The Mutual Fund Show: Should You Pause Your SIPs With India Under A Lockdown?
Pausing systematic investment plans at a time when the national lockdown—imposed amid the novel coronavirus outbreak—has stalled economic activity may not be a good move.
That’s according to Amol Joshi, founder of PlanRupee Investment Services, and Vishal Dhawan, founder and chief executive officer of Plan Ahead Wealth Advisors, who said in this week’s The Mutual Fund Show that investors can benefit from rupee cost averaging and buy incremental units at lower costs in prevailing market conditions.
Pausing investments is practical only for those whose cash flows have been badly affected by the pandemic, they said.
Dhawan said investors should decide their allocation mix in advance and stick to it, suggesting a “70-20-10” mix for most investors across market cycles. This implies investors could allocate 70 percent of their portfolio to large-cap funds, 20 percent to mid-cap funds and 10 percent to small-cap funds over 7-10 year time period.
Joshi said while equity funds could be useful for investors with longer time horizons, ranging between 5-10 years or more, investors must have a fixed income fund in their portfolios, given the elevated level of income yields and lower bank deposit rates.
Watch the full video here:
Here are the edited excerpts from the interview:
ANCHOR: Vishal, I think a lot of people are wondering ever since that number of that SIP closure ratio came in higher as to whether people are taking the right call or the wrong call. Now, the day’s common update has been that at lower times, you should keep the SIPs running, in fact, top them up because they make sense. But we’ve seen a number of times wherein tactical allocations also makes sense. Are you trying to play that game right now at all? What would you do with your SIPs? Would you pause them? Would you continue them would you top them up?
VISHAL DHAWAN: So I think it’s always very difficult as an investor to look at putting in your money in an SIP installment in a particular month and finding that it’s lower value the following month or a few days later. Therefore, it’s very, very tempting to try to stop your SIPs or pause them, especially if you feel that there’s possible uncertainty around the income front as well. But I think for most investors who have caught their emergency funds in place, the entire logic behind doing an SIP is to be able to get the benefit of rupee cost averaging. Therefore, the moment you stop an SIP when markets have fallen, it actually beats the purpose of an SIP itself. So very clearly our belief is that, unless there is a very compelling need from am income perspective for you to stop your SIP, you should just continue it. The second thing that I think people need to keep in mind is that equity returns are always lumpy in nature. That’s just the nature of the asset class. Therefore trying to get a linear rate of return through an SIP product, if it’s exposed to equity is very very unlikely. Therefore if you’re going to end up having an SIP that’s going to allow you to buy more at a lower cost, I think you should count yourself lucky, even if it’s hard to look at your mutual fund statement in the interim. Last but not least, I think we need to remember that even if you choose to pause an SIP, all you can do is control the timing of one installment because every subsequent installments are going to happen in an automated manner. Therefore there’s no point in trying to figure out that that your SIP installment is going to happen, let’s say five days later when you think it’s a good time to invest and then find that the next installment is anyway out of your control. So I do think that trying to be tactical with your SIPs tends to be not such a smart idea. You need to go back maybe to the 2009 crisis to look at what happened. So very interestingly, most of the returns are delivered in short periods of time even within that one year. Therefore if you stayed out during those days when the returns got delivered, or those months when the returns got delivered effectively you didn’t do as well as just staying through the entire period. So, we tend to believe that you know an SIP investor should really just continue to walk down that path.
ANCHOR: Amol, I reckon your views are not that different but I’m guessing that you’re saying that the only exception is the cash flow is affected due to the lockdown. Would that be a correct assessment of all?
AMOL JOSHI: That is correct. As we all know, SIP stands for systematic investment plan. So first and foremost you need to have investable surplus to invest. Only if your cash flow is affected in a pandemic sort of situation that we are currently in, that is the only case where we would suggest to pause or stop SIP simply because it’s not practical to keep the SIP on. In all other cases, it always makes sense for SIP to continue and especially during a downward move or a down phase of the market. Vishal also mentioned about rupee cost averaging. We heard the theory part, let’s hear quickly if you allow me the numbers part. If you have a Rs 10,000 SIP and suppose the NAV of the fund is 10, you will get Rs 1,000 for your SIP instalment. When the market actually goes down and let’s say a market falls by 20 percent, then the NAV comes to 8. Now your same Rs 10,000 SIP will actually fetch you Rs 1,250. So, you get 25 percent more units when you continue your SIP across the market cycle, especially the down cycle like this, and these units really come into the play when the market goes back up. I think we have shared some calculations with you. In a situation like currently what we are facing, markets were a few days back 30-35 percent down, when your SIP goes at this stage and market goes back to the previous highs, your SIP actually delivers a 45 percent absolute return. I think this is a chance that anybody who can afford to continue SIP should not miss out.
AUDIENCE: Mid-caps seem oversold, is it the right time to invest in mid-cap funds? My large-cap investments are down 20 percent, should I invest in index funds or continue with large- and multi-cap funds?
VISHAL DHAWAN: So, I think one of the things that most investors need to do is, within their overall equity bucket as well, have a pre-decided mix of how they want to allocate money to large caps, mid caps, small caps. What we’ve seen historically is that every time a particular part of the market does better, there is a tendency to try to go overweight on that segment. So we saw in 2017-18, for example, a lot of investors were very overweight on mid and small caps. We then saw the big impact of that throw up in their portfolios over the next couple of years after that. So I would say that strategically one needs to decide what that mix is going to be and then try to stick to that mix because it’s effectively a good rebalancing strategy that can be used. So for most investors, we would say about 70 percent large-cap exposure, 20 percent mid-cap exposure and 10 percent small-cap exposure, provided they are clearly investing for seven to 10 years, which is what ideally you should be doing if you’re an equity investor. Just to add to that, I think for investors who can’t do this themselves, they can definitely take the help of multi-cap funds to do it for them, because fund managers will try to rebalance wherever required if they feel there’s a bit of a valuation advantage in one part of the market over another part. But broadly, I would say this 70-20-10 mix works for most investors across market cycles.
AUDIENCE: Should I consider investing in equity mutual funds for retirement planning? Between large, mid and small caps, which one should I consider?
AMOL JOSHI: So, of course, before I comment whether equity is a good asset class to invest for retirement or a debt or for that matter any other asset class, I would ask the investor or I would suggest, if you have a long-term investment horizon, equity obviously cannot be ignored. Retirement typically, if you are not planning at the late stage in your life, would have several decades’ worth of horizon ahead of you. So, I would say valuations given the state that they are currently in, markets is 25-30 percent cheaper, absolutely, it makes a lot of sense to have equity as a component into your retirement planning product basket. Not to forget the mantra that most of us advocate all the time that most of your returns are going to come from the asset allocation rather than the security selection or rather than one particular asset class. So have asset allocation in place and periodical rebalancing as well. But to answer the question pinpoint, yes, equities certainly should be a part of your retirement planning bucket as long as you have a long-term horizon—five years, 10 years or most preferably 10 years and above.
ANCHOR: There’s a question that we of course got a lot of times in the last few days, why should somebody not consider fixed income funds over equity funds? What are your thoughts in the current scenario?
AMOL JOSHI: Yes, I think I will take a reference of my previous answer. Most of the times all the advisors, most of the planners would always suggest that equity as well as debt and probably some flavour of gold and international funds go hand in hand—all of these put together will make a product basket or will make a solutions basket for any of your goals. Of course whenever I include equity, we are essentially talking about long-term goals. So yes, most certainly fixed income funds can be a part of your portfolio. Fixed Income yields are slightly at an elevated levels today, especially given the fact that fixed deposit rates are pretty low at this juncture, especially after the last rate cut by the RBI. If you are in the highest tax bracket, then fixed deposit rate on a post-tax basis are probably 3.5-4 percent for most of you—those of you who are in the highest tax bracket. So, yes given the indexation benefit that debt funds have over fixed deposits; fixed income funds can also be considered as a part of any of your investment solutions that you’re trying to build for yourself.
AUDIENCE: Should I invest in debt funds or consider sovereign gold bonds or gold ETFs?
VISHAL DHAWAN: So I think it’s very tempting to look at different asset classes and different choices and then try to make a decision on what’s a better alternative. I think what one needs to keep in mind though is the characteristics of gold and fixed income is dramatically different from each other. Gold is a volatile asset class. Even if you’re using a sovereign gold bond, you will need to keep in mind is that, you know, on maturity, which is eight years later, you’re still going to be exposed to what the price of gold is at the end of eight years. And if you go back in history and look at gold prices, they can be very volatile, over shorter periods of time because gold prices have been moving up in the last year or so. I think there is a tendency to forget about downside volatility, which I think we can’t forget about when you look at you know, long term investing. So I would simply say that fixed income is a good alternative for investors who are looking at a two to three year investment horizon at this particular point, because of the kinds of yields that are available. I think, for investors who are looking at gold as an allocation in their portfolio, the sovereign gold bonds help because of the fact that there is a coupon of 2.5 percent a year available, plus there is a capital gains tax benefit available at the end of eight years we hold to maturity, which is basically that you don’t pay the capital gains tax. But you can’t go too overweight on your portfolio. So I would say typically, about 10 percent gold in your portfolio overall, is a good amount of allocation, the rest of it needs to go to equity and fixed income.
ANCHOR: A lot of questions have come in around whether people should invest in a healthcare fund or not. Should one invest in a healthcare fund?
VISHAL DHAWAN: So I think it’s very tempting to look at everything that’s happening around the world and believe that for the next many years, the entire world is only going to be spending on taking care of the health and I think we’ve seen this happen historically, as well. We’ve had points where people have believed that all the spending will only happen on technology, we’ve had another point where people have believed all the spending will only happen on infrastructure. At another point, we’ve heard about, you know, land being in shortage and therefore everyone’s only going to buy real estate in the future. So I do think that we need to take this decision of how much to allocate to healthcare also keeping history in mind. I think it’s important that you know, people are looking at healthcare carefully as an investment option. But I think we also need to be prudent with how much money we allocate because if this health crisis continues for a long period of time, then you might also see government stepping in with price controls- as far as healthcare and healthcare products are concerned, which will limit the ability for companies to be profitable in that space. So I would say be prudent if you’re looking at a sector. Look at it for the right reasons. We like healthcare in long-term portfolios because we believe it’s a good hedge for healthcare inflation, which tends to be much higher than normal inflation. We believe you need to have healthcare in your portfolio, just as a hedge for that particular purpose. Otherwise, if you want to take a sectorial call, then allocate only about 10 percent of what you’re allocating to a sector. If you don’t have that ability, just leave it to a fund manager to do that. Most fund managers will be adding to that sector in any case. That’s really why you pay a fund manager to decide when you want to enter a sector and when you want to exit a sector.
Okay, but Amol, do you have a different view?
AMOL JOSHI: I think most of the points are covered, but one thing is certainly when you have excessive bullish sentiment towards any sector, the rally may continue for some time, but it is not essentially a solution for any and every portfolio question that you may have. What I’m trying to say is if you’re hearing too much news, probably it is already priced in. I would say that sector fund, and I made some point earlier, while answering about a little bit about gold, gold sectoral funds and international funds put together can have about a 15 percent or so exposure. That’s what I believe. A chunk of your portfolio still can go towards fixed incomes which are debt mutual funds as well as equity. So I echo these thoughts. If you’re hearing too much about a sector, it is probably priced, and already priced into it, as well as a niche and for regular audience of this show, this is probably a reputation maybe second or third time. If you had to ask about the sector fund, then sector fund is not for you. In a sector you just don’t have to time entry as well as exit. Like Vishal mentioned, the gold’s rally is there for last six months or one year. Prior to that last six, seven years gold was relatively flat or mildly plus or minus returns on a year-on-year basis. Similarly, healthcare is out of favour or pharma funds were out of favour for last several years. And only because given the state that we are currently into, the pandemic, you’re probably hearing a lot about pharma than you usually do. But again, suffice to say, you will have to time the entry as well as exit. If you had to ask, it’s not probably for you, fund manager will do a decent job of adding or getting out as the as per the view in the market.
ANCHOR: So Amol, if people have SIPs in thematic funds, which will also border on being sectoral etc., should investors switch them to large-cap funds in the current scenario when things are looking slightly ‘iffy’ if I can use that term?
AMOL JOSHI: Okay, so instead of answering it as a yes or no, I would like to say that go back to the drawing board. In the sense, what was your idea of adding a thematic fund or a sectoral fund and that thematic exposure or sectoral exposure- whether it fits into your overall asset allocation. If I were to design a portfolio, as I mentioned, all these asset classes that we discussed about gold, international funds, sectoral funds could be about for 15 percent or so, of your portfolio. If the exposure is much beyond that, then probably it is time for you to take a relook. But I would say that it is different for each one. What your advisor has suggested you depending on that the portfolio was constructed. So, I would say if you are finding the team that you have invested into currently out of favour or currently much beyond your asset allocation that you have decided to invest into that, if that is the case, then you can probably switch to a large cap or a multi-cap fund. But go back to the drawing board, find out the reason. If the thesis has changed, only then change your allocation. If not, you will do well to stick with your previous plan.
ANCHOR: Vishal, would you do that or are there some themes where you believe people can continue with their thematic SIPs or thematic lump sums?
VISHAL DHAWAN: So, we tend to believe that there is one theme which tends to be relevant most of the time as far as India is concerned- that is really banking and financial services, because it’s a very broad based theme. And effectively what we see is the multiplier in a growth economy that something of that kind can create a significant. Having said that, I think there are two approaches to how to build your exposure in India to a theme like banking and financial services. One is through trying to pick a sectoral fund or an ETF, which is focused in that space. The other alternative is simply to buy an index product because the indices in India itself are very overweight on banking and financial services. And with a 30-35 percent weightage just sitting in the Nifty 50 for example, you can create an index-weighted banking and financial services weighted portfolio using an index product. The advantage of that is really, you’re getting an option to buy a large cap out of the market with an overweight on the financial services sector. So we think for most investors, they might like to play this kind of a theme through an index product itself.
ANCHOR: The final question that a lot of people have posed is whether it’s a good idea to do lump sum investing currently. Well, would it be a good idea to think of actually putting, if you have cash in the bank, some money in a lump sum format to work right now or do you believe that SIPs might be better because there’s a bit of an uncertainty around what will happen in the near term?
VISHAL DHAWAN: So we do think that markets will always be uncertain from a near-term perspective, they will be different drivers of it. They could be Covid-19 today; they could have been U.S.-Iran standoff, which was happening at the beginning of this year. Last year was the China-U.S. trade war. So they will always be uncertainties. I think the key aspect to equity investing has always been that when you’re putting money into equity, don’t expect markets to turn around the moment you’ve put the money in, as if the markets were waiting for you to enter. I think that’s our biggest concern with equity investing that most people tend to believe that all recoveries will be reshaped. While very often you will see recoveries that can take a long time to happen. Therefore, as long as you’re clear that your long-term equity investor, I think every time market valuations become attractive which is what data historically is now showing us when you look at price to book or market cap to GDP, I think it’s a good idea to start adding lump sums to your SIP strategy and you need to do it without the expectation that one month later or two months later, you’re going to have made the best investment decision in your life. I think as long as you’re clear this money is going to be there for 7-10 years. I think buying when markets correct even without knowing for sure whether they’ll go lower or not, is a good robust idea.
ANCHOR: Amol, what’s your thought- lump sum or stick to SIPs?
AMOL JOSHI: So as always, the cash flow is supreme. If you have a lump sum amount to be invested, I would say today probably is a good time to invest not just because the headline index number you have a 25-30 percent sort of a discount on it or it has fallen by that much but also sum indicators. Now what are those sum indicators? When market was just in the last January to a couple of months back, you had equity markets to standard deviation above the average and currently you have the market levels or market valuations one standard deviation below the average. So given this, and this obviously points towards the attractive market valuations. Market cap to GDP ratio is also probably at an all-time low, or at least as low as we saw at the bottom of 2008 global financial crisis. Given this entire situation, I would certainly say that this could be indeed a good time to invest lump sum. Just one minor tweak that you can do if you’re not so sure about whether this is the right time or not. So I would say that if you are 100 rupees of lump sum, why not break it up into three or four chunks? One of the chunks maybe 25-35 percent is good to go in the market today.
AUDIENCE: What are four good balanced advantage or the dynamic asset allocation funds having a different strategy of investment?
AMOL JOSHI: Yes, sure, no problem. Before I give out the name or before I give out my suggestion, core balanced advantage funds would be a tad too much. I would say that any number of any sort of portfolio in mutual funds can be comfortably built within four or six schemes. I’m talking about the entire portfolio that will include your retirement planning as well as that will include probably an emergency fund into a liquid fund. Coming back to the question, I would say if I had to give one name then I would say the pioneer in this category- ICICI Prudential Balanced Advantage. You can certainly take a look at this scheme. This is one of the largest schemes. This is the scheme that started with a dynamic asset allocation or a balanced advantage or the formula or algorithm based equity allocation into a fund. This is the fund that started. I would also say that this is this fund is unique in the sense that it has daily rebalancing. Many of the funds have rebalancing on a fortnightly basis, monthly basis or any such thing. But I think given the entire situation, given all the past track record, ICICI Prudential Balanced advantage has done pretty well. So if you had to pick one thing, you can go with this.
ANCHOR: Vishal, at the liberty to mention a name?
VISHAL DHAWAN: Yeah, so I think my choice would also go to ICICI Prudential Balanced Advantage because of the fact that it’s a tested model over multiple market cycles now. But in case we have to add one more name in there, then I think the interesting one that investors can look at is from Edelweiss, because of the fact that it’s got a tweak in the model in terms of trying to add in some more parameters while deciding the mix of equity and debt in the portfolio. So I would say that ideally just one fund is good enough but if you’re looking for a second alternative then the Edelweiss Balanced Advantage is an option to look at as well.