Mutual Funds

Fund query: Equity-only portfolio not ideal for retirees

Aarati Krishnan | Updated on January 23, 2021

I am a 63-year-old retired person. My risk profile is moderate. I had a surplus amount of ₹45 lakh which I don’t need for the next 10 years. I invested it across three debt mutual funds in December 2020. I have started monthly Systematic Transfer Plans (STP) of ₹15,000 from each debt fund into the following equity funds for a period of seven years from January 2021. My source debt funds for the STPs are Mirae Asset Short Term, Axis Banking & PSU Debt and Kotak Low Duration Fund. My target equity funds for the STPs are Mirae Asset ESG Sector Leaders Fund of Fund, Axis Growth Opportunities and Kotak Pioneer. My aim is to grow the surplus amount at an annualised rate of inflation plus 3 per cent by the end of 10 years. Is my investment strategy and selection of mutual fund schemes on the right track?

RBS Reddy

The strategy you have outlined does look appealing in theory. Investors who used the SIP (or STP) route to invest in active large-cap funds since January 2011 have averaged an annualised return (XIRR) of about 12 per cent and those who invested in multi-cap funds have managed 14-15 per cent. This comfortably beats inflation rates. However, this is no guarantee that the next 10 years will play out the same way as the last 10.

With the stock indices nearly doubling and many small-cap stocks trebling in the past year, valuations of Indian indices are at lifetime highs of over 35 times. Amid Covid-related damage to the economy and earnings, stock prices have headed steadily higher on hopes of a V-shaped recovery. This hope rally has been further lubricated by ample liquidity — both from a rush into India by foreign portfolio investors who are able to borrow at near-zero rates in developed markets and hordes of domestic retail investors who have made their equity debut in the last few months.

The stock market rally, at this point, has many indications of a bubble. No one can say when and if there will be a correction.

But if a correction does unfold, the fall in stock prices can be quite severe. Previous corrections from such phases have seen Indian indices lose 40-50 per cent of their peak value.

Yes, using the STP route to phase out your investment into equities, as you intend to, can help mitigate this timing problem (it all depends on whether a correction unfolds and how soon). But the flip side is that, by using STPs over long periods such as seven years, you will also be delaying your deployment in equities and putting off the compounding process, making 10-year targets difficult to attain.

Therefore, you should look to fully move your debt fund investments into equities only if you are willing to put up with the risks of not earning a reasonable return and suffering a significant capital loss in the interim.

Though equities do tend to beat inflation in the long run, there are no guarantees that this will happen over a time frame you choose.

Given the above imponderables, we would suggest not moving into an equity-only portfolio and using asset allocation even to deploy your surplus of ₹45 lakh. You can allocate 25-50 per cent of this sum in guaranteed instruments like GOI 7.15 per cent floating-rate savings bonds and use the STP route to slowly invest the remaining sum in equities.

The choice of equity funds you have mentioned would not be suitable for your long-term goal. All the funds you have mentioned are recent new fund offers of thematic funds. Instead, it would be best for you to choose index funds playing on the Nifty 50, Nifty Next 50 and Nifty Midcap or Nifty 500 for your STP. This will ensure that you don’t miss out on market gains because of a wrong choice of active fund, theme or fund manager.

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Published on January 23, 2021

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