In this weeks freefincal Q/A, we discuss matters ranging from last year’s star ELSS fund to portfolio rebalancing. Before we get to the questions, a quick mention that the Q/A is a feature in which I address generic questions from readers. You can use the form below to ask your questions. I will address them next week. I was supposed to do a video response, but my cold has not let up. So that will have to wait.
Q1: Portfolio Rebalancing
Hi Pattu Sir, I am noob in investing and started investing in MF 6-7 months back. I have heard a lot about portfolio re-balancing here in the blogs and in AIFW group. Can you please write an article how once can approach/carry out a portfolio re-balancing? i.e. lets say I 40yrs am investing 100% equity now and from 50yrs onwards I want to move some part to Debt. So how I will do that. Stop my investment in few equity MF, redeem and start investing in Debt? Pls guide. Thanks – Anonymous
The first step is to identify an asset allocation that will manage aspirations of reward and the reality of risk. A portfolio of 100% equity is extremely risky. The “I am young, there I can afford it” is an excuse that assumes that markets will eventually move up. Those kind of assumptions are dangerous in equity investing.
I would suggest first learn to define ‘long-term’ and ‘short-term’ in equity investing.
Then understand the risk associated with different levels of equity in the portfolio: Asset allocation for long-term goals
Then decide the asset allocation suitable for a financial goal.
My suggestion is to choose only 60% equity even if your goal is 20Y away and the rest in fixed income. Assuming this is the asset allocation, you can monitor deviations from this allocation periodically.
For the first few years of investing, nothing need be done. After 3-5Y, I would recommend rebalancing at least once a year. That is say the allocation is 70% equity and 30% fixed income after 3Y. Sell 30% equity and buy 10% of fixed income.
I have plenty of posts on rebalancing. Do check them out:
The What, Why, How and When of Portfolio Rebalancing With Calculators to Boot.
Q2: Should I exit Axis Long Term Equity?
Pl suggest a good ELSS. I had earlier purchased Axis Long Term Equity which somehow is not performing well for last year inspite of a good fund manager and some other fund in ELSS category like DSP BR Tax Saver, HDFC Long Term Advantage, ICICI Pru Long Term Equity giving good returns. Will it be a good idea to switchover after lock in period is over. – Arum
I follow two rules when it comes to mutual funds:
1: Never compare returns with peers in the category after buying units of a particular fund.
2: Never buy “popular” mutual funds or “five star” stars. The joy of holding a top performer will not last long.
Axis Long Term Equity was the darling of investors last financial year. However, it has underperformed its benchmark noticeably. A snapshot from value research.
Dividends are not included in bse 200. The underperformance would be a touch higher in the case of “regular” mutual funds. If you move the scroll window (bottom red oval) or set the date as one in which you started investing, you can get more insights. This has been the trend since Aug. 2015. So even before last minute tax payers got this fund last FY.
Why is this still a five-star fund? Because it is too early to call. VR uses a mix of 3Y and 5Y data to set stars.
Such periods of underperformance are quite normal and there is nothing to worry about. You can continue to invest in this fund.
However, did the performance dip because of its popularity is a valid question to ask. Unfortunately, we will never know if popularity (sudden increase in AUM) or just the stock choices are responsible.
By looking at the turnover ratio, it is seen that both funds that barely changed their portfolio in the last year and funds which have completely revamped it have beat Axis LTE. So nothing can be inferred from this. Axis LTE has a turnover of 73%. However, this does not mean most of the stocks are new. A look at the Aug ’15 and Jan ’17 factsheets suggests that most of the stocks are the same.
So nothing can be inferred, except that those who chase performance are likely to get disappointed fast. I would recommend keeping the faith with the fund manager for at least a little while long.
Those who choose another ELSS fund because Axis “has done badly” are likely to be in the same boat a year or so from now.
If you must go by stars, choose a 3-star fund that has consistently beat the benchmark consistently over 3Y and more. Use this if you wish: January 2017: Equity Mutual Fund Outperformance Screener.
Now as for Axis LTE, please give it more time. Just 12-15 months is too short a time to judge any fund. I recommend at least 3Y. Sometimes I have stayed put for even 5.
DO NOT INVEST IN ELSS FUNDS IF YOU DON’T UNDERSTAND RISKS.
If you set the performance bar too high and have a SIP going in an ELSS fund, the fact that each instalment is locked in for three years will frustrate you.
A plan and conviction to stick to the plan is key to any form of investing.
Q3: Home Loan EMI Calculator
Dear Dr. P, Could you please provide a home loan emi calculator with prepayments built-in? prepayments can be of monthly or Quarterly or annual frequencies Thanks – Srivatsan
Got one here: Excel Home Loan Amortization Schedule Template
Q4: Liquid Funds
how do liquid funds be better than savings account with example. In liquid funds is only the amount invested taxable or including the profit if redeemed before 3 years – JAIKUMAR
You can expect to earn a bit more than your savings account with liquid funds. It not going to make a big difference to your wealth. So if you hear someone saying “is your money idling in an SB account”, don’t take it too seriously. Everyone needs a good amount of money kept in an SB account for emergencies.
The (current) tax rule is the following:
The gain associated with each unit of a mutual fund holding less than 65% of direct Indian stocks* is taxable
- as per slab if redeemed on or before 3Y from purchase
- at a flat rate of 20% (+ cess) but with indexation. That is the purchase price is first inflated to current value using cost inflation index and then gain is computed. Refer to this for an example: Mutual Fund Capital Gains Calculator
*: liquid funds, gold funds, international funds, fund of funds, monthly income plans, all other debt funds fall under this category.
Q5: Which is better?
I am in 10% bracket and have to chose between these options: 1. Invest in Axis Tax fund and save 10% 2. Pay 10% upfront tax and Invest in HDFC mid cap fund. Assuming amount will be there for at least 10 years, which option would be mathematically better. – Santosh
I do not have a crystal ball to tell you that a post-tax investment in any mid cap fund will beat a tax saving investment.
more investment in a diversified equity fund vs less investment in a mid-cap fund (which allegedly can out-perform). I am a fan of more investment 🙂
Please refer to the response to question 1. First, have an asset allocation in place and align your tax savings with it. Since you have space in 80C, why don’t you invest more in EPF (VPF) and invest the tax saved in equity (non-ELSS)? If this is possible with a 60% equity and 40% fixed income allocation. If not get an ELSS – you may have an use for it for next few years. I am of course assuming that your retirement is many years away.
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