Tuesday, March 24, 2015

How did I select the Balanced Fund

First thing first: 

What is balanced fund: In general, when we say balanced fund, it means a fund which comprises of equity and debt in its portfolio. The percentages of equity and debt vary from AMC to AMC and from FM to FM. Example: A fund from AMC X may choose to be called as Balanced Aggressive and hence must have more allocation to equity. Similarly, a fund from AMC Y may choose to be called as Balanced Moderate may have 50-50 equity to debt allocation or more allocation to debt holdings.

Now the next question:

What is the need of balanced fund: For ULIP, we say that insurance and investment must be separate and hence you must avoid ULIP. Then why one must invest in Balanced fund which is a mixture of equity and debt fund? Why not have 2 separate funds for equity and debt? Personally, I avoid having 2 different funds to achieve what 1 Balanced fund can achieve. Agreed? Why complicate and keep track of 2 different funds rather than just select 1 and track it yearly or twice a year. The other reason is rebalancing. Suppose, you are investing in 2 different set of funds (1 is equity and other is debt fund). Now, the market seems to be a bull market. Hence, you will have to take the pain of limiting the inflow into equity fund and increasing the inflow into debt fund (to limit the volatility). Balanced fund is suppose to do this automatically i.e. the Fund Manager will do all this depending upon his conviction on the market. So now, you just have to select the right balanced fund for you. Note: this rebalancing stuff has to be done only if the goal is 7-8 years away. If your goal is 10-15 years away, you are very well off on a pure equity fund. The longer duration gives us the flexibility to rebalance the portfolio from equity to debt in the boom cycle. However, short term goal need not give the flexibility to a common man like us who are not very informed about the market and its macro/micro factors. Hence, I would rather invest in a Balanced fund for goal which is 7-8 years away. (Note 2: Pattu has mathematically shown that in 8-10 years, all the debt, liquid and balanced fund gives similar returns. Liquid fund achieves that with lesser volatility. Choice is yours. Remember: “Personal finance is personal”). Let us see this with an example: say the goal is 15 years away. Boom happens in 3rd and 9th year. When we are in the 9th year, we must redeem from the equity and put that in debt fund (however, when the quantum of amount in fund is very large as compared to the goal amount, you are not really needed to do this rebalancing. Just withdraw the amount needed during the goal year and keep the rest in as it is to grow). Now, choosing the same fund for goal which is 7-8 years away is difficult. We will not redeem in 3rd year as the goal is far away. Unfortunately, the next boom does not come in the goal period. Hence, the solution here is to have the Balanced fund for mid-term goals. The fund mandate does the re-balancing for us.

How I started my search: The base is always Pattu’s “How to select equity MF”.

Navigated to Valueresearchonline -> Funds -> Balanced -> Equity. Then click on the Returns tab. Sort the returns in the descending manner.

What we get is the big list of funds available for selection. Our objective is to select just 1. Difficult. So we have to look at multiple factors to narrow our list to just 1 fund.

Check if the fund belonging to the AMC whose fund is already in your portfolio or you planning to buy any fund from that AMC. Example: If I have funds from Franklin, HDFC and ICICI then I may want to narrow down on the funds which belong to these AMCs. In this way, we can narrow down to 3-5 funds.

If the above point is not applicable to you, just pick any 3-5 funds from the list which have given decent returns (> 10%) over 10 years (I know goal is 7-8 years away. However, 10 years selection is to check the consistency of a fund over longer period of time).

Once you have shortlisted 3-4 funds, open all the funds in different tabs of the same browser. Let us say we zeroed on Tata Balanced, HDFC Balanced and Franklin India Balanced.

Compare all the funds on below parameters:
Expense ratio
10 year return
Sortino ratio (the more the better.)
Standard deviation

Now just check which parameter is most important to you.

Example: alpha of Tata is more than HDFC. However, HDFC compensates that in expense ratio. Again, sortino is higher for Tata. Finally, it is just trade-off between these parameters. One of the fund would be good in some parameter while bad in other. So it is just which is important to you.

Personally, as Ashal says, instead of asking others about their opinion on best policy, check what suits you. I am planning to go with HDFC balanced fund due to its low expense ratio, decent sortino ratio, decent alpha and due to the fact that I already have HDFC in my portfolio. Add to this the fact that HDFC balanced has better Ulcer ratio than HDFC prudence (i.e. this fund would be less volatile). The courtesy for this Ulcer ratio goes to Pattu.

Readers, do let me know if I have missed any parameter for selection of balanced fund.

Sunday, March 22, 2015

From the Horse's mouth

Imagine, you are a cricket lover and a die-hard Sachin fan. You get to know that Sachin is in your town and would personally coach 20 people for the whole day. Okay, you are music lover and get to know that you can attend a personal coaching with limited people and the coach would be Lata Mangeshkar. Or you are... okay, enough of imagination. The truth is Subra conducted a whole day lecture on personal finance. There were 20 lucky people who attended that event. My wife and me were among those 20 people.

Needless to say that all the people over there belonged either to AIFW group or Subramoney followers. I belong to both categories :)

The lecture was to start at 9:30am and all the people were in by 9 in the morning. Rarely you see such enthusiasm and excitement. Offcourse, Subra was already there with his laptop.

The expectations were set for the day and we went ahead with the presentation. Each slide was elaborately explained with suitable examples.

As expected, Subra was at his best. Humble behavior, humor, witty, brutally honest and full of knowledge.

To give example of his wit and honest feedback: He asked any of the person to volunteer for the income-expense so that he can show us the quantum of retirement corpus. When the guy who raised the hand said that he has 55k housing EMI and 15k car EMI, Subra stopped him and said, "Next please.. I want a guy who lives on his own money and not on borrowed money". Did we expect this answer? Offcourse, yes. Even the guy would have expected same answer if he is regular on Subramoney and AIFW. Subra is not somebody who does it for the sake of doing it. His passion for PFP and teaching PFP was evident. The same guy asked hundreds for queries throughout the day and Subra answered all with same zeal.

Subra also gave some unspoken advices like how to use debt mutual fund for retirement, efficiently. He explained how RDs and FDs are inferior to debt mutual funds when we say that the duration is for 10-15 years.

As usual, somebody asked him which is the best mutual fund to invest for retirement. Subra gave his patent answer: 1 saving account, 1 index fund, 1 term insurance, 1 emergency fund and 1 health insurance would suffice all. He explained how earmarking each investment with goal plays a psychological advantage.

The topics covered during the lecture were like basic financial concepts, need for planning, goal based investment, basics of financial products and loads of questions from the attendees.

The sandwiches, tea and food was good. There were few health care tips too from the marathon runner. He advices us to measure the cash in and out; also measure the calories in and out of our body.

My wife enjoyed the day as well. For a financial lecturer it has to be great feeling to hear that a women from non financial background enjoyed sitting whole day listening him.

Just to explain how much people enjoyed, let me tell you what happened at 6:30pm. Subra asked if anybody had any questions. When everybody confirmed NO, he said that if no questions then we are done. Everybody heard that but nobody was ready to move. It was as if people did not want to hear that last line. Subra again asked if anybody had any questions and again there was NO. Finally, he said that "thank you guys" and closed his laptop. Boy, what a day it was.

I would definitely go again to Subra's lecture if he announces any sub sequent parts of the lectures.

Thursday, March 19, 2015

Marriage Expenses

Long time back, I had done a post on spending on our weddings. However, the feedback that I received was more interesting than the original post. Read that here.

Last time, it was about my wedding and my expenses. Over the time, I have observed others and here are the observations on general wedding expenses.

Number one culprit for the spending is offcourse the EGO. This could be anybody's ego: starting from bride, groom, parents or relatives. I had the honor to hear:"We have to spend at least this much amount, otherwise our buwa will taunt us"... As if the buwa is going to pay for the expenses. Recently, I attended my friend's wedding. It was right after the college wedding for both the boy and the girl. It was an arrange marriage. The parents of the couple had spent nearly 5-6 times the annual income of the couple combined (pre tax). The couple were obviously excited for such lavish wedding.

Sometimes, either of the family wants to influence the couple and hence blow money on their wedding and honeymoon. Example: Bride's parents spending lavishly and then forcing their decisions on the couple throughout the life. This too is not an uncommon scenario.

Getting carried away by make it big adds. The couple goes to a wedding planner. He/She gives them the list of items/things that they would provide. The bill is offcourse huge. If the couple argues, the planner says this magical line: "ek hi baar to shaadi hoti hian... itna to banta hain sirjee" or "apne maan baap ke bare me bhi socho... unko kitni khushi hogi apne beta/beti ki shaadi agar dhoom dham se ho". That is it. The bill is approved immediately.

Another common scenario: The boy or girl has just returned from 2-4 years of overseas assignment. The bank account has multiple trailing zeroes. The disposable income gives guilt free spending experience to the people. So here comes loads of jewellery, clothes, grand reception and and and finally empty saving account.

Cultural spending: One of my acquaintance purchased a wedding outfit for whopping sum of 60k and that too on credit card. The EMI (yes, off course) is running after 8 months of married life. When I casually asked, why did she purchase such a costly outfit, the reply was: "are hum logon me itna mehenga pehna hi padta hian, warna log tarah tarah ki baten karenge".

Guilt spending: This spending is little uncommon and rare. However, I have come to know about this through a common friend. Parents who were poor in their initial years and managed to save good chunk in their late years belong to this category. The guilt of not spending 'enough' on their child during his/her school days is so huge that they try to compensate that by spending extravagantly on the marriage. Completely emotional spending. You cannot try and explain any logic to the parents in this case.

To sum it up - marriage is important event in one's life. However, there is absolutely no (repeat) need to spend everything on it. Imaging starting a new married life on credit card debt. What is the point of going to Swiss land or Europe tour on loan. Shimla, Manali, Lonavla are much better that debt. Off course, your choice. Morever, in today's times, when the divorces are common, spending everything makes no sense at all. Pre-nup agreements are still unheard of in India.

People getting married for the second time, too spend lavishly on their weddings. The proverb: Once bitten twice shy does not apply here. Giving 800-1k per plate for the people we have never met and with no probability of meeting them again is little difficult to understand. Many times, even the people who attend weddings, attend it due to some or the other obligation. Believe me, in my wedding at least 20% of the people were my relatives whom I have never met before or after my marriage. They just happen to be there because my parents personally invited them. If they see me walking on road, I bet they won't recognize me. Same thing holds good for me too. I am part of this 20% group in most weddings.

Overall, it is very difficult to arrive at any particular amount to be spent on one's wedding. For a person like me, no amount would be small. However, you have to consider emotions of your parents, your would be spouse and his/her parents. There is no point in saving money if your spouse is sad about cheap marriage ceremony. After all, marriage is about happiness. Trying not going overboard on either side happens to be safest bet. If all are frugal by nature.. whoaaa .. nothing like that. You will save loads of money. If not, try optimizing the marriage expenses. On a side note, I think sum of greater than 50% of the annual income of the couple should not be spent on marriage.