Last Updated on December 29, 2021 at 5:57 pm
Each year, I evaluate my retirement portfolio’s performance and my son’s future portfolio in a personal finance audit. Published since 2013 these audits hopefully would encourage similar action among readers. This year, readers have started sharing their audits – How Suhas tracks his MF investments and reviews financial goals. Two more such audits will be posted in the coming days. My success (if I can call it that) is simply because of luck and discipline. I write this with gratitude with no intention to boast.
I have also started sharing my stock portfolio every month on Youtube and recently evaluated its returns: My stock portfolio analysis: total return 22.58% This gives an enormous sense of accountability. It helps me avoid the fear of missing out; making random purchases and risk losing any residual respect from readers. During the Dec 22, 2019, Chennai investor meet, I was asked about the funds used for retirement planning and audience members responded faster than me 🙂 Archive: This is the archive of personal finance audits published before 2013 audit, 2014 audit, 2015 audit, 2016 audit, 2017 audit, 2018 audit, 2019 audit.
Overview
What a crazy year 2020 has been! And it is still not over! On March 23rd, after biggest intraday fall: 10-year Nifty SIP Return is 2.3%, 14-year SIP Return is 5% When I then announced that my retirement equity MF portfolio return is 2.75% after 12 years, I realised how very few readers understood the nature of equity markets and were blindly banking on returns. They found it simply incredulous and wanted to know why I did not “book profits” (which btw will not affect the return!).
From 11.6% overall equity MF XIRR (retirement) in Dec 2019, it crashed to 2.75% in March 2020, only to recover to possibly an all-time high (see below). During this period, neither my son’s future goal nor financial independence status (min corpus of 30 times annual expenses) was affected: I still had enough debt assets for my son’s UG (he is not yet 11), and the corpus managed to stay above 31X. There is only one takeaway I wish you would consider from this exercise:
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Returns do not matter. A proper goal-based financial planning excercise with systematic risk management would help you achieve sucess no matter what the market condition is. Systematic investing is necessary but not sufficient – that woudl simply leave the fate of our investments to luck; Surely our hard earned money deserves more respect than that.
Retirement
- Asset Allocation: 62.6% equity (equity MF 53.5%; direct equity: 9.1%).
- In 2019 the stock portfolio was experimental. Today, at 14.5% of my equity MF folio, it is no longer an experiment, but my form of low volatility index investing. Details of the stock portfolio have already been published and will not be repeated here. Return update: Total return (absolute): 22.77% capital gains + 1.17% dividend income = 23.95%. An analysis of how this portfolio has fared against the market will be published separately.
- Fixed income: 83% in mandatory NPS (XIRR since March 2010: 10.2%) + PPF. The NPS has 15% equity + long-term gilts (majority). The reader, in particular those who have the default govt NPS allocation, is cautioned that long-term gilts are extremely volatile. My NPS corpus returns dropped almost half after the July 2013 bonds crash (see audit 2019 for an image).
- Equity mutual funds
- Overall XIRR since June 2008: 13.2%
- HDFC Balanced. XIRR: 12.61% (consolidated after the merger to become Hybrid Equity, using my tracker) Weight: 33.2%
Parag Parikh Long Term Equity Fund XIRR: 18.8% Weight 42.8%
Quantum Long Term Equity: XIRR 8% Weight: 24%
- Why not index funds?
- My stock portfolio is a low volatility passive portfolio.
- My MF portfolio has fallen less in the 2020 crash, recovered well (see below) and is 15% less volatile (via standard deviation since inception) than a corresponding investment in the Nifty Bees ETF (NAV). At 46, I appreciate that a lot more than younger readers can fathom.
- With HDFC Bank regaining top spot in the NIfty in Dec, my portfolio should do well as long as the market imbalance is reasonably low.
- I do not suffer from shiny object syndrome; do not look at star rating to worry about underperformance and have too much inertia to switch.
- Most readers are likely to be younger and must take their own calls. Those unable to decide can choose hybrid funds. They would, at the very least, provide guaranteed lower volatility and reasonable downside protection.
- Financial independence status: Let us say it is well above thirty times my current annual expenses. This means if I retire now, I would be able to live off my corpus for the rest of my insipid life and draw an income that increases with inflation at a rate equal to the rate of the portfolio return (zero real return).
- Those interested in planning for early retirement can consult this free e-book: Early Retirement in India -How to Retire Early Safely.
This is the normalised evolution of my MF retirement portfolio since inception (Jun 2008). The green line is my equity MF retirement portfolio. The red is Nifty Bees’ growth if I had made the same investments/redemptions on the same dates. Green is the corresponding data for Nifty junior Bees (Nifty Next 50). The blue line is the total investment made. The vertical kinks in the blue line are artificial – I have had some difficulty getting rid of these. The sharp drop in June 2018 is an artefact.
ETFs are used for comparison as it allows the use of a small expense ratio built-in (there were no direct plans before Jan 2013). The NAV is used and not the price. The price would only make the performance worse. The growth since Jan 2019 is shown below.
The volatile nature (sudden gains and sudden wipe out) of Nifty Next 50 can be seen from the above graphs. The underperformance corresponding to the peak in market imbalance (late 2017 to early 2020) and subsequent recovery of the portfolio after the crash is also seen.
Child’s Education
I have been investing for my son’s future since Dec 2009 (a month before he was born). Then it was an 18-year old goal, and now it has become a 7-year old goal. So more caution becomes necessary. Therefore, I reduced equity allocation from 67% (target was 60%, but it had drifted up) to 55%. Will gradually reduce it in the coming years.
Asset allocation
- Equity: Asset allocation 55%. Overal portfolio return: 11.8%
- HDFC Prudence. XIRR 13.1% consolidated after the merger as HDFC Balanced Advantage Weight: 36%
- Mirae Large Cap Fund XIRR 13.6%. Weight 38%
- ICICI Dynamic (ICICI Multi-asset fund) XIRR 12.5% Weight: 26%
- Fixed income Asset allocation 45%
- PPF (in his name) + I also use my mothers PPF (which doubles as her tax planning instrument). However, none of the PPF accounts is maxed out. I prefer to pay a little extra tax for my mother than lock money up in PPF.
- I do not know the exact balance in my son’s PPF due to trouble with SBI, so asset allocation is approximate – not going to the branch just for this.
- ICIC Equity arbitrage XIRR 5.9%.
- ICICI Gilt Fund – only a few days old. See: Why I partially switched from ICICI Multi-Asset Fund to ICICI Gilt Fund.
Outlook
Risk reduction for my son’s future goal is the immediate action item in the coming years. The return numbers quoted above are of little use anymore. What really matters is the actual worth of the portfolio. Cannot buy groceries or college education with impressive XIRR data.
Goal-based investing is the best way to ignore the noise around us and invest with focus. When combined with discipline, it can result in the best possible capital gain: peaceful sleep. In this vacation period (if you have on that is), do review your needs first and align your past and future investments to that need. Wishing all readers a Merry X-mas.
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Dr 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 ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter(X), 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 promoting unbiased, commission-free investment advice.Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! ⇐ More than 3,000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter the market condition is!! Watch the first lecture for free! One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
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