AskBQ: How Many Mutual Fund Schemes Are Too Many? Buy Equity? Retire Early? 

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Early Retirement

Name: Peter Tong

Query: The 53-year-old currently resides in West Asia. Tong wants to know if he can quit his job in two years and move back to his home in Goa, India. He wants to stop working and pursue his personal goals such as taking road trips in India at least five times a year. Tong also wants to set aside Rs 35 lakh to buy a sports utility vehicle. He points out that he and his wife have no liabilities and no dependants.

Portfolio Information: Tong has saved up Rs 2 crore in fixed deposits and another Rs 50 lakh is invested in mutual funds and life insurance schemes. He can continue to save Rs 3 lakh every month until the end of next year, but a large part of this will go toward purchasing the SUV.

Expert View: BloombergQuint spoke to Kiran Telang, certified financial planner and SEBI-registered investment adviser, about Tong’s query.

On the face of it, Telang said, Tong’s savings seem to be sufficient to support his goal of retiring in two years. This is assuming a post-tax return of 6 percent on his investments, an inflation of 5 percent and a life expectancy of 90 years. When he retires, Telang estimates, Tong will end up with a corpus of Rs 3.5 crore, from which he will have to fund his car purchase.

“A big positive in his case is that he has his own house and no liabilities,” Telang said. Tong will be able to manage with his retirement corpus if he restricts his monthly expenses to Rs 60,000 for the most part and does not cross Rs 90,000 per month at any stage, she said. At expenses of Rs 90,000 per month from the onset, Tong’s savings will get completely depleted at the age of 89, Telang said.

Telang also cautions that Tong needs to review his medical insurance and ensure that he and his wife have adequate cover. A large medical expense could dramatically change the state of his finances in the future, she said.

“The sufficiency of corpus needs to be checked on an ongoing basis. We are looking at a period of 30-40 years of income from the corpus. This is a very long period and things will change in terms of products, returns and taxation. So, what seems good today might not really suffice. It is always better to have some extra cushion to provide support in case situations turn out to be different than what was planned for,” Telang said.

She also said when Tong returns to India, his fixed deposits would be taxed as a resident and so his returns after tax would likely be lower. Telang suggested that Tong should consider finding an investment that is more tax efficient for the long term.

Fund Selection

Name: Rajkamal Singh

Query: Singh has started six systematic investment plans worth a total of Rs 6,000 a month. His goal is to create a retirement corpus and he wants to know if his selection of funds is appropriate. Singh wants to accumulate Rs 1.5 crore in 15-20 years.

Portfolio Information: Singh has split his investments into the following funds:

• SBI Small Cap
• Nippon Small Cap
• Axis Bluechip
• Mirae Asset Emerging Bluechip
• Mirae Asset Large Cap
• Tata Digital India

Expert View: BloombergQuint reached out to Amol Joshi, founder of Planrupee Investment Services, to get an answer to Singh’s query.

“Yes, the portfolio needs consolidation. Six schemes are far too many,” Joshi said. “A portfolio of any size can be managed with four-six schemes. There are two small-cap funds, two large-cap, one large and mid cap and one thematic fund. It is an aggressive portfolio. The 33 percent weight in small caps can be reduced.”

Joshi suggested that Singh should choose one of the two existing small-cap funds, and one of the two large-cap funds. He also said Singh’s allocation to the thematic fund be shifted to a multi-cap fund, or can even be used to top-up investments in the remaining funds equally.

To meet his goal of Rs 1.5 crore, Singh will have to increase his investment every month when income rises, according to Joshi.

Finally, Joshi advised that Singh set aside an amount to build a contingency fund, which he has not put in place yet. Once Singh has accumulated six months of expenses, he can then divert the amount back into the other funds, Joshi said.

Market Fundamentals

Name: Hardik Vachhani

Query: As per the fundamentals, markets across the world must fall when the real economy is contracting every hour under the lockdown, said Vachhani. But the Fed’s decision to pump money into the system has, in the past, kept markets afloat.

Expert View: BloombergQuint spoke to Parthiv Shah, director at Tracom Stock Brokers, about Vachhani’s query.

The liquidity provided by the Fed has brought a sense of stability to equity markets globally, Shah said, adding the selling that was in evidence by foreign institutional investors at the start of the year has reduced substantially. Volatility, as measured by the VIX, has also fallen from extremely elevated levels.

When it comes to buying fresh equity though, Shah said, it makes more sense to go with the market leader in each sector. A lot of market leaders have seen significant erosion in value, so demand destruction or impact on results is already factored in the current prices. Some companies are quoting at valuations that are eight to 10-year lows.

Having said that, with the economic impact of the lockdown, it might well come to pass that a lot of the smaller players in various sectors will cede market share to the leaders, Shah said.

Also, any purchases right now will have to be taking into account the ongoing pandemic. So, at this point one should avoid buying into sectors like hotels or movie exhibitors because it’s likely to be really long for them to recover, he said. Any sector, which is capex-heavy and still has a lot of balance sheet debt is a clear avoid, according to Shah.

“We are looking at the banking sector. The private sector names have an advantage—Kotak Mahindra Bank, HDFC Bank, Axis Bank and ICICI Bank are likely to benefit. In the chemicals sector, all companies that have scale will benefit because a lot of the global companies are looking at India for sourcing as an alternative to China. So you have Aarti Industries or Atul or even Navin Fluorine that will continue to do well,” said Shah.

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