.
15:45So I think it's a it's a small aspect, but I think one should consider it because I wanted
15:50to talk about from two aspects.
15:52You know, one was just from a pure index fund aspect where there is this whole big move
15:57towards passive investing.
15:59Many times investors are only looking at the expense ratio while they take the decision.
16:04They're not actually considering tracking error, which is what needs to be considered
16:08because that kind of tells you how optimally the fund is able to replicate the index.
16:14Right. And of course, that's a better measure as far as index funds are concerned.
16:18So, you know, the reason I had this was to really point this factor that sometimes it's
16:23not the expense ratio, but, you know, for index funds, you do need to look at the
16:29tracking error. The second thing actually I wanted to talk about was actually opportunity
16:34cost. So again, I do see that I do get a lot of questions saying, should I just go
16:40direct? Because, you know, the regular plan is more expensive.
16:44And I always say this, that the difference between the best and the worst performing
16:49fund in a year is going to be at least six to seven percent, you know.
16:52So when you're trying to save that one percent cost, right, you need to also choose the
16:57fund, right? Because if you choose the wrong fund, you're going to end up with a six
17:01percent lower return.
17:02So I really wanted investors to also think about these aspects, you know, from this
17:08perspective that, you know, have you thought of expense ratio and chosen and gone for a
17:12direct plan, but, you know, maybe chosen a sector or a thematic fund which may not work
17:17out for you in the long run.
17:19So I think also factors to look at.
17:21Absolutely. And points well made, both of you.
17:25I think today of all days, I'm not talking about a major drawdown in the equity markets.
17:31After all, if you look maybe a couple of weeks down the line, if you look in the review
17:35mirror, this is not going to be a very large event to talk about.
17:39But that's certainly something to bear in mind when you look at the health of your
17:43mutual fund portfolio.
17:45Let's talk about the second topic which I've lined up today, and it's an interesting
17:48one. You've seen a lot of people move overseas and change their their tag from Indian
17:55domicile to NRI.
17:57There are changes in the way that you would need to manage your mutual fund holdings and
18:01other investments.
18:02So I decided let's talk about this today.
18:04Jigar, let's first talk about the implication from the tax perspective of shifting
18:12overseas.
18:13What happens from that perspective?
18:17From a tax perspective, I don't see a lot of changes.
18:21The only change would be that there will be a TDS on the capital gain.
18:27So for a tax perspective, it is not that much difference between a resident and an
18:32NRI.
18:33More important is the FEMA, because when you invest in mutual funds, Foreign Exchange
18:39Management Act, FEMA comes into picture because FEMA regulates and covers everything
18:46that NRI does in India.
18:48So any investments that a resident had, now after becoming an NRI, he has to follow and
18:56comply with FEMA rules.
18:57So I think the first choice and first thing he needs to do is doing the KYC and he needs
19:03to change the status from resident to non-resident under KYC.
19:08Now, the problem is that people follow definition of Income Tax Act and use and apply
19:16that for investment, which is governed by FEMA.
19:19So technically, what investors should do is first they need to understand the definition
19:25of resident and non-resident under FEMA.
19:27As per FEMA, if someone leaves India for a job, immediately from that day itself, he
19:35becomes a non-resident.
19:36So when he does KYC, he has to put non-resident.
19:40He does not have to wait 182 days to become or declare himself a non-resident.
19:45So this is the basic and most important thing.
19:48Most important thing is understand the FEMA, update the KYC and once the KYC is done, you
19:56need to update the bank account because again, FEMA doesn't allow non-resident to have a
20:01resident account. So they have to change the bank account from resident to NRO.
20:05Yeah. In fact, that's that's the first point that Mrin mentions, change the existing
20:12savings bank to NRO.
20:15Mrin, any other things that you want to add in terms of specific geographies?
20:22Well, of course, as Jigar mentioned, you have to update the KYC once you become the NRI
20:28and you have to change your bank accounts to NRO, the savings bank account that you're
20:32having in India. And then, you know, you also have to visit each of the fund houses
20:38individually and give them a change in tax status, bank details as well.
20:45And you'll also have to give the FATCA declaration as well.
20:48Now, I just want to mention one more thing.
20:50Specifically, if you have moved to US or Canada, most of the fund houses do not allow
20:56you to invest online and you need to be physically present in India when you when you
21:02want to do the investment or when you want to redeem the investment.
21:06And there's also a declaration that you have to additionally provide every time you
21:10invest or any time that you want any transaction that you do.
21:13There's an additional declaration that you'll have to provide to the fund out.
21:16So this is one very important point for the US and Canada residents to remember.
21:23And this is because of the whole FATCA rules that are there, that this sort of a thing
21:28is there.
21:29You know, I was speaking to somebody just yesterday, incidentally, and they said that
21:33their sister moved overseas and their father, what they did was they used a gift deed to
21:40transfer their shares and mutual fund holdings.
21:44Is that common practice, Jigar?
21:46Is that something that is done?
21:47And why is it done?
21:49Usually people, because once someone becomes a resident of USA, they have to pay tax on
21:56their global income.
21:57So whatever the income they earn in India, they have to report there.
22:01So there are certain forms, the F-bar is there from 8938 and there are other different
22:06declarations that have to be done.
22:08If your portfolio is not that much, if you don't want to pay tax in USA for the income in
22:15India, this is one of the ways that they transfer all the assets to their relatives,
22:22usually the parents or the kids.
22:24And then investment can continue with their name and they don't have to report the Indian
22:29assets and income in their US tax return.
22:32So that is usually the reason for that.
22:34OK, fair point.
22:35If you are moving in overseas for a temporary base, on a temporary basis, I would think
22:43that you would still want to invest in the India growth story because it is ultimately
22:48the fastest growing economy and it is a market that is in a in a romping bull run.
22:55And so from that perspective, would you say, would you advise NRIs to definitely invest
23:01in the Indian equity market and what should they bear in mind?
23:05Oh, absolutely, they should invest into the Indian equity markets and keep their
23:09investments as as it is.
23:12I think the main thing that they'll have to keep in mind is the whole repatriability of
23:16the funds, considering that these are in NRO.
23:20But, you know, I think that's the main thing.
23:22Of course, you have to keep in mind the currency fluctuations and all that.
23:25But I think, you know, from a long term perspective, it's a you know, it's a great
23:29story to invest in and certainly hold on to your investments.
23:33OK, all right.
23:35I do say that this show is also geared towards answering your questions specifically.
23:39And viewers, I would encourage you, in fact, we can pull up that number on the screen
23:44right now. That is where you can send your question to us.
23:47If you've got a question for us, remember to tell us your name, your age and what the
23:51goal is. Why do you need the money for?
23:54The first question we're taking is from Sundar.
23:57Sundar is 61 years old and is asking for a suitable allocation for lump sum
24:04investment of 50 lakh rupees.
24:06The goal is wealth creation over a period of seven to 10 years.
24:10Sundar points out that they are a first time investor.
24:16Now, it is a bit of a tricky situation.
24:18I'm not sure, Jigar, what the other holding is apart from this amount.
24:24And I'm guessing that this is to fund later retirement and to generate a certain
24:30amount of capital gains in order to facilitate that.
24:33So with that caveat, what would you suggest?
24:37I would recommend the hybrid funds, especially the balanced advantage kind of a
24:41category or the multi asset fund, because it will have not only equity, but equity
24:47debt as well as the gold and other assets as well.
24:50So personally, my recommendation would be to find funds in a hybrid category.
24:57My recommendation within hybrid also, either multi asset fund or a balanced
25:01advantage, but he can also go with aggressive hybrid or conservative hybrid and
25:05other hybrid funds as well.
25:06Any schemes that stand out to you?
25:09Not a recommendation, but any ones that you're looking at closely?
25:13Usually, I think in hybrid funds, I like the ICICI balanced advantage and then in
25:20multi asset, like HDFC multi asset is also good, so the other funds as well.
25:26Mrin, you want to weigh in on this?
25:29So actually, I agree with him.
25:31I think, you know, given his age and the fact that it's a first time investor into
25:36mutual funds, I would actually say that's just stick to the balanced advantage
25:40funds. And of course, ICICI is a great fund to get into, but just stick with that
25:44because that's going to do your regular rebalancing for you.
25:48And that's a good way to really start if you're starting at this age.
25:52We have time for a quick question.
25:55Gunasekaran, who is 72 years old, is investing or wants to invest 15 lakh rupees
26:01through a one time investment.
26:02So it's a lump sum for their grandchildren.
26:04The time span is five to 10 years.
26:06How should they allocate?
26:08Mrin, it's an interesting question.
26:10It's a beautiful thought.
26:13Yeah, so, you know, just speaking from the allocation perspective and not from the
26:18operational perspective, but they would they could look at, again, balanced advantage
26:23fund if the period is five to seven years and for periods above seven years, like
26:29let's say seven to 10 year period, they could look at equity funds.
26:32Again, if you don't know what fund to get into a simple nifty fifty index fund is a
26:36good way to invest.
26:37Yeah, absolutely.
26:39And that brings us to the end of this edition of The Mutual Fund Show.
26:42It's been a pleasure bringing it to you.
26:43Do stay tuned. Lots more coming up on NDTV Profit.