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#BQMutualFundShow: This Strategy Helped Create A Low-Risk, High-Returns Mutual Fund Portfolio

Think equity and risk is invariably the next word that comes to mind. So is it possible for investors to build a risk-free mutual fund portfolio?

Vijai Mantri, the co-promoter and chief mentor of Buckfast Financial Advisory, illustrates on BloombergQuint’s weekly series The Mutual Fund Show how a sum of Rs 10 lakh when invested wisely can grow to Rs 77 lakh in about 18 years — a 770 percent return, with minimum risk.

“Let’s say the amount is first invested in HDFC Liquid Fund – Weekly Dividend Option in 2000. The dividend from this investment must then be invested in HDFC Growth Fund,” he explains, adding that the strategy will mitigate risks.

There is nothing like risk-free in the business of investing. So, let’s say low-risk strategy because you are putting a principal amount in liquid fund and liquid fund is at the lowest end of the risk curve.
Vijai Mantri, Co-Promoter, Buckfast Financial Advisory

The approach will also help investors ramp up their equity asset allocation to over 85 percent even if they start with zero equity exposure.

Here are edited excerpts from the interview:

Every time we talk about the long term, we talk about equities being good. Did you discuss this strategy because in the current climate people say that investing in equities is risky and then we give them another option which is risk-free?

I don’t think I was thinking from that perspective for long. For almost a couple of years we looked at how to give equity to investors where they won’t feel that kind of volatility in the portfolio and they feel very comfortable. It came from that kind of thought process. It is a coincidence that we are doing a show when there is a lot of pain in the mid and small cap indices. But that is not what was intended in the beginning.

It could have had happened with multiple funds.

I chose HDFC Liquid Fund and HDFC Growth Fund because neither of them are top performing funds. HDFC Growth Fund has a decent track record, but it’s not an exceptionally well-performing fund. You can say the same for HDFC Liquid Fund. I looked at it as I was involved in launching these funds in 2000.

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How should an investor create a risk-free equity portfolio?

There is nothing like risk-free in the business of investing. So, let’s say low-risk strategy because you are putting a principal amount in liquid fund and liquid fund is at the lowest end of risk curve. There could be technical risk in a liquid fund but we have seen over 20-year data of liquid funds, they have been very stable. So, you put your principle money into liquid fund and whatever the gain you get, whether it is monthly, quarterly; gets transferred into the growth fund.

So, from my calculation purpose I have taken monthly dividend. Suppose you have taken Rs 10 lakh, the fund has declared dividend on monthly basis. So, that monthly dividend outflow goes into HDFC Growth Fund.

So, principle amount of Rs 10 lakh will remain there forever. It will not change. So, you are not taking any risk on principle. Whatever gain the liquid fund is generating, you are just transferring that portion of gain into HDFC Growth Fund.

In this strategy, you have 100 percent debt allocation on day one. After one year, the equity allocation is just close to six percent. But year-after-year, the equity allocation keeps increasing which creates huge impact on total wealth creation.

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There are some people who are afraid of putting money in mutual funds as the NAVs are showing negative returns in 1-3 months’ time-frame. Is this strategy directed at such investors, so that you can get an option that can reduce risk and maximize returns?

It could be for that kind of investor who has invested in the past and has made a lot of money because of certain factors like age or has some other liabilities and doesn’t want to take risk in his portfolio. Somebody who has seen 2-3 bear and bull market cycle, then he understands equities. So, certain amount of money can be parked in this kind of strategy where the person feels very comfortable that his principle is not compromised.

The second part is that this strategy gets you a lot of flexibility. So, it is not that you invested one time. Whenever there is cash flow, you could continue to invest in liquid fund. The liquid fund return per se has not been bad at all. If you look at HDFC Liquid Fund, the compound annual growth rate over the last 18 years is 7.28 percent. So, your Re 1 has become Rs 3.43 or Rs 1 lakh has become Rs 3.43 lakh.

So, even if you keep the money there, it is not a bad strategy because liquid fund per se allow lot of flexibility to enter and exit the market.

Let’s talk about how this changes the asset allocation over a period of 5-15 years.

On day 1, you are investing into debt fund and equity exposure is zero. After one year, the equity exposure becomes close to 6 percent and debt exposure is 94 percent. Every year the equity exposure keeps going up. If you have waited for 18 years, then your equity exposure is approximately 85 percent and debt exposure is 15 percent. I don’t know how many investors in India has an equity exposure of 85 percent of their financial assets.

In spite of being a very conservative strategy, gradual process of equity allocation allows wealth creation and the future potential to grow your wealth is much higher because now you have 86 percent in equities.

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What’s the CAGR return on this strategy?

If you look at 18-year data, the CAGR on Rs 10 lakh is close to 12.4 percent. That kind of return beats even real estate and it’s liquid. So, whenever you want to access this money you can take it out. In spite of this conservative strategy, the CAGR from year 2000 is 12.4 percent, which is a fantastic compounding story. At each passing year, the equity allocation will keep going up.

If I look at CAGR of HDFC Growth Fund, it is just below 18 percent. But we started with 0 percent exposure to equity. Now, we have 86 percent of exposure in equity and in every passing year the equity exposure will grow. So, with 12 percent CAGR, if the equity market does well in next 5-10 year, then it is going to go up.

This allows that flexibility that they won’t see that red tick on their investments and will continue to see green ticks. Even those with a conservative bent of mind get an equity exposure.

Not only it is restricted to liquid fund investing. But if somebody who has invested in a fixed deposit, whatever the interest component he is getting, if he transfers that interest components in equities or somebody who gets regular cash flows from tax free bonds, if that person invests that cash flow in equity funds on a quarterly or six-month basis whenever that cash flow arrives, he will enhance his tax-free bond with 2-4 percent over a 10-15 year which is staggering amount. So, it is just not ultra conservative. It can apply to everybody who is looking for building a quality portfolio over a longer period of time.

Did it take care when it is negative equity returns?

Yes. The equity allocation happens every month and equity is not a linear asset category where you get linear returns. There has been couple of years where equity has not delivered returns. HDFC Growth Fund’s NAV has dropped as low as 50 percent from its peak.

So, there are periods where equity has not delivered positive returns. But in this strategy that principal amount is intact. Anybody can have a bad experience with mutual funds if they take money out when the NAV was in negative territory. Anybody who stays the course, don’t lose money in mutual funds.

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