[graaja]

Originally Posted by SmartCat

I have been doing this for two decades now. However, don't make a complete exit and re-entry. Instead, in your mutual fund portfolio, fix a desired percentage for each type of fund and maintain it by rebalancing.

I have been doing this re-balancing the past 6 months. How about dynamically changing the percentage of holdings as well based on some market parameters like P/E ratio?

For example, if P/E ratio is above x value, change the equity to debt split to 40:60, if P/E ratio is below x value, change the equity to debt split to 60:40. Wouldn't this give a little more buffer from sudden market corrections? Of course, it is going to be very tough to time the market and sometimes we may lose some growth potential if we change too early.

What are your thoughts on this?

[DigitalOne]

Originally Posted by SmartCat

Instead, in your mutual fund portfolio, fix a desired percentage for each type of fund and maintain it by rebalancing. This way, you will buy low and sell high. For example, lets say this is the desired allocation for each type of fund:

- Multicap equity funds (30%)
- International equity funds (10%)
- Gold funds (20%)
- Gilt funds (20%)
- Overnight/liquid funds (20%)

...
However, the disadvantage of this strategy is multiple transactions and tax implications.

The "Multi-asset funds" category is also supposed to do this for you. After a barrage of promotions by Motilal Oswal and Nippon MF who launched their Multi-asset NFOs this month, I had a look at this category. Also read up the excellent analysis by Freefincal where he seems to recommend it.

What are your thoughts? Can these funds be the core portfolio? One advantage I see is reduced transactions, consequently less exit loads and taxes.

[SmartCat]

Originally Posted by graaja

How about dynamically changing the percentage of holdings as well based on some market parameters like P/E ratio? For example, if P/E ratio is above x value, change the equity to debt split to 40:60, if P/E ratio is below x value, change the equity to debt split to 60:40. Wouldn't this give a little more buffer from sudden market corrections? What are your thoughts on this?

Problem with this strategy is that the current index PE ratio depends on a number of factors:

- Rare events like Covid-19 or War can serious affect the earnings of company earnings in the short term. If all companies report an average of 50% drop in earnings, then PE ratio will double. So despite a falling market, Nifty PE will still be around 30 or 40.

- The composition of an index can change over time, with larger allocation towards Tesla like companies with no earnings but huge valuation. So there is a possibility that average PE ratio of an index keeps going higher and higher, when compared to its long term average. In India's case, NIFTY had a high allocation to PSU & private sector banks in 2017/18. But large NPAs resulted in losses or drastic drop in earnings, spiking up the PE Ratio of Nifty.

- There is a link between interest rates & stock market index PE ratio. 40 years ago, S&P500 average PE ratio was 10 or 12. But now, S&P 500's average PE ratio has been 20 to 25. That's because interest rate in US and other developed countries have been dropping steadily over the past 40 years, making stocks more attractive (since fixed deposits yield nothing). Even in India, if interest rates keep dropping, Nifty's average PE ratio will keep rising over time.

So essentially, the problem with your strategy is fixing the PE ratio number and linking it to asset allocation between debt and equity.

Originally Posted by DigitalOne

The "Multi-asset funds" is also supposed to do this for you. What are your thoughts? Can these funds be the core portfolio? One advantage I see is reduced transactions, consequently less exit loads and taxes.

You can give this a try, but there is one big problem with these funds - they usually stick to 65% allocation to Indian stocks (so that they are classified as "equity funds" for tax purposes). So the fund manager has one hand tied behind his back, since he can allocate only a small percentage to debt (usually 25%) and gold (usually 10%)
https://www.valueresearchonline.com/...nd-direct-plan



So in a big market crash, these funds can see a significant drawdown.

[DigitalOne]

Originally Posted by SmartCat

You can give this a try, but there is one big problem with these funds - they usually stick to 65% allocation to Indian stocks (so that they are classified as "equity funds" for tax purposes).

Yes, that is true. Freefincal article also mentions the same.

So within the same category of nine existing funds plus three new kids on the block – Motilal Oswal Multi-Asset Fund, Tata and Nippon India Multi-Asset Funds -,we can have debt-oriented funds (Nippon, Motilal Oswal) or equity-oriented funds (ICICI, HDFC, Axis) or funds with variable tax status (Quant, SBI).

Nippon MF says probable allocation for domestic equity will be 50% (slide 10) and total equity including overseas equity will be 50-80% (Slide 9).

I am planning to invest in the Nippon multi-asset fund once it opens for subscription. This is for getting an international equity exposure to my portfolio.

[swiftnfurious]

Guys, are the Debt funds the (comparatively) safer option in the mutual funds space? A friend has some bulk amount which he wants to invest. Very very new to the stocks / mf space and is not greedy. He is happy with anything reasonably better than fixed deposit rates.

[hothatchaway]

Originally Posted by swiftnfurious

Guys, are the Debt funds the (comparatively) safer option in the mutual funds space? A friend has some bulk amount which he wants to invest. Very very new to the stocks / mf space and is not greedy. He is happy with anything reasonably better than fixed deposit rates.

I could suggest liquid funds, but current returns are no higher than FD returns. Heck, T bills are currently yielding less than 4%

If safety is the issue then stick to FD. If he doesn't need the money right away then PPF.

This whole MF business relies on imperfect information, if not misinformation. An impression has been created that returns WILL be higher than traditional instruments. The truth is unraveling now

[graaja]

Originally Posted by hothatchaway

An impression has been created that returns WILL be higher than traditional instruments. The truth is unraveling now

I understand the MF holdings can be volatile in the short run, but in the long, it definitely provides better returns to beat inflation. This requires some discipline and proper plan and execution from investor's side - like staying with a suitable equity:debt ratio, keeping funds that may be required in the immediate future in low risk investments (could be FDs), understanding various types of funds, regularly re-balancing, not panicking during volatile situations etc.

For example Gilt funds invest almost 99% in Government bonds and can be considered the safest, and they generate 8 to 10% returns if held in the long term. If the Government defaults on it's bonds, then God save us all

Having said that, if an investor is averse to any risk or volatility at all, or is not willing to put the effort to learn the basics, it is better to stay with traditional investments. Only issue is with the high inflation and low interest rates FDs in the end are going to yield negative returns.

Originally Posted by swiftnfurious

Guys, are the Debt funds the (comparatively) safer option in the mutual funds space? A friend has some bulk amount which he wants to invest. Very very new to the stocks / mf space and is not greedy. He is happy with anything reasonably better than fixed deposit rates.

Like hothatchaway mentioned, in the current scenario, even debt funds are volatile. If your friend does not get scared by the volatility and can stay invested for 3 or 5 years, then I am sure debt fund categories like Gilt or Banking and PSU will provide better returns than FDs. But if he needs the money in less than 3 years time, then over night funds are the best bet, but their yield is less than FDs. So, in that case, better to stay with FDs.

Originally Posted by SmartCat

Problem with this strategy is that the current index PE ratio depends on a number of factors:

Thanks a lot for the detailed explanation. Totally makes sense.

[raksrules]

If HUF Invests min Mutual funds, he can show the same as investment to claim deductions right. But is this allowed only for specific ELSS mutual funds or any mutual fund is ok?
I read a few things and it seems only Equity Linked Savings Scheme (ELSS) are allowed to be claimed.
I guess that means if I invest is something like Motilal Oswal N100 Fund of Fund using HUF, I cannot claim deduction.

Also when they say ELSS, I need to invest only in one of the funds from the list below?

https://www.moneycontrol.com/mutual-...urns/elss.html

And then I can claim deductions for showing investment in these funds?

[huntrz]

Now SEBI is after the only fund category which had some degree of freedom and hence returns and safety: Multicap funds. They should rather start a fund of their own and ask AMCs to shut down. Now Focused category is the only one left with some degree of freedom left. Perhaps SEBI wants people to start investing on their own. Are there enough smallcaps to absorb 27000 crore of funds moving from large cap to small cap universe.

https://www.livemint.com/money/perso...827117383.html

[sansvk]

Originally Posted by huntrz

Now SEBI is after the only fund category which had some degree of freedom and hence returns and safety: Multicap funds. They should rather start a fund of their own and ask AMCs to shut down. Now Focused category is the only one left with some degree of freedom left. Perhaps SEBI wants people to start investing on their own. Are there enough smallcaps to absorb 27000 crore of funds moving from large cap to small cap universe.

https://www.livemint.com/money/perso...827117383.html

This move just does not make any sense. An investor would again have to move back to large caps or Index funds. Who would pay for the redemption taxes?
Small cap promoters would be a happy lot.

[SmartCat]

This SEBI order is a huge negative to existing investors of Multicap funds. Over the next 3 to 4 months, multicap fund managers have to liquidate their largecap holdings & buy mid/smallcaps. That is, they will be forced to buy mid/smallcaps at higher and higher prices. On the flipside, existing investors in mid & smallcaps can possibly see a big spike in their NAVs over the next few months - because mid & smallcap stocks are likely to see Rs. 10,000 to Rs. 30,000 cr inflows



Since this is unfair to existing investors of multicap funds, I think fund houses will just "merge" their existing multicap funds with largecap funds and then launch a new multicap fund NFO. This is what the CEO of PPFAS has to say:

[huntrz]

Originally Posted by SmartCat

This is what the CEO of PPFAS has to say:

PPFAS has only one fund. They may move it to Focused category. PMS managers are already ecstatic.

[bullrun87]

The small cap universe isn't liquid enough to accommodate all the money what will chase them. We recently had sbi small cap close its doors to lumpsum investments. The small cap and mid cap universe isn't exactly cheap currently. A fund like kotak standard multicap which with an AUM of 29000 crores will be mandated to invest about 7500 crores in small caps. We must remember that the largest small cap fund itself is only 9000 crore. If SEBI doesn't change its order then we will likely see huge rally in small caps. Investors like me who have invested most of their money in multicap funds will have to look to other categories. AMC's will either merge with their large cap or large and mid cap funds. AMC's like PPFAS may even change from the multicap to focussed category. Small caps currently are around 8 percent of BSE 500. I feel that SEBI should have mandated a 10 or 15 percent exposure to smallcaps, 25 percent is way too high for the average investor. This revised mandate makes the multi cap fund too risky for my liking.

[adimicra]

Originally Posted by bullrun87

The small cap universe isn't liquid enough to accommodate all the money what will chase them. We recently had sbi small cap close its doors to lumpsum investments. The small cap and mid cap universe isn't exactly cheap currently. A fund like kotak standard multicap which with an AUM of 29000 crores will be mandated to invest about 7500 crores in small caps. We must remember that the largest small cap fund itself is only 9000 crore. If SEBI doesn't change its order then we will likely see huge rally in small caps. Investors like me who have invested most of their money in multicap funds will have to look to other categories. AMC's will either merge with their large cap or large and mid cap funds. AMC's like PPFAS may even change from the multicap to focussed category. Small caps currently are around 8 percent of BSE 500. I feel that SEBI should have mandated a 10 or 15 percent exposure to smallcaps, 25 percent is way too high for the average investor. This revised mandate makes the multi cap fund too risky for my liking.

Agree 100%. This is a perfect example of regulatory overreach. Multicap funds were created with the idea of giving complete freedom to the fund manager. This is completley contrary to that and a stupid regulation, if I may say so.

I am an investor in PPFAS and it is probably one of the very few funds which provides a good differentiation over passive index funds. In fact, I have sold everything other than 1 Nifty Index fund and PPFAS and I was very happy with my selection. Hopefully, PPFAS can just switch the category to focussed or value or whatever and continue doing what they are doing.

About the other fund houses which don't have such flexibility as they might already have funds existing in various categories, I see them merging funds. For example -
Merge multicap into largecap funds
Merge midcap/smallcap funds into multicap funds.

Some people believe this will lead to a big run up in mid and particularly smallcap stocks. I don't think so even though there might be some knee-jerk reaction. I honestly believe we do not have enough good quality smallcap companies in India and on top of that liquidity is a big issue. So, they cant absorb such huge inflow of funds. So, I believe fund houses will adopt one of the 2 strategies (rather than diverting huge funds to small caps) - change fund category OR merge funds.

I also believe that SEBI has killed the multicap category.. with 25% smallcap exposure, it is going to be too volatile and risky for most retail investors and I won't advise using multicap fund as a core portfolio holding for anyone. So, for investors like us, let's wait for the strategies from respective fund houses. If PPFAS doesn't change the category, I will probably sell my holdings and switch to index fund or aggressive hybrid fund.

[poloman]

A toothless and ignorant regulator like SEBI who is in the business of killing golden goose is one reason investors are vary of capital markets in India. This regulator let loose chor companies and promoters on the hapless investors. The same regulator did not move a finger when crores of investor money got stuck in debt funds. One can give thousand such examples of inefficiency and incapability.

Now why on earth they would dictate the portfolio of any mutual fund for that matter if they are giving good returns and not cheating customers. This move is aimed at benefiting the chor companies in the disguise of small cap companies. Many of them have dubious promoters and questionable corporate governance. Why should some one be forced to invest in such companies by the regulator? This is beyond ridiculous.