A systematic investment plan is the best way to ensure disciplined investing, according to A Balasubramanian, chief executive of Aditya Birla Sun Life Asset Management.
The market is bound to be volatile on occasions but the key to an investor’s success is to stay focused on the purpose - to generate wealth or income for a longer period of time, Balasubramanian said on the first anniversary edition of BloombergQuint’s The Mutual Fund Show. “Market is driven by inflows, outflows, sentiments, optimism, pessimism and all other things. But what remains constant is the purpose for which you come into mutual fund investing.”
To that end, he advises staying with SIPs irrespective of market conditions.
The principle I apply is that 50-60 percent of your net take-home salary should go towards an SIP, such that you can withdraw it any time or stop it, in case you have other requirements.A Balasubramanian, CEO, Aditya Birla Sun Life Asset Management
Here are edited excerpts of the conversation.
Over the last 18 months, we have seen big transformations in mutual fund investing. The markets have gyrated up and down. The Indian mutual fund investor has by and large stuck to his investing course. That is a sea change from what used to happen.
Especially in the last one and a half years, the growth in the mutual fund industry has been significant. At the same time, the maturity level of investors has been growing continuously, not just during this period but since the 2009 crisis. I have been seeing this trend since the 2008-09 crisis in the U.S. markets. I have seen the number of investors improving which is a reflection of the way people react in terms of increasing exposure to mutual funds and other investments.
I have also been tracking queries that come in especially during market volatility. We see if investors have questions on redemptions or are asking questions on subscriptions. So, the number of queries for subscriptions used to always be higher than the number of queries that came on redemptions. That marks the maturity of investors and distributors who have been advising these investors and also the mutual fund advisors who are helping investors to stay put from the longer-term point of view. That is what I call the structural change that the mutual fund industry has seen in the last few years. It is the proof of the maturity of all players who have been responsible for growing its size.
What is the most challenging aspect of your job?
During market volatility, the challenge lies in determining how to manage the portfolio risk and secondly, how to ensure that the company’s communication meets investors’ expectations. Since all of us are dealing with money, which is bound by day-to-day fluctuations, in these kind of occasions, it is challenging to ensure that your portfolio downside is limited in a volatile period.
Especially in the last nine years, as the CEO of the company, I am supposed to give returns to investors. There is a wider responsibility that every CEO has, it’s a fiduciary responsibility.
You had said that listening to all market voices and still staying calm is challenging too. Is that the key to investing success?
Yes. The market is bound by fluctuations, it is bound to be volatile. At the end of the day, all of us have to accept that economies are getting integrated globally where the Indian economy is playing a role in the global economy and the global economy is playing a role in India. So, there is bound to be a lot of volatility in the market. The market is driven by inflows, outflows, sentiments, optimism, pessimism and all other things. But what remains constant is the purpose for which you come into mutual fund investing. The purpose is to generate wealth or income for a longer period of time.
Therefore, these fluctuations will be there. I, on my part, need to stay away from the noise and ensure I’m sticking to the purpose for which I have come. Therefore, I completely stay away from the noise. I have seen this personally too in the last 25 years of being in the mutual fund industry, that these noises will come and go as if tomorrow is the end of the whole bull market and bear market. If you don’t stay away from these things, then there is a high probability that you will end up taking a decision which is not the most decisive decision that one must take.
Where do you park your money?
There is no time to manage your own personal money or micro focus on your portfolio. The best thing one can do is to have a discipline of investing every month. There is a widely known system called SIP (systematic investment plans), which is something I have also subscribed to. Secondly, you realise you want to save money for the long term and you have a lot of money in your account currently to do that, but you don’t do anything about it. So, I have opted for 100 percent SIP. Which means if you have a certain monthly expenditure which you have to meet, then keeping that amount aside, the balance in your account should go towards an SIP. The principle I apply is that 50-60 percent of your net take-home salary should go towards an SIP, such that you can withdraw it any time or stop it, in case you have other requirements.
As a result, irrespective of market conditions, my money moves into SIPs. Most of my SIPs are in equity and for the longer term with a perpetual nature. So, till I retire, the SIPs will continue. The experience, so far, has been good and bad too in parts. In the last one year, SIPs would have given me the least possible return. At the same time, if I would not have invested in SIPs on a continuous basis, I could have completely missed the bull market which we saw from 2013-2016 during which I received enough return on investment. From when I started investing in SIPs till date, I have received decent returns on my investment. Such investment gains could be used for meeting other needs, such as buying a house.
As my risk appetite is large, I do all my SIPs through equity schemes, and all my fixed income components are done via retirement plans like provident fund investment and public provident fund investment.
Would you follow this principle even if your monthly take-home salary was not as high as it is right now?
The way one has to do this is to determine one’s monthly expenditure. Every month you have certain fixed expenditure, which may include household expenses, rent, travel and EMI payments. After meeting all these expenditures, some money is left. At the early stage of my career, I saved around 20 percent of my income. As my salary moved up, the needs remained the same. Therefore, as your income keeps rising, your expenditure remains the same. The extra income should be saved and put in SIPs. That amount now has gone up by 50-60 percent of the income from 20 percent of the income. This ratio, however, could vary from person to person.
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What about the risk to investing? What is your definition of risk and how do you apply it to mutual fund investing?
Risk needs to be understood from the extent of downside risk that you are willing to accept. That risk is applicable to every investment you make. As long as you understand the extent of downside to the risk that you are willing to accept and you are able to ascertain the period for which you are going to invest, you will be able to take the right decisions for asset allocations.
In my case, I understand the downside risk and at the same time I am a long-term player. Therefore, I choose to have a large portion of investments in equity for the simple fact that equity as an asset class gives you longer-term compounding. Compounding in a good market gives you substantial high returns. In a bad market, it does punish you. On an average if you take a 15-year period, as long it gives me returns in line with the growth in nominal GDP, ranging between 10-12 percent and also has a risk premium of 4-5 percent, it is more than enough.
Hence, I have to keep my greed level low. One of the principles which applies is not only on returns but also the greed element.
Watch the full interview here.