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Freefincal Q/A: From Retirements Buckets to Mutual Fund Portfolio Turnover Ratio

Each week I try and answer generic questions from readers. Here is this week's edition in which we cover topics ranging from the retirement bucket strategy, mutual fund portfolio turnover ratio and the scheme information document. You can use the form below to ask your question. I shall take them up next week.

Before we begin, my book with PV Subramanyam, You Can Be Rich Too is available at a 50% discount (Rs. 198) for short periods of time this month as it was among the top 25 bestsellers in the last 3 months. Grab it now!

Yogesh: Hi Pattu Sir, I am a software engineer with minimum knowledge about financial products.My age is 37. I am investing in Mutual funds & PMS . My belief is that in order to get maximum out of MF and shares I should always go via experts ( financial planner) and i shdnt try things from my side. For MF I am going by jagoinvestor and for shares I have taken PMS of kotak bank. I think if I will do things then will waste time,  energy and profit percentage could vary. Is my understanding sensible ?What are your thoughts?

Pattu: Jagoinvestor is a mutual fund distributor. If I wanted professional advice, I will only pay for the advice from a SEBI Registered fee-only planner and not a distributor who gets commission +/- fees. I maintain a list of such planners. I cannot comment about Kotak PMS.

Kirubachari: First of all I want you to thank you for sharing your experience. I have a plan to subscribe for VPF. While analysing to invest in VPF , I came across the following phrase. 'If the direct tax code comes into effect, the entire maturity amount from VPF becomes taxable.' . I googled about it for a clear idea but failed. Could you explain if you have an idea about it ?

Pattu:  If you don't mind my saying, Google is an algorithm and it often ignores the date of publication. So when we Google, we need to look at the date of publication. The direct tax code is passé. The government has moved on. If there is an idea to tax the VPF, it will not be done retrospectively. So do not worry about it.

Yogesh: Hi Pattu sir, I am new to your blog.I am finding it really great. Q1.I save around 1.2 lac per month. I have taken PMS and have SIP in mutual funds as well (25k per month) .I am into PMS from last 6 month and till now have 10% profit(2.5lac) where as in Mutual fund from last two years invested 5lac rupees(via SIP) and having profit of 56K .Mutual funds are performing well( I have calculated XIRR) but my observation is wealth creation via MF is very slow compared to PMS. I am confused whether I shd increase SIP amount or invest saving as top up in PMS. How much of saving shd I invest in MF(SIP) and how much in PMS(Top Up)? Initial in carrer, I invest in more in FD but at the moment focusing on Equity.From last two years investing in Equity.No more investment in Debt category.My age is 37 years. At the moment I am thinking to keep 25K SIP in MF and rest amount to be Top up In PMS? Whats ur suggestion about this approach ?Is this too risky ?

Pattu: Your observation period is too short (6 months) to come to any conclusion. Besides is that 10% post tax? And it is just an absolute return, not annualized. If you trust your PMS, invest more there.

"No more investment in Debt category"!! Everyone needs debt at all times in their lives. It need not be FD! Avoiding debt is more risky than choosing a PMS!  I would suggest that you work on an asset allocation first: Deciding on asset allocation for a financial goal.

Krishna: Dear Pattu Sir, i am an avid reader of your blog and i implement many of your ideas in my financial life. my query is, by the time of retirement, in which form you recommend to keep the already grown money? example, 1. if we invest in PPF, we get tax free returns, but when we invest it somewhere, we need to pay tax again or if we keep it in SB account, again TDS will be there. 2. at 60, a person may not be willing to face volatility. So,if we withdraw our MF,stocks, no tax but again taxation will eat away, if i invest/put in bank account. So, paying certain amount of tax is inevitable at some point. 3. NPS is deferred taxation. So, assuming, we start investing early, the corpus will grow huge by the time of 60. So, which can be the best avenue to preserve the money with less tax exposure.

Pattu: Thank you. A person who is used to volatility for years before retirement is likely to be comfortable with it after retirement. Naturally, the extent of exposure will change. PPF can be perpetually renewed as long as rules do not change. The key in retirement is to minimize tax but not compromise on liquidity. IF  there is enough corpus to play with, one can choose a bucket strategy where we partition the money for immediate, near future and distant future needs. A combination of PPF, debt funds, equity savings funds can be used for generating income by withdrawal (avoid pensions if possible).  There are many tools available for this:

When should senior citizens purchase an annuity? This is to check if the corpus is big enough or not.

Retirement Planner For The Middle-Aged Employee This is for people with some form of pension or annuity.

The Retirement Bucket Strategy Simulator : A fun game to play

Generating an inflation-protected income with a lump sum The idea of bucketing

Illustration: Generating inflation-protected post-retirement income an example

Inflation-protected Income Simulator The bucketing tool

The even lower stress retirement calculator! A retirement calculator with the above bucketing tool bundled in.

Anita: I have a Bsli dream retirement enhancer Guaranteed policy since 2010. I have already invested >10 lakes as premium over 7 years for an insurance of 39 Lakhs. The policy is for 20 years payment. Though it has shown now 9.8% growth, should I stop and recover my money or stop and wait for the policy to mature and get what ever returns or should I continue the payment and hope for the best. What would be the best step to salvage my money. Thanks

Pattu: Get adequate term life insurance cover and stop this policy. You can completely your money since the ULIP is 5+Y old. But what is more important is that you list your goals, decidede on a suitable investment strategy and then act on it.

Jig: Dear Prof( Guru ), My parents got lump sum from inheritance. 5 lac. So far I invested in pvt bank as FD. I came across with post office sr citizen saving scheme. Is it good option to move this scheme? I read there will be TDS in this scheme over 1000 per year interest. then how beneficial it is compared to pvt bank FDs? Thanks

Pattu:  No 'guru', perhaps 'garu' 🙂 It has much lower risk. If your parents have to pay income tax, then TDS or no TDS does not matter! If they do not have to pay tax, then the TDS can be stopped by submitting form 15H.

Srivatsan: Dear Prof, Is it possible to create a "market diffusion indicator" for Nifty50 for a fixed period (say 3/6/9/12 months) ? Please let me know your thoughts info: - this is like a first derivative / slope of your market and can act as a good sell signal giving an indication of a market topping out. For example, if all 50 stocks of Nifty50 have all gone up in the last 3 (or any fixed period) months - the indicator is 100% - if your indicator falls from over 90% to 50%, the slope has changed and you are downhill from the top Ref: "It is when you sell that counts", D.L.Cassidy, 1993 edition, pg173-181

Pattu: Thanks for the suggestion. I will read up on this. I believe you are referring to this kind of diffusion indicator. It is possible in Excel, but maybe too heavy.

Arshi: Hello Sir, how the mutual fund turnover ratio is calculated and what should be the significance of it when selecting a mutual fund.

Pattu: The definition is

minimum (value of stocks sold or value of new stocks purchased in a year)/(average AUM in a year).

All it says is how "active" the fund manager is. I showed earlier that the turnover ratio of HDFC Equity and Top 200 decreased as its AUM increased. But that may be an isolated situation.  If I plot current turnover vs AUM, there is no pattern (source VR)

When I see Birla Sun Life Pure Value Fund with a turnover ratio of 213%, it makes me wonder how such activity is possible with value investing. But then again, the Birla Sun Life Index Fund (Nifty) has a turnover of 362%. So I choose to ignore this while selecting funds.

Neeraj Kukreja: Dear sir I wish to know how to check whether an equity mutual fund is using right benchmark as it is very important for reviewing its performance. Also i want to know your views on how to decide whether a fund is truly midcap or small cap or multi or large cap.How much percentage say a mid cap fund must invest in mid cap stocks? Which site is best to check true categorization of funds.

Pattu: AMCs are not worried about right or wrong benchmark. They choose something that is easier to beat. Quantum Long Term Equity prides itself as the only fund house benchmarked to a total returns index (Sensex with dividends reinvested). However, it can pick stocks from the BSE 200 universe.

Finding pure large cap or mid-cap or small-cap funds is practically impossible as the definition of market cap in of itself is arbitrary and many funds move around quite a bit. There are many large cap funds with significant mid-cap exposure. So there is no such thing as true categorization.

Srivatsan: Prof, my question is reg rebalancing: 1) do you consider epf and ppf part of debt allocation? 2) I vividly remember your post somewhere that you "frequently lock your alpha from equity and shift to debt" as a part of rebalancing. can you elaborate this with a hypothetical example?. 2a) I am not clear when you say alpha, whether you lock your LTCG or the % that is skewed from your asset allocation or the actual alpha of the MF? 2b) When you rebalance from equity to debt, do you suggest moving it to PF or FD or debt fund?. The reason I ask is, moving to PF/PPF locks my money till god knows when.

Pattu: Yes EPF and PPF are part of debt. In my case, NPS is also part of debt. I also have a PPF, but I just keep it alive. Whenever my equity allocation swells uncomfortably, I move some gains to PPF (mine and my wife's). If we hit the PPF investment limit, I intend to move some to say an equity savings funds (which is of much lower risk). In my case, the first 5-6 years were a sideways market, so  I have only rebalanced twice in 8+Y and there was no question of STCG. But as my needs come closer, I will have to rebalance regardless of tax or exit load considerations.

If you don't like PPF, use a debt fund or equity savings or arbitrage fund.

Chaitanya: Hello again Professor Pattabiraman. Thank you for answering my previous questions. I am back with a couple more of them. My apologies for asking very basic and generic questions, just started the financial journey. 1)You said one should go through the Scheme Investment Document before selecting a fund. So what exactly does one should look for in the SID? Every AMC has their own design of the SID, not to mention the financial and law jargon they put to frighten a novice investor like me. All I could understand is the companies where the AMC invests the money in and certain return metrics. What if one did not hear of a single company the AMC is investing in? Does it matter or we should continue as we have come this far after considering many aspects and select the fund. What fundamentals should one clearly understand from the SID as it is the final step before choosing a fund? 2)Is it better to invest in 2 ELSS funds than in 1 fund if the funds' allocation is different or is that considered as portfolio clutter? Also, can we have ELSS and a balanced fund together or is it advisable to go for debt funds with ELSS provided the ELSS will be continued for years. Or is it wrong to consider ELSS as a long term investing option and should be invested in only because of 80C dedcution and one should always choose a pure equity or a balanced fund for their long term portfolio? I would like to invest with certainty and don't want to get confused or worried after investing. My sincere salutations to you for illuminating the investing path so that we could travel easily. I have also purchased your book, checked a few pages, yet to start reading it.

Pattu: Thank you. In the scheme information document, I look for (1) broad the investment strategy (2) where the fund will invest and (3) the asset allocation. It is also a grat place to learn about the different types of risk. I do not look at the stocks a fund holds.

A single ELSS fund is enough for saving tax for as long as you need to save tax (and not any further). Investing can never be done with certainity. We have to learn to set our confusion aside and move ahead.

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And I will respond to them next week. I welcome tough questions. Please do not ask for investment advice. Before asking, please search the site if the issue has already been discussed. Thank you.

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