Can you review my MF portfolio? Are my return expectations correct?

Published: December 23, 2021 at 7:00 am

Last Updated on February 12, 2022

A reader writes, “I am a 37-year-old investment professional. I have worked for large global financial institutions throughout my career. Most of my professional network unsurprisingly consists of other investment professionals. This might be counterintuitive to many, but I have known some exceptional professional money managers who are rather average at managing their personal investments. I wish I could explain why, but can’t”.

“I mention the above to gather some credibility before stating the following opinion. I have been a regular reader of your content for a while and believe it is the best resource I have come across thus far. I particularly like your pragmatic approach about setting the right expectations from market returns, something we can control; rather than trying to control the market return itself”.

“In addition to the content, your method of explaining complex topics in a straightforward manner is remarkable. For this, I want to express my gratitude. Thank you for being a teacher and an educator. I wanted to share my portfolio and get some feedback”.

Background


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– Age 37+

– NRI (earn a salary outside India)

– No outstanding loans

– Spouse has a decent paying job

– 3-year-old daughter

– Parents & In-Law are not dependant, live in their respective owned houses and have decent cover for medical/life insurance

– Decent medical and life insurance cover provided my employer/spouse’s employer for me, my spouse and child

– Live in a rented house myself and don’t intend to add any real estate to my portfolio. (I don’t have any competitive advantage in identifying undervalued real estate and have no aspirations of owning a house and the inflexibility & admin work that comes with it)

– No need for liquidity in the near or medium-term

Objective

– My objective is for my portfolio to outperform the following equation on a post-tax basis. I hope to stay invested for the foreseeable future (25+ years)

Target = 15.5% annualized = India CPI (My long term est. 6% annualized) + Bank FD rate (My long term est. 7% annualized) + USDINR depreciation rate (My long term est. 2.5% annualized)

Approach

– I rebalance my portfolio once a year and take advantage of the INR 1 lakh limit of tax-free LTCG.

– I don’t have any competitive advantage of identifying either the star AMC or star active PM in that AMC.

– As such, I prefer to use passive equity benchmarked funds for the majority of my equity MF allocation and add 10% exposure via two-sector/theme funds to (hopefully) gain some outperformance.

– Over time, I will look to move direct equity holdings (single stocks) to equity MFs, in a tax-efficient manner. I don’t have the time to track single stocks anymore.

Target portfolio (largely in line with current portfolio)

Cash 5%

Debt (PPF) 10% (Allocation expected to decline over time)

Direct Equity 20% (Allocation expected to move to Equity MFs over time)

Equity MFs 65% (Break up below)

Real Estate 0% (No intention to increase this)

Target Equity MFs holdings (largely in line with current holdings)

  • ICICI Prudential Nifty Direct Growth 50%
  • ICICI Prudential Nifty Junior Direct Growth 25%
  • Motilal Nifty MidCap 150 Direct Growth 10%
  • Motilal Nifty SmallCap 250 Direct Growth 5%
  • Tata Consumer Direct Growth 5%
  • ICICI Prudential MNC Direct Growth 5%

It would be great if you could share your feedback on –

(1) Overall portfolio allocation

(2) Equity MF holdings allocation

(3) My expectations of returns for my portfolio.

First of all, thank you for your kind generosity. A website is only as good as its readers, and we are thankful to our community for pushing us to do better. Second of all, your question is essentially a “reader audit”. Thank you for sharing your thought process with us.

We are flattered that an investment professional would ask us for an opinion. Your honesty about how your peers tend to manage their own money and your lack of competitive advantage in choosing the “best mutual funds” and lack of time in managing a stock portfolio is most refreshing. Many young earners should take a cue from this. You are fairly close to SEBI RIAs “ideal investor”, as explained in his recent article: Why it makes sense to become a defensive (passive) investor.

Your decision to be a passive investor (until you find the time to manage stocks) is particularly admirable since you have the necessary training to be an active/enterprising investor. Focusing on your primary income stream while allowing your investible surplus to grow passively is

We don’t think you need our opinion, but since you asked:

  • Overall portfolio: It is not clear if you have any debt holding in your country of residence aside from the ones mentioned above. We recommend a higher debt holding – about 40% in total.
  • Mutual fund portfolio: As pointed out earlier, the tracking errors in the mid cap and small cap space are quite high – Not all index funds are the same! Beyond top 100 stocks tracking errors are huge! So we recommend not increasing allocation, at least to the small cap fund and getting rid of it in time. The rest resembles a passive (core) and active (satellite) structure and is fine.
  • Return expectations: We have seen return expectation reasoning similar to yours in a couple of articles. While it is certainly possible to get 15% returns from equity holding or even the entire portfolio, it seems unlikely over the next 25 years. At the very least, considering the volatility, it may not happen when we need it.
  • As we have shown earlier, S&P 500 long term returns are highly cyclic but still just about manages to beat US consumer price inflation. The Sensex has just started showing this cyclic behaviour but has managed to beat the PPF rate most of the time. See: Why should I invest in equity mutual funds when there is no guarantee of returns?
  • We think a reasonable equity return expectation (post-tax) is 1-3% above the PPF rate – so about 9-10%. The advantage of having a low expectation is that we force ourselves to invest more, and there is far less stress during the investment journey. Even if our actual return is 1% higher than our estimate, we would have amassed significant wealth due to the higher investments. See, for example, Portfolio Audit 2021: How my goal-based investments fared this year.
  • More importantly, as we age, the equity holding should gradually decrease. Even if we are wealthy enough to hold 40-50% equity in our late 50s, the overall portfolio return expectation over 25 years will gradually decrease. See, for example, I am 30 and wish to retire by 50; how should I plan my investments?
  • So an underpromise, and overdeliver strategy makes the journey smoother. We recommend reducing your equity return expectations to at least 12% (if 9-10% seems extreme to you) and proportionately lowering your overall portfolio return expectations (after tax!). Our Robo advisory tool automates the process of creating an asset allocation schedule according to individual requirements.

We wish you the best in your wealth creation journey.

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Pattabiraman editor freefincalDr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over nine years of experience publishing news analysis, research and financial product development. Connect with him via Twitter or Linkedin or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation for promoting unbiased, commission-free investment advice.
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