Equity markets are down with no signs of looking up again anytime soon. And don’t you keep kicking yourself - you did not really sell when you were making so much money!
Extensive research shows that we simply hate to take money calls. Status quo is so comfortable. If that sounds like you, listen up - we have just the product for you!
Most of us simply hate to sit down and take a long hard look at our portfolios. Especially now, when it is bleeding so heavily on stocks and equity mutual funds. But jog your memory a bit, each one of us, as a long-term investor was making a pretty neat profit a year and a half ago. But we just sat pretty, happy but pretty. And today what are we doing? We're still sitting - unhappy and not so pretty!
The economic meltdown this time around is a nasty reminder of a painful gap in our investment efforts - the ability to rebalance our portfolios and stick to our asset allocation. So today, we will look at Lifestage Mutual funds. What are these and more importantly, are these the answer to our biggest investment handicap rebalancing?
The Big Question: Are lifestage funds the answer to your rebalancing handicap?
Let's understand lifestage funds or asset allocation funds before we see if we want to use them.
Long term equity will create wealth ONLY if we follow the rules.There are three simple rules:
# Invest regularly
# Make an asset allocation
# Rebalance portfolio
It sounds easy but almost impossible to do.
# Investing regularly is now better under control with the emergence of SIPs as viable investment vehicles
# But the other two are still out of whack
# Asset allocation is the split of your savings into various buckets - debt or risk free, equity or risk bearing, real estate and gold
# And rebalancing the portfolio is to keep periodically going back to the asset allocation that you had decided upon
# What is rebalancing?
a. Suppose in 2004 you are happy with a 50:50 split of your savings between debt and equity.
b. And due to rising markets by 2007, this is now 30:70. Without you doing anything, the rise in the value of your stock portfolio has skewed your asset allocation towards equity.
c. So this is the time you should sell equity and buy PPF or bonds or make FDs.
d. But could any of us have done this in 2007 when the markets were gaining 1,000 points every fortnight?
e. Investing is all about emotions and to sell the rising asset is near to impossible. None of us could get ourselves to doing it, knowing fully well that we must do it.
# So the investor need is of a product that will deploy his savings in the chosen asset allocation and then rebalance the portfolio according to the ratio chosen.
Lifestage Mutual Funds - this is the category of investment you should closely look at. If you really cannot sit down at least once every six months, do the math, buy and sell into investments to ensure your asset allocation is maintained. I personally know how important doing this is. But find it impossible in practice to do it.
So a quick heads up on what life stage funds are. Life stage funds are basically fund of funds, which maintain an asset allocation suited to investors of a particular age group and keep on re-balancing their asset allocation after fixed intervals of time to maintain the defined allocation between debt and equity.
Essentially if you had opted for an equity heavy- high risk high return Fund of fund, what would have happened. Sometime in October 2007 because of the bull run, the equity weightage would have gone over 80 per cent and the fund managers would have sold some equity to bring the asset allocation back to 70 to 80 per cent and moved the amount of profits booked in equity into debt. So when the slide down began in end 2007, your portfolio was cushioned much more against losses because of the safer debt.
Essentially then, there are three things in which Lifestage Mutual funds work:
They are fund of funds. They maintain as asset allocation depending on your age or your risk appetite. And most importantly they not only automatically rebalance portfolio held on your behalf periodically, they also enable a larger decision to move from risky to less risky portfolio every time you cross a certain age and need to change the asset allocation.
Now, are there enough Lifestage funds to choose from?
These funds are not so popular in India yet with no scheme having a corpus of more than Rs 100 crore, with the smallest just at Rs 4 crore. But a down market like this will encourage interest in a product that will automatically rebalance for you.
One of the top performing Lifestage funds comes from Fund House Franklin Templeton. As a fund house Templeton was in oblivion during the go years of 2006-7, but in this down market, we're seeing a resurgence of the fund house as it emerges as a stable return fund manager.
# They will invest in other FT funds
# FI Lifestage Fund of Funds, they revert to the chosen asset allocation every six months
# There is a choice of 5 schemes that reduces the equity component as you move up the age ladder or down the risk ladder. The schemes are:
1. 20s plan: 80 per cent in equity
It is a 5 star Morningstar rated fund. While over the past 3 years it has underperformed the market slipping a bit, over 5 years it has returned almost 13 per cent year on year, whereas the Sensex has given 5 per cent. The expense ratio is of 0.75 per cent along with the expenses that you pay for the underlying funds.
It becomes difficult to benchmark these schemes because of the asset mix but we can look at a broad return by the market and see what FDs were returning over the same period.
2. 30's plan: 55 per cent in equity
This is a 4 star Morningstar rated fund
Sensex would have lost you 10 per cent a year over the last three years and with this you are down 7.5 per cent a year because of the cushion of 45 per cent debt. The expense ratio is at 0.75 per cent.
3. 40’s plan: 35 per cent in equity
This is a 4 star rated fund. Sensex would have lost you 10 per cent, and this fund lost 6.4 per cent. 0.50 per cent is expense ratio (Notice how expenses come down as allocation changes towards debt).
4. 50's plan: 20 per cent in equity
The only scheme in this that is low rated is the 50s fund with just a 2 star Morningstar rating.
5. 50 plus floating rate plan: 20 per cent in equity
This is a 4 star rated fund and the expense ratio is of 0.25 per cent.
For investors in their 30s and 40s using these schemes for no sweat investing, makes sense.
Now, the first fund house we are looking at is Franklin Templeton.
Fund:FT India Life Stage FoF
3-year risk-adjusted return (for investors in their 20s): -12.0 per cent
Morningstar rating: 5 star
Fund: FT India Life Stage FoF
3-year risk-adjusted return (for investors in their 30s): -7.5 per cent
Morningstar rating: 4 star
Fund: FT India Life Stage FoF
3-year risk-adjusted return (for investors in their 40s) : -6.4 per cent
Morningstar rating: 4 star
Fund: FT India Life Stage FoF
3-year risk-adjusted return (for investors in their 50s) + FRP: -0.7 per cent
Morningstar rating: 4 star
Fund: FT India Life Stage FoF
3-year risk-adjusted return (for investors in their 50s): -4.2 per cent
Morningstar rating: 2 star
The next fund house we are looking at is Birla Sun Life. Interestingly, this is one of the rare fund of funds which has an open mandate to invest 30 per cent of its corpus in well performing funds outside of the Birla Sunlife umbrella of funds. Though the current portfolio they hold in all there 3 plans - aggressive, moderate and conservative does not include any outside fund. Let’s check out the fund’s performance.
Investors with aggressive risk appetite can look at the aggressive option, which currently has 75 per cent of its corpus in equity and 25 per cent odd in debt over a 3 year period. In this fund you've lost about 8.5 per cent while the equity indices are down 10 per cent. So not so bad. Though only 3 star rated from morning star because it has slipped up on performance in other periods.
The other two funds - moderate and conservative have done well being 5 star and 4 star rated respectively.
A moderate fund has about equal weightage in debt and equity. So it has cushioned the downside very well restricting it to only negative 4 per cent returns.
The conservative is with 80 per cent in income and bond funds – the current corpus also has a huge amount of cash. And the fund has done well in preserving capital for investors. A small plus point – it has 2 per cent return over 3 years. The expense ratio in all 3 funds is a standard 0.35 per cent.
AmongstICICI Prudential, we will look at four funds. Again, varying in investments as per the risk appetite with heavy on equity in aggressive and tapering down to very little equity in very cautious. We find only one 4 star rated by morning star fund and the rest are 3 stars and below. The returns are as given below:
# ICICI Pru Aggressive (an equity heavy product): -10.7 (3 star rated)
# ICICI Pru Moderate balanced with: -6.4 (4 star rated)
# ICICI Pru Cautious: -4.3 (2 star rated)
# ICICI Pru Very Cautious: 0.4 (3 star rated)
A cautious fund should not have given negative returns. The very cautious has done fine. Returns will vary. So we'd say - stick to 4 star and above rated funds amongst asset allocation funds from the list that you've just seen.
Now for all of you who promise to rebalance your portfolio yourself and diligently every year, we have the winning list of mutual funds in every category - equity, debt, money market, gilt. For do it yourself investments, Morningstar, our knowledge partners have culled out award winning funds of 2008 and here they go:
# BlackRock Top 100 Equity Fund wins hands down in India Large Cap category
# Reliance Growth Fund is the best fund in India Small/Mid Cap
# Sundaram BNP Paribas Tax SaverIndia walks away with ELSS or Tax Saving honours
# Another DSP BlackRock fund - the Balanced Fund India Moderate Allocation come out tops
# Reliance Monthly Income PlanIndia Conservative Allocation is the best performer in MIP
# LICMF Liquid Fund India Liquid bags the prize in the liquid fund category
# ICICI Prudential Short Term PlanIndia in the Short-Term Bond category
# Fortis Flexi Debt Fund gets ahead in the Long-Term Bond category
# In the short government gilt funds, ICICI Prudential Gilt treasury is the winner
# In long term Gilt funds, it is Canara Robeco
Now, it is time to look at the new product of the week: LIC Jeevan Varsha
# Closes: 31 March 2009
# Money back plan
# You get money back every three years
The relevant number to check is the return per year over the life of the policy. I've used the XIRR function to calculate the returns. You too can use this tool if you can work an excel sheet.
The IRR of the 12 year policy is: 6.81 per cent for a 10 per cent return and 3.88 per cent for a 6 per cent return. Clearly DON’T BUY.
The IRR of the 9 year policy is: 5.44 per cent for a 10 per cent return and 2.56 per cent for a 6 per cent return. DON’T BUY.
And that brings us to the end of today’s show.