How do smart Systematic Investment Plan (SIPs) operate? Are smart SIPs better than regular SIPs? Should we include smart SIP in our portfolio?
– Anand
Smart SIP involves varying your SIP contribution or the asset allocation across multiple asset classes (equity/fixed income) using an algorithm based on certain valuation indicators such as price-to-earnings (P/E) ratio. For example, if markets are cheap, the algorithm may suggest investors to increase their SIP contribution by say 10%. Also, it may suggest higher allocation to fixed income if markets are expensive.
Asset allocation approach is one of the key determinants of portfolio’s performance, in terms of risk & return. It involves optimizing risk-adjusted performance by investing across multiple asset classes. You should follow your asset allocation in a disciplined manner to achieve your goals. Also, it is recommended that you should top up your SIP amount annually in line with your income growth in order to reach your goals comfortably.
1) My father is 72 years of age and wants to invest Rs 1 lakh in mutual funds with a 1-2 years horizon. He wants a return of 10-12% per annum. 2) I have a 6-month old baby girl and want to create wealth for her future expenses (schooling, college, marriage). Is Sukanya Samriddhi good? What about a unit linked insurance plan (ULIP)? Any children’s funds?
– Chirag
1. A suitable asset allocation is typically based on investment horizon and risk appetite. Generally, longer the investment horizon and higher the risk appetite, higher would be the allocation to equity. Based on given information i.e. your father’s age and the short investment horizon, it is recommended to invest the entire corpus into funds with a high credit quality portfolio and minimal duration risk viz. liquid and ultra-short-term funds. However, these funds would fetch lower returns (5-6%) than his expectations of 10-12% per annum which seem unreasonable given his age and investment horizon. Alternatively, as the horizon is lower than three years, he may be better-off investing in bank fixed-deposits. Under section 80TTB, senior citizens can avail a deduction of Rs 50,000 per annum for interest earned on FDs. If your father’s limit for the same is unutilized, you may consider investing in FDs which would be a better option from a post-tax returns perspective.
2. For portfolio construction, asset allocation-based approach should be followed as it is one of the key determinants of the portfolio’s performance, in terms of risk & return. Asset allocation is an investment strategy which involves optimizing risk adjusted performance by investing across multiple asset classes such as equity, debt, commodities, etc. Given the goals mentioned, you have a long investment horizon. You may have an allocation of 80% to equity (55% large cap, 10% mid cap, 5% small cap, 10% international equity) and rest 20% into fixed income. The international equity allocation is for diversification across geographies and hedging against currency risk. For investment in fixed income, you can consider accrual fixed income categories such as Banking PSU Funds and Corporate Bond Funds with a high credit quality portfolio. Given the current market scenario, it is advisable to invest in Banking & PSU funds, as these have a mandate to invest at least 80% corpus in banks and PSUs, which are safer bets from a credit perspective. As your goal approaches (last three years), shift allocation out of equity into fixed income. Assuming a goal of Rs 57 lakh for education in 18 years and Rs 67 lakh for marriage in 25 years. You would need to invest Rs 14,500 per month as per recommended asset allocation in order to attain your goal comfortably. Alternatively, you may start investing Rs 6,000 per month and increase the amount by 10% each year to reach your goals. The corpus amount has been computed assuming equity market returns of 11% per annum and fixed income returns of 7% per annum.
Sukanya Samriddhi Scheme
It is fixed-income savings scheme offering tax deduction under 80c. The interest rates are reset quarterly and investments under this scheme are subject to lock-in till the girl child attains 21 years age or at marriage. Contributions can be made till the child attains 15 years of age. The benefit of investing in this scheme is the higher fixed rate compared to most other government backed schemes, apart from the deduction offered under 80c. You may consider investing the fixed-income portion of your asset allocation towards this scheme.
ULIPs
ULIPs offer investment and life insurance benefits into a single product but have high upfront costs and a lock-in of five years from policy inception. The invested amount is marked-to-market which subjects your investments to market risk. Also, the high upfront costs erode the potential returns of your investment portfolio and the life insurance offered may not be required as the investor may already have a separate life cover. For your pure investment needs, a mutual fund-based portfolio is recommended with an asset mix as suggested above.
Children’s Funds
Children’s funds are subject to a lock-in of either five years or till the child attains 18 years of age. Such funds invest in a mix of equity and debt instruments with an objective of either wealth or income generation. To enable better control over the desired asset allocation pure equity and fixed income funds would be ideal.
To evaluate mutual funds across categories, you can look at Morningstar’s star ratings and analyst ratings for funds here. You should consult your financial adviser before investing in mutual funds.
I want to build portfolio of Rs 25-30 lakhs. This is my one-time payment of retirement fund. Purpose is to get some monthly income and I don’t want the principal amount depleted. Can you suggest such a portfolio?
- Ravi Pingle
For portfolio construction, asset allocation-based approach should be followed as it is one of the key determinants of the portfolio’s performance, in terms of risk & return. Asset allocation is an investment strategy which involves optimizing risk adjusted performance by investing across multiple asset classes such as equity, debt, commodities, etc.
Assuming your current age at 40 years and retirement at 60 years of age, you have a horizon of 20 years to accumulate your retirement corpus. You may invest the current corpus of 30 lacs with an allocation of about 50% to equity (35% Large Caps, 10% mid-caps and 5% international equities) and rest 50% into fixed income. The international equity allocation is for diversification across geographies and hedging against currency risk. For investment in fixed income, you can consider accrual fixed income categories such as Banking PSU Funds and Corporate Bond Funds with a high credit quality portfolio. Given the current market scenario, it is advisable to invest in Banking & PSU funds, as these have a mandate to invest at least 80% corpus in banks and PSUs, which are safer bets from a credit perspective.
Assuming a post retirement lifespan of 25 years, you may be able to withdraw an inflation adjusted amount of Rs 80,000 per month, based on the recommended asset allocation. The corpus amount has been computed assuming equity market returns of 11% p.a., fixed income returns of 7% p.a. and inflation of 5% p.a.
You may consider allocating some corpus to the National Pension scheme to avail the additional deduction of Rs50,000 offered under section 80CCD(1b). Please consult your financial adviser to evaluate your suitability for the same.
To evaluate mutual funds across categories, one can look at Morningstar’s star ratings and analyst ratings for funds here.
Is it wise to invest in Corporate Bonds at this juncture? If not, which debt fund category would you recommend? Should i invest lumpsum or go for a SIP in debt fund?
- Shankar
Corporate Bond Funds are mandated to invest 80% of assets in highly rated instruments (AA+ and above) and hence have a relatively better credit quality portfolio. You may invest in corporate bond funds after looking at the portfolio credit quality.
Given the current market scenario, it is advisable to invest in Banking & PSU funds, as these have a mandate to invest at least 80% corpus in banks and PSUs and are relatively safer bets from a credit perspective.
SIPs offer the benefit of rupee cost average, as each SIP investment collects more units when prices are down and fewer units when prices are up. This is particularly beneficial in case of equity funds, which have a high degree of volatility and are subject to significant drawdowns. In case of accrual fixed-income categories the price of the concerned funds tends to move upwards steadily with relatively lower volatility. Hence, an investor is better off investing a lumpsum amount rather than through SIPs.
My age is 72 years. I have bank fixed deposits that take care of my monthly expenses. I would like to invest in an equity and debt fund and do a Systematic Withdrawal Plan (SWP) every month of about 1% of the total amount. In a bank FD, I get only 8% per year. I need to earn more to make the principal grow. I am ready to take risk. Is it wise to invest in SWP in a hybrid fund?
- Gokaldas
Given your age and requirement for monthly expenses, a predominant allocation to fixed income is advisable. This presents a disconnect with your requirement of withdrawing 1% monthly, as the portfolio would need to generate approximately 12% per annum; which is unreasonable given the recommended predominant allocation to fixed income and the long-term return expectations for equity (10%) and fixed income (7%).
Given that you are dependent on the corpus to meet your monthly expenses, we would advise you to invest in line with your ability (and not willingness) to take risk. You could have an allocation of about 90% to fixed income and 10% to equity. This would allow a monthly withdrawal of about 0.6% of the portfolio. You may consider investing the fixed income portion of the allocation into bank FDs to avail tax deduction under section 80TTB of up to Rs 50,000 earned as interest.
Conservative hybrid funds, which are the most conservative of the hybrid funds, have a mandate to invest about 10-25% of the allocation to equity. So, a fund manager may have equity exposure at the higher end of this band which would not be in line with your recommended equity allocation of only 10%.
My mother is retiring next year. She would like to move from FDs to mutual funds. Maturity details of FDs are:
1) Rs 12 lakh in early 2020
2) Rs 22 lakh in mid-2021
3) Rs 40 lakh in end of 2023
She would like to do a SWP of Rs 50,000 per month from 2024. Corpus should grow as she would like me to inherit the corpus amount. My investment horizon is around 25 years. Would equity-oriented hybrid funds be the way to go? If not, what type of funds?
-Ananya
For portfolio construction, asset allocation-based approach should be followed as it is one of the key determinants of the portfolio’s performance, in terms of risk and return. Asset allocation is an investment strategy which involves optimizing risk adjusted performance by investing across multiple asset classes such as equity, debt, commodities, etc.
Given the monthly withdrawal need of Rs 50,000 and the long investment horizon, you may have an allocation of 30% to equity (25% Large caps, 5% Midcaps) and rest 70% into fixed income. For investment in fixed income, you can consider accrual fixed income categories such as Banking PSU Funds and Corporate Bond Funds with a high credit quality portfolio. Given the current market scenario, it is advisable to invest in Banking & PSU funds, as these have a mandate to invest at least 80% corpus in banks and PSUs, which are safer bets from a credit perspective. As your goal approaches (last two years), shift allocation out of equity into fixed income.
As per the recommended asset allocation, your mother may be able to attain her monthly withdrawals and leave you a corpus of about Rs 1 crore at the end of 25 years. The corpus amount has been computed assuming equity market returns of 11% per annum and fixed income returns of 7% per annum.
Hybrid funds v/s pure equity/fixed-income funds:
The recommended asset mix of 30% equity and 70% fixed income is closer to that followed by conservative hybrid funds which are mandated to invest about 10% to 25% into equity. The next category of hybrid funds with higher equity exposure which is mandated to invest about 40-60% into equities. Hence, pure funds would offer better control over the asset allocation decision compared with hybrid funds.
To evaluate mutual funds across categories, you can look at Morningstar’s star ratings and analyst ratings for funds here. You should consult your financial adviser before making investment in mutual funds.
When constructing a portfolio, is it advisable to have funds from the same fund house, managed by same fund managers-albeit different categories. Is there not likely to be an overlap and hence duplication in strategy?
- Kshitij
Funds managed by the same fund house may have some degree of similarity owing to a common fund house view at the broad and sectoral level. Hence, in spite of belonging to different categories, it is advisable to invest in funds across fund houses rather than concentrating in the same fund house. Ideally, one should not hold more than 25-30% of one’s portfolio (of the same asset class) in the same fund house.
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