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Q: What should a retail investor do in a market rally? It could be sometimes tempting to enjoy the profits a little, but for long-term investors is it good to stay put? Let’s hear it from Tarun Birani. To start with an investor is not the first milestone you have experience in the Indian Equity market touch and surely it’s not going to be the last either. How have you seen equity markets help create wealth for the average Indian?

A: Good evening Mubina and thank you for having me here. So what a journey it has been with a bench market index which was at 100 in 1979 to a 50 thousand mark as we talk in January 2021. And to my mind, this is one of the biggest wealth creation stories with a compounded annual growth rate of almost 15.5% over 43 years. No doubt this journey has its ups and downs where we have seen the Sensex reaching 25 thousand also this year in the march so it is not for the light-hearted this is for someone who has the patience to make money over some time. One more big observation I have seen is that investment and investor returns are always different. I have seen investments have given 15-16% returns but when you talk to investors their returns are less than 10-11% so this gap of 5-6% is because of investor behavior. So to my mind investments are giving and equity is giving, Indian markets are giving phenomenal returns but we have to make sure investors make this money. That is the point we have to work on.

Q: Well, will take that point forward with you Tarun and I am sure many of our viewers have this standard question about what should I do now the market has rallied, or sometimes another very common question that we are asked is that; I am seeing the market rally but when I look back at my portfolio I don’t think it has done a lot and I think that is a very valid point as well. But let us start first with this point. Do you think there will always be room for wealth creation, for long term investors? Why should they stay put?

A: The year gone by has given us a strong reminder of the importance of the financial plan and to summarize money success is the single word called ‘Survival’. I feel capitalism is hard but part of the reason is making money and keeping this money is a very different skill set. I wonder how making money requires taking a risk but being optimistic but wealth planning or saving requires the opposite. It requires one to be humble as well as realistic so more than two thousand books are dedicated to Warren Buffett. He is worth as we speak almost 85 Billion Dollars but he made his at the age of 50, 60 Billion Dollars, and at age 60 he made 81 Billion Dollars. So you can understand the magic lies in compounding. The more you stay on, that’s where you make money. So the magic is compounding as well as asset allocation. According to me after defining your risk tolerance and your financial goals and accordingly plan your investments and this puzzle of when to get out, when to get in can be solved much more easily then. I understand the markets are up but at this point, you have to define your formula if you are not defined, so let’s say I talk about myself, I have defined a 50-50 formula or a 70:30 formula for myself. Whenever I see this formula moving about to 75 or 80 I quickly sell and come back to 70 level, and according to me, this helps me navigate this volatility much better rather than getting into that noise discussion all the time about what to do in markets are up-down.

Q: Yes absolutely and I think one should start with asset allocation and decide what you are investing for and then perhaps just stick to that. However Tarun sometimes, as seen in AMFi data as well, it has been indicated that especially in the last 4 to 5 months where the market rally has caught up speed we have seen equity mutual funds investors put out. There have been net outflows month after month. How would you explain and what would be the right approach over here?

A: As I discussed, asset allocation is the only approach that can help investors. They should always do something which is in their control not outside their control so rebalancing is one of the processes of realigning the weightage of the portfolio of the assets. It involves periodically buying and selling assets in a portfolio to maintain an original and desired level of asset allocation. For example, you start an asset allocation of 50 stocks and 50 bonds. If the stock performed well during that period it could have increased the stock weightage and you need to get them out to the level of 50-50. So it helps in safeguarding the investor against being overly exposed to a single asset class. And I would strongly recommend this current scenario, so talking about the AMFI-data, to my mind we are at 30lac-crores of asset under management in mutual funds as we speak and out of that between 10 to 12lac Crores is with equity or the hybrid mutual funds. Out of this 10 to 12lac Crores even is 30-35 thousand crores have come out I would not read much into it, it would be a basic profit booking that is happening and this is a healthy sign that investors are doing their profit booking at this higher level.

Q: How can investors take advantage of this rally to even consider rebalancing their portfolio?

A: Rebalancing is a process where you have to be very disciplined about the periodicity of that. One can look at the quarterly rebalancing, annual rebalancing, 6monthly rebalancing. Once you can be defined that you have to make sure you are following it with a complete discipline. So at this point, let us say 50 is my desired level and if I want to achieve 60 please go ahead and get that 10 from your system. And this will make sure you will maintain that original level of 50-50. So this will help you sell at a higher level and whenever the market goes down and this 50-50 moves to 40 then you will be able to add 10 more and that will again get you back to the 50 level. So according to me, the magic lies there nothing else.

Q: What would you say to those individuals who look at the market and say that markets are at record high, Sensex is at 50 thousand and Nifty is soon going to approach 15 thousand itself but I don’t see my mutual funds giving such returns. What would you say to such individuals? Would this be a tell-tale sign that maybe you should shuffle your portfolio a little bit, move a particular fund in a different category, or do you think that should be completely ignored?

A: There is a science behind that there are many qualitative and quantitative parameters one can look at. Whatever investments they have done we need to get deeper into those qualitative as well as quantitative aspects wherever we see this marker getting worse I think one should get their portfolios rebalanced to a better one. So yes one can use this current rally to rebalance their portfolio into the better portfolio.

Q: One of the viewers has written to us asking, How many mutual funds are ideal for a long-term portfolio for the next 5 years? Secondly what should be the percent allocation in various fund categories?

A: I feel small is beautiful and wherever there is a small set of funds in your portfolio it brings in simplicity and when there is simplicity there is a proper review mechanism that can be put in force, but let us address the viewers question. First, he needs to clearly define his clear cut financial goals, his risk tolerance and I am assuming, if his risk tolerance is between 50:50 my quick suggestion to him would be for an allocation, 35% of his money should go into debt mutual funds, 30% should go into a category called dynamic asset allocation and 35% should go into equity funds. Again coming to equity funds, he can further divide them in between 30% into large-cap funds, and their primarily their advice would be to go more for index-based NIFTY as well as NIFTY next 50 index funds because that’s where I see better alpha creation compared to normal large caps mutual funds. 30% can be allocated to multi-cap funds where you can see funds with a mix of the large and mid cap as well as some global allocation also. Mid and small caps can have 30% because I feel going forward relative valuation in mid and small caps are much better so a 30% allocation can help him get better alpha and from a tactical point of view, I feel the sectoral fund like banking category is poised for better growth in going 5 years so he can look at 10 % allocation there. And I feel not more than 1 or two funds in each category should be selected.

Q: ET Wealth had an article saying there will be a correction of 8-10%. What should be my strategy? I have a portfolio of three large-cap funds, one mid-cap, and one small-cap fund that I started investing for my retirement in 2045. I started these in 2017 this was 4 years ago. Should that change his strategy to stand up and pay attention, make calls to his financial advisor to change anything?

A: On a lighter note, nobody knows what is going to happen tomorrow and I don’t believe in all this noise. So let’s not get into that debate that markets are going to correct or not and again my suggestion would be to do what is in your control and that is define your asset allocation, define your goals and the magic lies in patience and temperament. Your investing behavior needs to be correct, when there was a 30% correction in the market in March how many of us were able to add to the portfolio? That is the question we need to ask. I feel if he is not able to take an 8-10% drawdown, he should not be in equity, he needs to stay into fixed deposits because that is not a place he should invest into. Again very extreme views but I feel that one needs to be a high conviction investor and follow this asset allocation magic to get the money. I feel he has done the right thing by having large-cap funds majorly in the portfolio and two in mid and small caps funds for his retirement again I am surprised that if he has an outlook like 30 years on the portfolio why he is getting affected with an 8-10% draw down. He should focus on asset allocation based investing and goal-based investing. That’s my suggestion to him.

Q: I am 45 years old and I would like to get a corpus of 44 crores for my retirement please check if my SIP portfolio is correct. I invest twice a month. What should be my SIP amount to reach my goal? (She shares the portfolio details)

A: My quick observation, to reach a 1 crore goal in 15 years she will need to save a minimum of 20-25thouand per month and she is currently saving Rs.11,000. So 10,000-15,000 addition to the portfolio can help her to reach her goal comfortably with an expected growth rate of 10-12%. Her current allocation of 10% into Gold, 20% into mid and small caps, 10% into global strategy, and 35% into multi-cap fund Parag Parikh looks good to me, ELSS fund is where 25% of her money is going. I can see one gap in her portfolio, I can’t see any large-cap funds so maybe she can add an index fund in her portfolio for the incremental SIP’s that she is planning for herself.

Mubina: Thank you Tarun for joining us.