[Maverick Avi]

Originally Posted by midazolam

If I close the SIP in the regular fund and start another SIP in the direct fund, will it continue and add to the previous corpus amount or will be separate from it? Thanks

Fund switch from regular to direct would mean you are basically redeeming your regular fund and then investing the amount in direct fund. In this case the previous corpus has moved over to direct fund and now your SIP can continue in direct. Hence the tax implications.

When you simply cancel an existing SIP in regular fund and start a new one in direct fund then essentially its not a switch. Its 2 different funds under your portfolio with one having an active SIP.

[rajushank84]

I have a super-newbie question for the investment & MF gurus here, looking to get some basics right.

If I understand correctly, to generalize (not always)

• When interest rates fall, debt funds generally go up and vice versa
• Economy doing well usually results in stock market doing well and interest rates going up, and vice versa

However, now seems to be an odd point

• Interest rates have stayed low for a while
• Nifty and Sensex are at an all-time-high

This means, both equity and debt markets are possibly overvalued? Is this possible?

Am I making sense?

Kinda related: What are y'all's opinions on a 50-50 long-term strategy, with periodic rebalancing?

[pvivek2]

You're bang on - right now is a very odd moment, where equity is at an all time high and interest rates are at a multi year low! Part of this also because, the US fed has been maintaining a near-zero interest rate resulting in the markets reaching an all time high but still believes the economy isn't strong enough yet to start raising rates. Similar is the situation in other economies like our own where govts haven't dared raising rates yet given the overall state of post covid impact.

Given that we are at an odd moment in economic history, where we go from here is anybody's guess! However I'd suggest to go with 70:30 in favour of equities, simply because a) Even though equity markets are at their highest, basis forward looking pe projections, it seems to be justified. Coupled with the fact that covid has resulted in market share transition from the unorganised sector to listed companies in most industries. b) If you're the kind who would stay invested for ~5-10+ years, then equity is almost always going to give a better return than debt. Anything short term than that, you may look at a higher proportion of debt

Originally Posted by rajushank84

I have a super-newbie question for the investment & MF gurus here, looking to get some basics right.

If I understand correctly, to generalize (not always)

• When interest rates fall, debt funds generally go up and vice versa
• Economy doing well usually results in stock market doing well and interest rates going up, and vice versa

However, now seems to be an odd point

• Interest rates have stayed low for a while
• Nifty and Sensex are at an all-time-high

This means, both equity and debt markets are possibly overvalued? Is this possible?

Am I making sense?

Kinda related: What are y'all's opinions on a 50-50 long-term strategy, with periodic rebalancing?

[DigitalOne]

Originally Posted by rajushank84

If I understand correctly, to generalize (not always)

• When interest rates fall, debt funds generally go up and vice versa
• Economy doing well usually results in stock market doing well and interest rates going up, and vice versa

However, now seems to be an odd point

• Interest rates have stayed low for a while
• Nifty and Sensex are at an all-time-high

This means, both equity and debt markets are possibly overvalued? Is this possible?

Yes, your understanding is right. Economy is a cycle :

Economy grows ----> Asset (includes stock markets) prices go up ; Commodity prices go up ---> Inflation ---> Central banks try to control inflation ---> Increase interest rates ----> Bond yields increase ---> Debt funds fall ---> Economy cools down ---> Assets/Commodities cool down ----> Inflation comes down ---> Central banks reduce interest rates to stimulate economic growth ---> Economy grows.

We are in the 2nd/3rd phase of above cycle, that is asset/ commodity (check international oil prices) have gone up considerably in last 3 months in anticipation of rapid economic growth in post-pandemic environment. Inflation is trending up worldwide.

[pradkumar]

There are a lot more factors that affect debt funds. The government borrowing is one of the biggest factors. 1) Currently, the government is on a borrowing spree because of Covid. 2) High inflation is another. 3) The US Fed raising interest rates leads to a flow of capital to the US. They are planning to raise them in 2023. 4) The state of the economy. The Indian economy is at its worst and economists are saying that it is doing worse then the second term of Manmohan Singh.

Pradeep

Originally Posted by rajushank84

• When interest rates fall, debt funds generally go up and vice versa
• Economy doing well usually results in stock market doing well and interest rates going up, and vice versa

[download2live]

What is the feedback around index tracking funds in India? Any recommendations?

S&P500 tracking funds are very popular in the passive investment community (Bogleheads ). What has been the experience of members with index tracking funds wrt to mutual funds?

[graaja]

Originally Posted by rajushank84

Kinda related: What are y'all's opinions on a 50-50 long-term strategy, with periodic rebalancing?

I have been following the portfolio rebalancing method with a 50-50 balance. But so far I have been doing this by adjusting the monthly inflow to maintain the 50-50 balance. My idea is to continue with periodic re-balancing once 3 months post retirement. I wanted to test this theory. So I created two trial portfolios in Value Research. I selected the following funds to provide diversity - 3 in debt and 3 in equity. Investment of 2 lakhs in each fund, 5 of them on 1st April 2013, and one on 1st April 2014. I was expecting the re-balanced portfolio to be higher in value than the one that is not re-balanced. But was surprised at the results.

The latest value of the portfolio that has not been re-balanced.


The latest value of the portfolio that has been re-balanced.

One drawback of the re-balanced portfolio is the tax. I just did an approximate tax calculation with 10% of tax on LTCG though the taxation on debt and equity funds are different. The tax outflow is about 60K. However, the tax accounts only for 25% of the difference of 2.4 Lakhs between the two portfolios. I think the main issue is periodic outflow from the equity funds when market is growing continuously for months together.

Maybe instead of doing a re-balance at fixed interval, re-balance should be done based on some thresholds like rebalance only if there is a 5% difference between debt and equity?

What are the thoughts of experts?

I am attaching the excel sheet that I used to do the rebalancing.
Trial Portfolio Rebalancing.xlsx

[SmartCat]

Originally Posted by graaja

I have been following the portfolio rebalancing method with a 50-50 balance. But so far I have been doing this by adjusting the monthly inflow to maintain the 50-50 balance.

Correct. Professionals or business owners with regular income and salaried individuals should try to achieve 50/50 balance by investing in an asset (debt MF or equity MF) that is lower in value. Only retired folks or those with irregular income should sell units to maintain balance.

The latest value of the portfolio that has not been re-balanced. The latest value of the portfolio that has been re-balanced.

The former is straight forward. How did you get the re-balanced portfolio results? Did you manually check NAVs for each quarter over the past 10 years? Impressive work!

I was expecting the re-balanced portfolio to be higher in value than the one that is not re-balanced. But was surprised at the results.

Three things:

1) Objective of rebalancing is not necessarily to generate highest possible returns. Anyway, there is only a tiny difference between the two strategies and that too, its because the markets are now at all time highs. Check the same results at different points of time between Jan 2020 and June 2021.

2) Rebalanced portfolio will have lower drawdowns and smoother equity curve. The fall from the peak is likely to be significantly lower.

3) Rebalancing generates regular cash flows (since we are selling an asset that has gone up, every quarter, at a profit). This is highly desirable during retirement. Without rebalancing, there will be no discipline/process when it comes to cash flow generation. We might end-up pulling out funds from the wrong asset (debt MF or equity MF) or at the wrong time.

One drawback of the re-balanced portfolio is the tax.

That's a big drawback, agreed.

Maybe instead of doing a re-balance at fixed interval, re-balance should be done based on some thresholds like rebalance only if there is a 5% difference between debt and equity?

That's a good idea. Is it possible to "test" the above strategy? I have a few more ideas:

1) Can you add Gold to the mix and check the results? Gold has generated around 12% pa in the same time period. Keep Gold percentage at 10% and 20%. To keep things simple, choose one flexicap fund (50%), one gilt fund (30% or 40%) and one Gold fund (20% or 10%) for calculations. Since Gold and Gilt funds perform extremely well during a crisis, addition of Gold should further smoothen the equity curve and reduce drawdowns. Since we have sovereign gold bonds that give additional interest income, the above exercise should be an eye-opener.

2) How does monthly (instead of quarterly) rebalancing affect returns, equity curve, drawdown and taxes, for each of the above combinations?

Also, plot the equity curve with rebalancing and without rebalancing. Let's see the smoothness of the curve and also the drawdown on each strategy. Check this link: https://zerodha.com/varsity/chapter/equity-curve/



See if you can get a graph like above for each strategy for comparison. I know this will be hugely time consuming, so take it one step (idea) at a time.

[JediKnight]

Originally Posted by rajushank84

[*]When interest rates fall, debt funds generally go up and vice versa

This means, both equity and debt markets are possibly overvalued? Is this possible?

When interest rates fall debt funds with long duration go up. Short duration funds will follow the interest rate cycle. So when interests rates are down their yields go down. When the interest rates rise their yield will rise.

I believe we are at the bottom of the interest cycle. Therefore it may be wise to invest in short term debt funds.

Also I believe that the stock market is inflated by excess liquidity in the system due to pandemic response by various central banks specially the US fed. If we don't have anymore covid waves and the global economy truly recovers this money will get eventually pulled out. The economic recovery and the easy liquidity disappearing will work in opposite directions. I have feeling the stock market will move horizontally in a zig zag manner. Implying it wont give any real average returns for the next few years but we will see dips and rises now and then. This may be a good time to build equity portfolio for the long term, by investing during the dips.

Of course take this with a kg of salt. I am no expert.

[graaja]

Originally Posted by SmartCat

The former is straight forward. How did you get the re-balanced portfolio results? Did you manually check NAVs for each quarter over the past 10 years? Impressive work!

Three things:...

That's a good idea. Is it possible to "test" the above strategy? I have a few more ideas:

1) Can you add Gold to the mix and check the results? Gold has generated around 12% pa in the same time period. Keep Gold percentage at 10% and 20%. To keep things simple, choose one flexicap fund (50%), one gilt fund (30% or 40%) and one Gold fund (20% or 10%) for calculations. Since Gold and Gilt funds perform extremely well during a crisis, addition of Gold should further smoothen the equity curve and reduce drawdowns. Since we have sovereign gold bonds that give additional interest income, the above exercise should be an eye-opener.

2) How does monthly (instead of quarterly) rebalancing affect returns, equity curve, drawdown and taxes, for each of the above combinations?

Also, plot the equity curve with rebalancing and without rebalancing. Let's see the smoothness of the curve and also the drawdown on each strategy. Check this link: https://zerodha.com/varsity/chapter/equity-curve/

Attachment 2171541

See if you can get a graph like above for each strategy for comparison. I know this will be hugely time consuming, so take it one step (idea) at a time.

In Value Research, it is possible to check the value of the portfolio on a particular date. So, I recorded the value every quarter and decided on the buy/sell value to rebalance and then executed these buy and sell transactions. This can be done for a monthly interval as well, but will be very time consuming as there will be 3x the number of entries. But I expect the final result to be almost the same.

As you rightly mentioned, the rebalance strategy should not be considered to generate maximum returns, but give a much smaller volatility that is better suited post retirement.

Whenever I get time, I will work on the following and share the results.

1. Rebalance only if the difference between debt and equity is more than 5%
2. Add gold to the mix
3. Plot the curve for re-balance vs. no re-balance portfolios.

[daretodream]

Seeking advice

One of my friends (not a Bhpian) wants to invest:
1. Bulk amount of INR 7Lakhs
2. Monthly SIP of INR 35 K

He has high risk appetite(willing to go 100% Equity MF). He will not need the fund atleast for next 8 years.

I suggested him to start SIPs right away since he has a long term outlook and no need to time the market.

However, for bulk amount investment of 7Lakhs, we are not sure what to do - as markets are at their peakiest.

Kindly suggest on the bulk amount investment part.

[graaja]

Originally Posted by daretodream

Kindly suggest on the bulk amount investment part.

For the bulk investment, you could park the fund in a liquid fund and execute a systematic transfer plan (STP) from the liquid fund to an equity fund. This will be like an SIP and will do cost averaging.

[huntrz]

Originally Posted by rajushank84

If I understand correctly, to generalize (not always)

• When interest rates fall, debt funds generally go up and vice versa
• Economy doing well usually results in stock market doing well and interest rates going up, and vice versa

This means, both equity and debt markets are possibly overvalued? Is this possible?

Am I making sense?

I am not a guru but here is my understanding.
You are right about equity and debt correlation except that during major crashes which cause financial crisis and economic uncertainty like 2008 and 2020, both equity and debt will underperform and gold will give better returns. Some of it can be handled due to inverse relation between interest rate and bond yield. So longterm GILT as well as gold can be a hedge.
In 2020 due to excess liquidity equity rebounded sharply but the results of tightening excess liquidity is yet to come.

Secondly though gold returns were better during the crash but I see gold as the actual currency and not an asset class. Gold is giving returns because centrals bank are bringing down the value of paper money. Therefore gold is a hedge than a real asset.

[DigitalOne]

Corporate and credit-risk debt fund investor, please be extra careful !!

Default rates among corporate bond issuers to rise in medium term

According to Crisil, there have been two defaults from the AA category on account of the pandemic

Rating agency Crisil expects default rates among corporates issuing debt instruments to rise going forward as pandemic-induced regulatory measures get phased out.

Source : Mint

[hondafanboy]

Originally Posted by graaja

For the bulk investment, you could park the fund in a liquid fund and execute a systematic transfer plan (STP) from the liquid fund to an equity fund. This will be like an SIP and will do cost averaging.

In this method , is it advisable to transfer large amount like 10L in one shot into the chosen liquid fund ? And then execute STP if needed or just leave the amount there ? Can you suggest any liquid fund ?


I have couple of SIPs running for sometime now so I am kind of comfortable with that. But for a large amount in my Saving account that I want to take out and put somewhere safe for better returns, liquidity and tax friendly, and I am not able to decide what's the best method to do this.