The Mutual Fund Show: An Alternative To 'Buy And Hold'
Mantri says investors should have "very, very moderate" return expectations going into 2022.
Buying and holding equity is often the best strategy for investors but may be not when saving for a specific purpose or expense.
That's according to research by Vijai Mantri, co-founder and chief investment strategist at JRL Money. "Of the 41-year period (starting 1980), we have seen in 14 years, where buy and hold has not worked."
"We observed that around one-third of the time, equity has not delivered the desirable result when someone has to take money out," he told BloombergQuint's Niraj Shah on 'The Mutual Fund Show'.
Mantri said investors can't predict how the markets would perform at the time of withdrawal. He suggested a three-pronged approach.
Investors need to have one very good financial adviser available to them at all points of time. 'Doing it yourself' may sound good and may be cheaper, but the end cost is very high.
Asset allocation. Don't get carried away with equity doing very well because no asset category does very well at all points of time.
And investors must figure out the right equity-debt ratio for their corpus and also take out funds via a systematic transfer plan.
Moderate Returns Expectations For 2022
Mantri said investors should have "very, very moderate" return expectations going into 2022. "You had a great run in 2020-21, economy is doing very well, all macro data are giving very good news, but I think most of them are already priced in."
Investors also need to be "extremely careful" of new age companies' IPOs. "The value destruction in these can be humongous. So be mindful of these pitfalls and when you make money in equity your confidence level goes up and it encourages you to take more and more risk," he said. "It is very important to sober down on these things."
Watch the full interview here:
Here are the edited excerpts from the interview:
Can you just briefly talk about why buy and hold may not be the best strategy at all times?
Vijai Mantri: Whenever it comes to equity, it has been taught to us that when you own equity, you should own it forever. So, buy and hold is the one thing that you should do in equity because equity is an one asset category where longer you go, better and better is the investment performance, and I haven't seen any asset category which can outperform equity, in the longer term, keeping all things in mind. But whenever you do a transaction, there's a buying and selling, and selling happen when you must redeem in equities to fund whatever requirement you have. What we have witnessed that buying and hold does work very well because equity represent businesses which are growing over the long term. But there are periods when you have to take money out from the equity, the equity may not be the best asset category to perform, and we have seen these numbers over the last 41 years and we have observed that around one-third of the time equity has not delivered the desirable result when someone has to take money out. To do that we have done some studies. What we had done last time was that suppose you are funding for your retirement, and you are 60 years of age and when you retire at 60 years of age, you have a corpus which you built, and you want this corpus to last at least for 20 years because life expectancy post retirement is 15 to 20 years. So let's assume that you have Rs 1-crore corpus. This entire Rs 1 crore is invested in index fund and then you take money out at the rate of 8%. So, suppose in first year, you have withdrawn Rs 8 lakh, this Rs 8 lakh is divided into 12 equal monthly installments of Rs 66,667, and then you increase this next year by 6% and next year by 6% and so on and so forth to basically to fund for the increase in prices because of inflation. Suppose you do that number and suppose you start on first April 1980, it does very well in 1982, 1983, 1984-85 for the next 20-year plus and you have the corpus that lasts even today. But there are periods, and one of those periods we have seen in 1992, 1993, 1994, 1995, 1996, 1997, 1998, 1999, 2000—that's a very long period, in this suppose you bought and hold equity and took money out on regular intervals, then the corpus is lasted anything between seven years to 18 years. So, it has not lasted 20 years. Then we have a similar kind of situation not only not from 1992 to 2000, we have also seen a similar kind of situation in 2006, 2007, 2008 and as recent as 2010-2011. So out of the 41-year period, we have seen in 14 years, that is approximately one-third of the time where buy and hold has not worked, if we have to take money out to fund your specific goal.
...Is there a right strategy for most, if not, all times, and most, if not all conditions, and if so, what is it and why?
Vijai Mantri: So, before we come to that conclusion or whatever alternative we offer, I think it's very important to understand why it happened. People say buy and hold is the best strategy, but when you're taking money out, there are some periods which are as high as one-third where the buy and hold has not worked. Why did it happen? It happens when you start your corpus when the market is peaking and you start taking money out when the market is in a bearish space. So your withdrawal happens, and the bearish phase hits you in the beginning of the corpus withdrawal. What happens is the reverse of SIP. SIP does very well in bearish markets where what happens when the prices are low, you buy more and more units. What happens when you take money out? Suppose during that time the market is in a bearish phase, then what happens that whatever amount you take out, it ends up in consuming lots of your units. So, the period which we have seen 1992, 1993, 1994, 1995, that was a period when the market in 1992 hit a very high level and then for next 10-11 years the same prices did not come. We have seen a similar kind of situation in 2006, 2007 and 2008, when the market had hit a very high number and then went into a bearish phase. SIP is great to accumulate assets when the market is in a bearish phase. The reverse of this—you have to take money out and unfortunately at that time the market is in a bearish phase, then you have a struggle. So, what we are trying to say is that the future is an uncharted territory, a random walk. We do not know when you start withdrawing whether the market will enter bearish space or bullish space... So, what is the solution available if you don't know what will happen in the future? The only source of information we have is the past data. In India, we have a 40-year data, I think it's a long enough time period—post-independence, post economic reform, we have seen all kinds of scandals, scams, whatever possible thing could happen has happened in the market. We looked at this historical data and came to a conclusion... One, investors need to have one very good financial adviser available to them at all points of time. DIY may sound very good and may sound cheaper, but the cost is very high. So, you need to have a very good adviser. Two, asset allocation. Don't get carried away with equity doing very well because no asset category does very well at all points of time. So, do your portfolio review periodically, more particularly when the asset category is doing too well, at that time you'll need to be more careful. Third, what are the other alternatives available to save more or take less money out. So, in the given illustration what we have done is instead of putting everything 100% into equity, we have split the corpus—I did a 10% debt-90% equity, 20% debt-80% equity, 30% debt-70% equity, 40% debt-60% equity. I did all the permutations and combinations, but nothing worked. Finally, what has worked is that I did a 50% allocation in equity and 50% allocation into debt. The equity allocation goes into equity over a 60-month systematic transfer plan. So, we are not doing allocation into equity at one time—the entire Rs 1 crore gets invested into debt, Rs 50 lakh is earmarked to be transferred to equity for the next 60 months and the balance Rs 50 lakh which is there in the debt, you take money out on a regular basis, same logic, but instead of 8%, we reduced that to 6%... otherwise the corpus will not last at all.
So, what we have done is that suppose you take Rs 6 lakh in first year in equal monthly installments of Rs 50,000 per month, and then you increase this yearly withdrawal by 6% per annum, the way we have done in the past illustration, then your corpus lasts even in those 14 years in which in earlier illustration the corpus lasted seven to 18 years. The moment you tweak it to 50-50 allocation, equity a location doesn't go at one time, it goes into 60 installments and you reduce your takeout from 8% to 6%, then in every given condition in the last 41 years, the corpus has lasted more than 20 years. In some of the cases 30 years, 35 years and the corpus is available even today. It can fund for the next 10-20 years.
What's with the equity STP amount and for how long does it have to be done? So out of the Rs 50 lakh that are invested into equities, what's the monthly installment and for how long does the investor have to keep on doing it?
Vijai Mantri: So, what we have done is that this Rs 50 lakh gets invested in a debt fund, whether it is a floater, equity, arbitrage depends on the risk profile and the taxability of the investor... So, Rs 83,000 per month, and you can do a number crunching—50 lakh divided by 60 installment—is the kind of money which goes into equity and the rest of the money remains in the debt product. So, what happened Rs 50 lakh invested in debt, first year you take out Rs 83,000. So, Rs 49,17,000 are still lying in debt and generating returns for you. So, on average this 60 doesn't get over in 60 months. It goes much beyond because what is lying, which has not got into equities, still is in debt and generating return. So, on an average, it gets over in 18 months’ time and the balance Rs 50 lakh services you for many months. What happened that after five years, the debt portfolio keeps serving you for a couple of years because you are taking this Rs 5-6 lakh and then increased by 6% per annum, so after a 7–8-year period you start withdrawing from equity. So, this STP will lot of flexibility, initial funding from debt will give a lot of flexibility in the sense suppose the market in which you are withdrawing the money in the beginning is in bearish phase, you are not getting impacted. Why seven, eight years? Because in seven eight years every market goes through a cycle... So, if you look at U.S. data, there are a period of 20-20 years where the market has not delivered return and that was from 1929 for next 20 years. But today, the economic cycles are much shorter because of the proactive steps taken by various policymakers. So, I do not think that you will have a 20-year period where the asset category won't deliver any return.
You obviously have back tested and I know we have that data. Can you just run us through that? I mean has it worked in all timeframes when the equities were bearish at the beginning of such a transition period or if the equities were bullish at the beginning of this transition period? Has that been a material difference to the returns and the longevity of such a strategy?
Vijai Mantri: Yeah, it was very, very interesting when we just did a small number crunching. So for instance, if your starting point is year 1992. If you did 100% equity allocation, the market remained in bearish phase for at least the next 8-10 years. So whatever money you had, the entire money got consumed in a seven-year period only. So, when you started in 1992, your entire corpus got over in 1999. So just a seven-year period. But suppose you did 50-50 allocation and then you did 6% withdrawal, the corpus lasted till 2013— so from 1999 it extended to 2013. So, it extended seven years to 21 years if we just look at year 1992. If you look at the year 1993. In earlier illustration, the corpus lasted till January 2007, some 14-year period, but in revised calculation, it lasted 25 years till the year 2018. Then you look at 1994 where the corpus lasted only for eight years, today, the corpus lasted 26 years in the revised calculation. So, we did all those 14 years where in previous calculations the corpus has not lasted for 20 years. When we did this number crunching, in every situation the corpus lasted more than 20 years. However, when the market was in bullish space, and when you were taking money out at that time, it did very differently. At that time, suppose let's look at the number for 1980s. Suppose you took money out on a monthly basis, and you invested the entire thing in equity, the corpus today would have been Rs 80-crore plus. In the revised calculation, is Rs 40-crore plus. Still, you are fine. Having less money is still fine, rather having no money at all.
What are the downsides that people should keep in mind if they want to deploy such a strategy?
Vijai Mantri: The downside is very interesting in my opinion, what happens to interest rate. I have assumed 7% on the debt side, but in 1992, 1993, 1994, all those 14 years, the interest rate was 14-15%, in 2010 it was 12%. But I've taken 7%. All these historical numbers we did number-crunching, the interest rate was much higher. But what I did was I took 20-years average of bond fund which deliver on 7%. But in current environment, this assumption can be questioned. Where are the 7% returns? Returns are 5.5%. But if you do number crunching at 5.5.%, still the calculation holds itself. And our view is that interest rates are going to go up, so retirees could look forward to 2022 as a great year in my opinion where interest rates will slowly start creeping up. So my advice to all the investors for 2022, like we said in the beginning of 2021: don't commit money into any long-term FD or any long-term bond fund, because in the rising interest scenario you will not get best bucks for your money. So, the risk to my strategy is that suppose interest rate—I have taken 7%—in the economy comes down then it is not the question of my strategy, the whole asset allocation model collapses.
Can you lay out the assumptions that when are we talking about the STP into an equity plan, does it have to be a particular kind of equity funds?
Vijai Mantri: I have done this with the Sensex because the Nifty came into existence only in 1994 and we did data crunching for 1980 and the Sensex was the only data available to us then. But suppose you do on an index fund, index fund return will be 1% higher because on an average last 40 years we have a dividend yield of 1.4% which is not being captured in Sensex number or Nifty number. So, suppose you do Sensex fund or large-cap fund, then I think the numbers would look much closer. Mid cap and small cap can remain really more volatile in my opinion. So the question is that if I do it with a small cap, then which mid and small cap do I pick? So then for every fund we need to do different kinds of numbers. So, if you are doing for retirement planning, large-cap index fund could be a great idea to start with.
Let's assume somebody's corpus is much higher and they believe that this strategy is great. Is there an option that within the equity portion, they can choose a mix of let's say 50% of the corpus is done exactly in the index fund, the remaining 50% can be used in say for example a mix of flexi cap, mid cap and large cap to enhance the returns?
Vijai Mantri: That could be a very interesting strategy and now we not only have these products, but we also have international equities as well. So, if you look at the period from 1992 to 2020, where the Indian equity market has not delivered great investment performance, during that period the global markets did very well. If Indian markets are not doing well, it means the Indian economy is not doing well, it means the currency is under pressure. So, at that time, part of the money into an international fund could be a great idea. Not only that, but you can also look at doing a part-allocation into gold to fund your requirement. And if we look at the gold as a product, on an average gold has doubled money in 11-year period—in 1992 to 2002-2003, unfortunately was not a great period for gold investing but at that time, fixed income did exceedingly well. So, if you look at numbers for fixed income, they are looking really, amazing. The returns are in double digits and that is the reason I told you need a good financial adviser because they can tell you that given this situation you should be in what kind of bucket, as far as even the fixed income is concerned.
Is there are anything we missed?
Vijai Mantri: You haven't asked me, but I can still tell you—in 2022, the return expectation of the investor has to be very, very moderate. You had a great run in 2020-21, economy is doing very well, all macro data are giving very good news, but I think most of them are already priced in. So, investors need to have a reasonable expectation. Two, investors need to be extremely careful of these new age IPOs or you know this micro-cap and all kinds of things because the value destruction in these can be humongous. So be mindful of these pitfalls and when you make money in equity your confidence level goes up and it encourages you to take more and more risk. I think it is very important you need to be little sober down on these things