Dealing with my investment fears and doubts

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My investing doubts and what I am looking forward to…

As a Covid-19 investing generation, I am spoiled by good days. However, I need to look at the history of markets to keep my expectations on check. Here are a few things bugging me, and how I am convincing myself of it.

Do I need asset allocation? How?

A 100% stock portfolio of INR 100, increasing 20% a year, and decreasing 10% next year will have INR 108 as the end value. However, if I had only 60% stocks and 40% cash, it would be INR 112 after a year, after rebalancing, and another 10% decline following year, would be INR 105.3 next year. We can do a vast variation of these scenarios, and see the inactive component of 40% cash with no appreciation also keeps your returns more or less in line, while helping during downtrends. The assumption here is missing the tax component, which is changing forever and making life more unpredictable. So much so, that it forced influential voices to utter the words ‘Conservative Hybrid Funds’ for certain cases. If I infer at this point that ‘asset allocation is needed’ but taxes are not helping, I don’t think it shall be wrong statement.

This understanding makes me so much interested in tax-free vehicles, currently available as NPS Tier-I / Tier-II and Hybrid Index Funds or Target-date retirement funds, none of which are distinctively available in India yet. NPS Tier-I has active management of equity, and locking scenarios limiting liquidity, not a passive Index fund / bond structure or selection of funds like USAs 401K or Roth IRA. NPS Tier-2 has no clarity of taxation even if I compromise on the active management. If taxed in slab rates, it hits harder on pockets. India has certain target hybrid maturity index funds, but no clear life-cycle or constant allocation hybrid index funds.

However, these are problems, and beyond my limits, how can I solve it?

The locked portion: How much?

If you keep 60-40 (equity-debt) allocation, and let’s say market falls even 75%, making it 15-40 or 27:73 (normalized to 100), you need to move only 33/73 = 45% of your initial debt component to rebalance, giving you an upper ceiling of 50% of your debt component to be easily forgotten in you locked component e.g., PPF, NPS etc. We are not considering Equity in locked component, as in such scenarios of rebalancing, you lose liquidity up to maturity and future rebalancing becomes unobtainable.

So, although I need to have debt in my portfolio, I may be able to manage my overall portfolio allocation only if 50% of my debt component is liquid even if market falls 75%. Thus, PPF/EPF/NPS etc. shouldn’t be ruled out of my debt components or as good vehicles of investments.

Kya Mutual Funds Sahi Hain?

The recent explosion of financial gyan on open forums makes me doubtful. What I understand is that wherever opportunities are publicized, they die. This is also apparent in a recent IPO where the increasing possibility of allocation via shareholder quota was so publicised that opportunists exploded the application in that particular quota, decreasing the rewards for all. Reading the older factsheets of Mutual Funds is my recent hobby, and I noticed that the largest small cap fund had an AUM growth of nearly 100x while the NAV became 9x. The gold-plated history of these funds is written when they used to manage a very tiny AUM compared to current forms. Also, whom do you marry? There are significantly more schemes than large and midcap stocks combined. Analyzing stocks can at least provide you with an idea, but how do you forecast a fund’s future when its managers are becoming TV celebrities, marketing managers, and switching or resigning, opening their own PMS and AIF?

Long story short, any choice would lead to doubt, any doubt would make it impossible to cross tough times. Also, underperformers and outperforms of future 10, 20 or 30 years can’t be imagined now. The future, by design will be automated indexed or balanced fund, and people should be happy with average, as we are all happy to lead and average life. All these makes me so confused, and I am doubtful enough to rely on a shorter past data to extrapolate a longer future.

Then? What do I actually do?

All these needs to the conclusion as described often by Avinash Lutharia in his content that, if I invest INR 100 today, I should only expect its value to retain after taxation on my asset allocation investment portfolio. That would be enough. This means considering the proportion of my remaining working life, and projected optimistic lifespan, I would save and invest. If I have 30 years to become 60, and 30 years to live after becoming 60, and have 0 saved, should save equal to as much as I spend monthly (50-50). This conservative view would refrain me from chasing high returns, volatility and make me happy. If at the end of the journey, the outcome is better, it is mare luck. If the outcome is worse, I can at least tell myself I did my best.

What I fear is what I can’t predict…

I am very new to the stock market, since 2021 I am here. But in this small span of time, I have seen too many policy decisions / trends made in this section as well as pension products,

• Removal of indexation of debt funds, FOF and international funds / gold funds
• MFs chasing indexation, releasing multi-asset funds
• Allowing 100% equity in NPS Tier-2, but no clear taxation rules yet
• Introduction of A assets in NPS Tier-1
• Introduction of SWP of matured 60% liquid NPS corpus
• Tax on EPF contribution’s interest by employee over 2.5L
• No increase in PPF rates, although other entities are increasing interest rates
• Change of LTCG from 10% to 12.5%, STCG from 15% to 20%
• Reclassification of fund taxation, all loosing indexation, FoFs benefitting etc.
• Explosion of “back tested” indexes and thematic funds due to SEBIs classification and restriction of number of funds in each category

This has become too much to follow, and choosing a mutual fund has become more confusing for me than choosing stocks. Also, I am not believing that fund managers are some deities of excellence. I often see speculative actions, and short-term plays, coupled with no respect for valuation and too much story-telling. The biggest advantages of a MF structure are tax-free churning and reinvestment of dividends, where the churning capabilities are lost with size. Currently I am an active stock picker have made good value for myself (maybe a glitch of this bull run), but when life becomes busy, and the decisions become bigger and bigger to lose, I would rather just put everything in a systematic idea and call it a day. Please give me equity-debt hybrid index fund, as soon as possible.

Reader stories published earlier:

As regular readers may know, we publish a personal financial audit each December – this is the 2022 edition: Portfolio Audit 2022: The Annual Review of My Goal-based Investments. We asked regular readers to share how they review their investments and track financial goals.

• First audit: How Suhas tracks his MF investments and reviews financial goals.
  • Update 1: Why I hiked my retirement corpus target though my networth doubled since Dec 2019.
  • Update 2: After ten years of MF investing, Suhas is on track to achieve his financial goals
• Second audit:  How Avadhoot Joshi evaluates his investment portfolio.
  • Update: Why I redeemed from EPF to invest in Equity MFs.
• Third audit: How a single mom is on track to financial freedom
• Fourth audit: How Gowtham started goal-based investing & took control of his money
• Fifth audit: Why my financial independence & early retirement plans were postponed by four years
• Sixth audit:  How Abhisek funded his marriage & is on track to financial freedom.
• Seventh audit: How Rohit’s early struggles defined his investment journey
  • Update: I feel confident about my retirement planning after five years of MF investing.
• Eighth audit: Why my investments are still on track despite job loss and lower income.
• Ninth audit: How a retirement planning calculation scared me to take action
• Tenth audit: I made several investment mistakes but have turned my life around.
• Eleventh audit: My net worth doubled in the last financial year, thanks to patient investing!
  • Update: How I achieved investing nirvana.
• Twelveth audit: My financial journey: from novice to goal-based investor.
• Thirteenth audit: My journey: from a negative net worth to goal-based investing.
• Fourteenth audit: From Fixed Deposits to Goal-based investing in MFs.
• Fifteenth audit: My 10-year financial journey – mistakes made and lessons learnt.
• Sixteenth audit (part 1): How I achieved financial independence without mutual funds or stocks.
• Sixteenth audit (part 2): Lessons from my financial independence journey and future investment plans.
• Seventeenth audit: How I plan to achieve financial independence and move to my native place
• Eighteenth audit: I used the current bull run to reduce my mutual funds from 14 to 4!
• Nineteenth audit: How a conservative investor created his financial plan
• Twentieth audit: I plan to achieve financial independence by 46; this is my master plan
• Twenty-first audit:  I have made many investment mistakes but am on course to financial independence by 45.
• Twenty-second audit: I felt worthless six years ago but have achieved financial stability today
• Twenty-third audit: My financial journey was directionless until age 40: this is how I made up for lost time
• Twenty-fourth audit: Why I increased equity MF investments by 275% and reduced PPF contributions.
• Twenty-fifth audit: How I track financial goals without worrying about returns
• Twenty-sixth audit: I am 24 and started investing 1Y ago, but what am I investing for?
• Twenty-seventh audit: How we plan to achieve a retirement corpus 50 times our annual expenses.
• Twenty-eighth audit: I thought equity investing was a gamble, but now I aim to hold 60% equity for retirement
• Twenty-ninth audit: My journey: From 5 lakhs in debt to building a corpus worth six years in retirement
• Thirtieth audit: My investment journey: From random purchases to a goal-based portfolio
• Thirty-first audit: My investment journey: from product-driven to process-driven
• Thirty-second audit: How a young couple is trying to balance travelling and investing
  • How to achieve your travel goals without breaking the bank!
  • How a young couple tries to balance their personal and financial aspirations
  • How a couple reached their desired asset allocation after starting late
• Thirty-third audit: My journey: From Rs. 30 bank balance to financial independence
• Thirty-fourth audit: Our journey: From scratch to a net worth of 18 times annual expenses.
• Thirty-fifth audit: From a net worth of Rs. 6000 to auto-pilot goal-based investing
  • Follow-up: How I manage my goal-based investments in auto-pilot
• Thirty-sixth audit: How I retired from corporate bondage at 46, two years ago!
• Thirty-seventh audit: How I learnt to keep it simple and build a net worth 19 times my annual expenses
• Thirty-eighth audit:  How Abhineeth plans to achieve financial independence and build a house.
• Thirty-ninth audit: How Sahil plans to achieve financial independence by efficient tracking
• Fortieth audit: My Journey to a Ten Crore Portfolio
  • Analyzing the growth of my 15 Crores portfolio
• Forty-first audit: Burdened with debt for several years, I am now aggressively investing in equity
• Forty-second audit: From Engineer to Librarian after Financial Independence and Early Retirement (FIRE)
• Forty-third audit: I lost six months’ income in F&O and ditched it for systematic investing
• Forty-fourth audit: My retirement plan to handle the harsh realities of the IT industry
• Forty-fifth audit: My investment journey: mistakes, 10 years of MF investing and recovery
• Forty-sixth audit: My MF portfolio is worth six crores despite multiple mistakes
• Forty-seventh audit: Saving, Investing, and Running Marathons: My 25-year Journey to Financial Independence
• Forty-eighth audit: Never Too Late to Start: How I Became Financially Savvy at 40
• Forty-ninth audit: My Investment Journey to a net worth 29 times my annual expenses
• Fiftieth audit: How I audit my portfolio without tracking returns
• Fifty-first audit: Financial Lessons Learned During and After a PhD
• Fifty-second audit: Investment & Financial journey of a 23 year old
• Fifty-third audit: The system I use to draw income and spend after retirement securely
• Fifty-fourth audit: From Start-Up Employee to Millionaire: A Success Story of Resilience and Smart Investing
• Fifty-fifth audit: 25-Year-Old Software Engineer’s Investment Journey: From Stocks to Mutual Funds and Beyond
• Fifty-sixth audit: Crossing the Million Mark: Our Journey to the First Crore
• Fifty-seventh audit: Navigating Market Volatility: How an IT Professional Transformed His Investment Approach for Retirement
• Fifty-eighth audit: How Sahil achieved a 10X retirement corpus by efficient portfolio tracking

These published audits have had a compounding effect on readers. If you would like to contribute to the DIY community in this manner, send your audits to freefincal AT Gmail. They could be published anonymously if you so desire.