The Mutual Fund Show: How Balanced Advantage Funds Can Help In Retirement Planning
An elderly couple sit on a bench. (Photographer: Wojtek Rzazewski/Bloomberg News)

The Mutual Fund Show: How Balanced Advantage Funds Can Help In Retirement Planning

The ability and willingness to switch from underperforming asset classes to those that outperform is crucial for long-term retirement planning.

Balanced advantage funds achieve this switch very well because of their inherent nature and are best suited for retirement planning, Ajit Menon, chief executive officer of PGIM India, said in this week’s Mutual Fund Show.

These are hybrid funds that manage their exposure to equity and debt instruments without any caps or minimum exposure limits. Such funds alter their allocation to equity and debt in accordance with changing equity valuations with the help of in-house proprietary models—reducing human bias in decision-making.

Menon cited returns over various time frames to indicate why balanced advantage funds offer the safety of investment corpus and alpha—both of which are vital for retirement.

Watch the full show here...

Also read: The Mutual Fund Show: How Active Funds Fared Against Benchmarks

Here are the edited excerpts from the interview...

What are the stand out learnings of this survey (how India plans for its retirement) that you did, and why did you do it in the first place?

Menon: PGIM—Prudential Global Investment Managers is part of Prudential Financial of the U.S.—which is technically, currently the largest multinational mutual fund brand in India. It manages about $1.89 trillion of funds, with PGIM, the asset management business, managing about $1.4 trillion. What’s important is that Prudential is also one of the largest asset managers for pension funds around the world, so retirement came naturally to us, including here in PGIM India.

I think the context that we wanted to set was that this is an all-important life goal which we have known traditionally that people sort of pushed to the background and our survey wanted to find out the reasons for those and where people are getting stuck. Let me give you one very interesting perspective that I share with clients and advisers.

Did you realise that retirement is the only financial goal in your life for which you don’t get a loan?

You might think about children’s education, marriage, house, car, starting a business—you can get a loan for all of that. The only thing you don’t get a loan for is retirement, other than maybe a reverse mortgage or something like that. So it is very important as a goal and our survey found that the attitude towards retirement is shifting in the cities, which is what our survey is largely more urban, about eight metros and seven mini metros, very representative of Indians all across those cities, is that people are worried that they’re going to be dependent on their children; they don’t want to. But 51% of people who hadn’t planned for their retirement, 55% of that 51% said we don’t want to retire. They feel that they’ll work forever. The younger generation, they feel that you know they’re in business, they have multiple skills, they don’t need to hang up their boots on a certain date. There’s a lot of danger in this which is what I’d like to highlight from what we learn from our survey:

  • People don’t account for these kinds of eventualities that might happen towards health and your income stream actually breaking down.

  • People don’t look at alternate income streams for instance

  • And 90% of the people we surveyed, don’t take inflation into consideration when they’re planning for their long-term goals.

So you put all this together and you’ve got a pretty tight situation coming up for a lot of people as they are closer to when they want to do something passionately and hang up their primary source of income.

The other interesting thing that I think your survey also threw up and please correct me if I’m wrong, is that fewer people in the lower income or lower salary bracket thought of retirement plans wherein maybe that’s the bucket that probably needs to save a larger proportion of their income in order to have a decent retirement. Would that be a fair assessment?

Menon: I think this is a perfect assessment. In fact, one of the biggest insights that we’ve had in this retirement survey is planning for long-term goals like retirement is not incumbent on age. It is incumbent on your income and people only start putting away money for goals like retirement once they have a surplus after taking care of all the other expenses and their other priorities which is largely related to children’s security and spouse’s security. And of course our survey found that with Nielsen, a partner who had done a similar survey about in 2017, that new goals are coming up for Indians, financial security seems to be going down the order of priority and things like having a comfortable lifestyle, staying fit, those are things that are coming up in priority even earlier than goals like retirement.

It’s income that’s a bigger determinant of planning for these long-term goals rather than age.

What is the best mode via the mutual fund route for people to plan for their retirement? Any thoughts about what kind of age is ideal for starting to do this via mutual funds routes?

Menon: So, to answer your second question first, the earlier the better. I think that has been said again and again across all media by experts that the earlier the better because you let compounding work in your favour and you can take care of inflation as well.

But as far as mutual funds are concerned and using that for planning for your retirement is concerned, you’re absolutely right. I would say that mutual funds is a perfect category to look at while planning for retirement for a couple of reasons. I’ll also speak about the category within mutual funds which I believe is a great category for people to start with.

Why mutual funds? Because we all know that diversification, or not putting all your eggs in one basket, is the most fundamental mantra for a good experience with your investments, and mutual funds allow you diversification, allow you transparency and allows you convenience. So as a category compared to many others, this is right up there, very tightly regulated by SEBI as well. So, you trust the category.

Within that category, I would think that I personally like Balanced Advantage Funds for any investor to start their journey towards long-term investments. I would say that not just Balanced Advantage Fund as a category because there are other asset allocation categories available but this, I would put as the primary one.

There are other things with mutual funds like the convenience of doing an SIP and similarly doing an SWP, a withdrawal, or for that matter a top-up SIP, which not too many people are aware of. These are little strategies that mutual funds allow you to do and if you can bundle that with the category of Balanced Advantage Funds, that would be a great starting point for you to be investing for your longer-term goals.

Also read: The Mutual Fund Show: Should Investors Keep Adding Gold To Their Portfolio?

Ajit, why you’re saying that Balanced Advantage as a category is the best or one of the better categories to invest in from a retirement planning perspective?

Menon: The Balanced Advantage Fund category, according to me, is one of the best categories to think about when you’re looking at planning for things like retirement for the simple reason that first, it has asset allocation built into it. It is something that is timeless in terms of achieving a good outcome with your investments and this is one category that has it automatically built into it.

Second, it builds you discipline. Everybody says that you need to balanced your asset allocation through up and down market cycles. The Balanced Advantage Fund category is the one category in mutual funds where they run by different kinds of maybe internal formulae, whether it is related to P/E or P/B or yield or bond yields, and it automatically resets the equity and fixed income allocation in this, so it helps you build that discipline.

Third, everybody wants better downside protection. And I can tell you that this is one category that helps you definitely build that downside protection.

Fourth, I would say that a lot of people chase returns and we know that that’s not a great thing to do. I think when you look at investors internationally in more developed and more mature markets they will always tell you to look at returns per unit of risk that you’re taking with your investments. Balanced advantage funds allow you to get a better return per unit of risk that you’re taking in your exposures.

Lastly, I would say that it’s a tax-optimised category as well rather than you trying to do it with one equity and one fixed income and moving in and out, this is a category that’s designed so that you have your equity-like tax benefit already embedded in the product.

So, I would say those are the four or five reasons that I feel this category is appropriate.

Can I ask you why do you say that it’s the best bang for the buck that the BAF category provides? Why do you say that vis-à-vis some of the other options?

Menon: It’s about what is the kind of returns that you would need for say fulfilling your goals. You would typically look at something that is keeping pace with inflation, beating inflation and beating taxes. So that’s the kind of returns that you want from a category. Now, while I’m not going to talk about what overall returns have been or so, I just want to give you a rough example. Say for instance in the year 2010, the Nifty TRI index would have given roughly a return of about 18% when this category gave a return of 16%. Not bad returns, but somebody would argue- hey it’s lower than having invested in equity. In the very next year, the Nifty TRI index was down 24%. And this category was down only 14%. So, when you think about downside protection because of the embedded asset allocation, this gives you decent returns that are good enough to meet your financial goals over the time frame, and also gives you good downside protection in years that are bad. And just talking about bad years and the year 2020, if we were to look at the calendar year 2020 as well then if TRI index would be negative whereas this fund or this category, it’s not given any great returns to write home about but it’s not negative, it’s positive as a category. I think a lot of people would like to see that. They don’t like to see their capital deteriorate and over periods of time therefore take advantage of this asset allocation that’s embedded in it. That’s what I meant.

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Can I ask you for a young person like yourself or even a younger person, who is maybe 20, are there specific routes that you would adopt while investing in a balanced advantage category, say, SIP with a top-up or a normal SIP? So, from a perspective of somebody who is 20 or 25, or 30 and has 30 years of retirement, you are advocating starting investing in a BAF right now and keeping on for 30 years, is it?

Menon: I would say that because the category has got embedded asset allocation, you need not worry too much because it will do the auto balancing for you. It’s almost like a ‘fill it, shut it, forget it’ kind of an option available within the mutual fund industry. So, that’s why I would recommend it. It’s easy to keep track of. But just to look at the specific example that you’re asking me for. I spoke a little earlier about certain little tricks with mutual funds where you have things like SIPs, STPs, SWPs and something like the top-up SIP that most of the mutual funds allow. How can a young person use this while investing with mutual funds and the balanced advantage category for retirement? So let me give you this example. Assume that you’re talking about a 30-year-old, somebody who’s looking at hanging up his or her boots by let’s say 60. Assume that this person has a Rs 25,000 expense on a monthly basis. That’s a Rs 3-lakh expense a year. I am taking 25,000 because I want to try and reach as many large retail investors and viewers as possible when they think about that example. So, a Rs 3 lakh expense a year. One of the things our survey said is that 90% of people don’t look at inflation when they look at their long-term goals. And for our survey where the average income was about Rs 5-5.5 lakh, people felt that eight or nine times that or maybe a 50 lakh corpus is good enough and that’s dangerous, it’s not good enough. So, let’s take this 30-year-old example. Rs 3 lakh expense a year, your expenses thumb-rule based would probably double every 10 years, given the inflation that we have in India currently. There are other tricks to that let’s not get into the rule of 72 and all of that. Just assume that your expenses will double. So, 30-year-old with Rs 3 lakh expense, at 40 years that’s Rs 6 lakh, at 50 years that’s Rs 12 lakh, and at 60 years that’s Rs 24 lakh. Now, any expert that helps you plan for retirement will tell you that you need at least 30 times your annual expense to be your retirement corpus. That’s the way to think about it—30 times your annual expense at retirement should be your target corpus. At Rs 48 lakh at the age of 60, for a 30-year-old today, he needs a Rs 7.2 crore retirement corpus. Now, for somebody who is spending Rs 25,000 a month, they will think, “What the hell, how am I going to even reach there?” Half the time people don’t plan for retirement according to our survey because they don’t know the number and how to compute it. Now, here is the trick. The SIP that the 30-year-old person might need to do to reach that Rs 7.2 crore corpus assuming a 10% kind of return, is Rs 30,000 per month as an SIP. Now if you tell somebody that they’re going to jump out the window and say, “Stop this nonsense, there’s no way I’m going to, when I’m spending Rs 25,000 a year, why are you asking me to do this?” But when you use the top-up SIP facility, which essentially is start small and automatically increase your SIP by 10%, every year. You can do that because your incomes are rising as you go through your career. Now for a top-up SIP, all you need is about Rs 11,000-ish to achieve that same Rs 7.2 crore corpus. So instead of Rs 30,000 a month, just using the top-up SIP facility and looking at a beautiful category like Balanced Advantage Fund—Rs 10,000-11,000 a month and you’re there. Maybe you can reduce that even further in case you already have some savings built with you or some other property, inheritance or provident funds and things like that which you already have. My advice is always to go to a good adviser, a trusted adviser and figure out what your retirement number is, but I think this is key to just for your example of how a person who is a 30-year-old can plan for something like this using the Balanced Advantage Fund.

Ajit, are there are options within your fund house wherein there is a Balanced Advantage Fund category and what’s the kind of returns that one should expect from such a category?

Menon: We do not have a Balanced Advantage Fund at this point of time and we intend to launch a Balanced Advantage Fund shortly. What we do have are certain investment facilities and solutions which we call the dynamic asset allocation facility for instance, and an age-linked asset allocation facility. Both of these are good solutions for investors that we offer. What we intend to do is to embed the dynamic asset allocation facilities algorithm within our Balanced Advantage Fund when we launch it. This has been a live facility with us for quite some time. There are many life portfolios on it. All I can tell you is that even if I look at a 10-year horizon for this particular product or this facility, if the Nifty TRI has been about 6.5% in that time frame, this facility has given a low double-digit return in its history. As a product what we have done is now the default in this facility is our diversified equity fund and the bank PSU debt fund. But more than the facility, I would say to also make it better tax optimised, we intend to put this algorithm into the Balanced Advantage Fund, which we will intend to launch pretty shortly.

One is a category which is not necessarily branded as a retirement category, but you believe it’s the best one. There is also a branded retirement category within the mutual fund universe, right? What’s that all about? Why do you think that the balanced advantage category is better than the one which is branded as the retirement category?

Menon: The category that is currently branded as retirement and SEBI has allowed for this category, the difference is that while this is a full long only equity product, it has a five-year lock-in for the investor when he comes in. After the first five years you can step out of the fund. So, it is just about promoting people to stay long term and experience the benefits of equity investing. For the whole mutual fund industry today, as you know, the average age is under three years. So, people are moving in and out of this. I think this five-year lock-in is a good feature for the retirement fund, but a good adviser will tell you don’t need a fund called retirement to do this. To me, I think the fundamental principle of asset allocation and automatically gaining that within a Balanced Advantage Fund category is an easier and simpler and as I mentioned earlier, a ‘fill it, shut it, forget it’ kind of option for investors to probably use. So, that’s what I would think is good.

Much of these retirement fund category products—since they are100% equity funds—they’re most suitable for younger investors who are in the savings phase of their life and not in the distribution phase of their lives, whereas an asset allocation product actually suits on both sides.

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