A monthly investment of Rs 1.2-1.35 lakh via systematic investment plans for five years can help you save Rs 1 crore.
Two investment advisers suggested either equity mutual funds or a mix of debt and equity schemes to achieve this goal.
The basic premise is that returns should be proportional to the risk involved, Prableen Bajpai, founder of FinFix Research and Analytics, said on BloombergQuint's The Mutual Fund Show. She advised a 50% allocation to pure equity products, and the remaining between debt and hybrid products.
Amit Kukreja, founder of AmitKukreja.com, suggested an all-equity portfolio, banking on India's growth story.
“We have a very strong macro story," he said. "We are seriously gunning for a $5-trillion economy, and I don’t see a reason why we won’t be touching that in the next two to three or four years’ time frame."
Bajpai and Kukreja have created a model portfolio for investors to reach the target of Rs 1 crore in five years via the SIP route.
According to Bajpai, if investors choose funds from categories recommended and in the percentages advised, there is a probability of reaching the target with an SIP investment of Rs 1.25 lakh or a lump sum investment of Rs 60 lakh.
Debt schemes recommended by Bajpai:
IDFC Gilt 2027 Index Fund: Target maturity index fund that invests in constituents of Crisil Gilt 2027 Index. Matures on June 30, 2027.
Axis Crisil SDL 2027: Open-ended target maturity index fund investing in constituents of Crisil IBX SDL – May 2027.
Edelweiss NIFTY PSU Bond Plus SDL Index Fund – 2027: Open-ended target maturity index fund predominantly investing in constituents of Nifty PSU Bond Plus SDL Apr 2027 50:50 Index.
Mix of debt and equity schemes:
Kotak Debt Hybrid Fund: Conservative hybrid category
Parag Parikh Conservative Hybrid Fund: Conservative hybrid category
Edelweiss Balanced Advantage Fund: Dynamic asset allocation or balanced advantage category
Mirae Asset Aggressive Hybrid Fund: Aggressive hybrid category
Pure equity schemes:
ICICI Prudential Nifty Index Fund
DSP Equal Nifty 50 Fund
Axis Flexi Cap Fund
Parag Parikh Flexi Cap Fund
International via Kotak/ABSL Nasdaq-100 FOF
Kukreja’s recommendations were based on an assumption that an investor has a balanced risk profile, can stay invested in capital markets for at least five-six years, and a 10% growth rate for the portfolio. The required SIP, according to him, would be Rs 1.3 lakh a month, assuming that they are starting from a zero base portfolio.
Funds and allocation percentages recommended by Kukreja:
UTI Nifty Index Fund (20%)
HDFC Sensex Index Plan (20%)
Axis Growth Opportunities Fund OR Canara Robecco Emerging Equity Fund (15%)
Parag Parikh Flexi Cap Fund (PPFAS) OR SBI Focused Equity Fund (15%)
Kotak Balanced Advantage Fund OR Edelweiss Balanced Advantage Fund (30%)
Watch the full show here:
Here are the edited excerpts from the interview:
Prableen, what would it take for an investor to build a corpus of Rs 1 crore, in the most balanced way possible, in the current circumstances?
Prableen Bajpai: Whenever we are looking at building a corpus – five years being the time factor – what is important is the return expectations from the products which are picked, and the risk appetite of the investor. Someone may be comfortable with a 6-7% return; someone else may be a high-risk taker and is okay with taking an all-equity exposure. Broadly, it would depend on the risk appetite and comfort level of the investor. Based on that, we can create a portfolio.
If somebody is looking at a low-risk sort of portfolio, or just about 6-7% returns, it would be broadly an all-debt portfolio for that person. Such a portfolio would actually require a huge amount, in terms of lump sum let's about Rs 70 lakh in the present day oblique about Rs 1.4 lakh as SIP.
As you go higher, in terms of increasing your risk appetite, the demand in terms of what needs to be invested starts to go down, because you're taking a higher risk and your expected returns are going up.
Broadly, here are the categories which can be combined and used in a certain permutation by investors based on the suitable risk appetite. One is the debt basket and there I have three funds, which are all index and passive strategies within the debt segment. This is a good time to take exposure to a five-year sort of an index fund in the debt space.
We are in the month of March. So, it covers about six financial years, and indexation benefits would be higher. There is no credit risk in all of these, but there would be interest rate risk. All these three funds are target maturity, that is if you're holding them, whatever yield they are entering at today they get that – it is hovering around 6.2 to 6.5%. So, these three funds are the IDFC Gilt Fund, Axis Crisil fund which is investing in state loans, and the third one is the Edelweiss PSU Bond SDL Index Fund.
The second category is broadly hybrid. Hybrid gives you a combination of debt and equity. I have picked the conservative hybrid category for someone who is only looking to take little exposure to equities, because it can go up from 10% to about 25% in equities. The two funds which I like are Kotak and Parag Parikh.
One of the popular categories with a timeframe of about five years is the Balanced Advantage Fund category as well as the Hybrid Aggressive category. From here, one fund from Edelweiss and Mirae is what investors can look at.
These are not hardcore recommendations. These are just suggestions for investors to look at and can give them decent returns.
Edelweiss, during the March 2020 dip, had only fallen by 13%, while the category funds had fallen by about 32%. Even Mirae Asset has given no negative returns on a five-year rolling basis.
Let's say somebody parks a bit of their funds in debt, maybe something in hybrid or a conservative debt space, and wants to take some exposure to pure equities. Some of the funds which I would suggest are the index funds – the Large Cap Index – this can be done by a market weighted index, the regular Nifty 50 oblique an equal-weighted strategy like DSP has. I am suggesting DSP because that is the oldest fund that we have in the equal Nifty space. Two active funds here are the Axis Flexi Cap and the Parag Parikh Flexi Cap. Again, these two funds have been consistent performers in terms of rolling return.
International allocation still makes a great case and it's a good time to take some international exposure – maybe about 10% to 15% – depending on the risk appetite of the investor to go into global equities. The options here can be the Kotak Nasdaq 100 or Aditya Birla Nasdaq 100.
A combination of these funds (can be looked at) and based on that, one can work out the returns.
If somebody is investing 20% in pure debt, 30% in a conservative fund, and 50% in an equity fund, with the range of returns that I have taken, they can get a portfolio return of close to 10% with not a very high risk.
Therefore, the SIP sum needs to be about Rs 1.25 lakh per month, for a goal of about Rs 1 crore in about five years?
Prableen Bajpai: Yes, because it's a huge demand and five year is a very short time period.
I was about to ask you what percentage allocation you would do. I am glad you answered that about 20-30 and 50, and that would mean around 10% returns.
Prableen Bajpai: Broadly, a 50-50 approach (50% pure equity and 50% in the remainder).
Prableen is giving a range of funds, and you can choose some of these. The returns that an ICICI Prudential Nifty Index Fund would give would probably be lower on a normalised basis than what a Parag Parikh Flexi Cap or an Axis Flexi Cap would give. You can pick and choose. Amit, what's your approach if somebody wants a crore in five years?
Amit Kukreja: I am slightly (more) optimistic than Prableen. I would not suggest a debt allocation through a mutual fund.
We have a very strong macro story. We are seriously gunning for a $5 trillion economy, and I don't see a reason why we won't be touching that in the next two to three or four-years’ time frame. That can only be achieved by a strong economic engine, which means we have a tremendous growth story. So I would still stick with 100% equity fund allocation for this portfolio to accomplish a target of a crore in five years.
I made some assumptions. As an investor, I do have a risk tolerance and I would keep my risk tolerance as a balanced risk profile. My life stage is stable; I am not expecting any major disruption in lifestyle in the next five to six years. My risk profile is balanced and age wise also, I have a good enough professional working life remaining. The fourth one is the macro assumption that we have a very powerful growth story.
I would suggest an equity allocation through five schemes. These schemes are low-cost index funds, which is UTI and HDFC; both are index plans. Let's have 20% each and there is a 20% allocation that I'm suggesting to Balance Advantage Fund which has an algorithmic adjustment formula to debt and equity ratio which is a hybrid fund. They have a nice way of adjusting. So I don't want the manual effort of switching from equity to debt; I want to outsource that to my fund manager and let the fund manager handle that.
But that's up to 30% and the remaining 30%, I'm suggesting large and mid-cap funds, of which 15% can be large and mid-cap and the other 15% can be multi-cap. Among the multi-cap, I would suggest either SBI Focused or Parag Parikh Flexi. Among the large and mid-cap I would suggest either Canara Rebeco or Axis Growth Opportunities.
In the Balanced Advantage category, I would suggest either Kotak Balanced Advantage or Edelweiss Balanced Advantage. In the large cap space, I'm suggesting only the index funds, which is UTI Nifty Index and HDFC Sensex Plan.
Behavior management is far more important than portfolio management in the journey of an investor. If the market crashes, don't panic and try to exit your portfolio.
I would also suggest to maintain the allocation of 20%-20% large cap to index funds, 15%-15% large and mid-cap and multi-cap fund or a flexi-cap fund, and 30% Balanced Advantage Fund.
If you see need for an adjustment in the percentage exposure that we are trying to baseline or freeze, then do that after a year or so.
Because if markets are crashing or the mid-cap space is going through any correction and the allocation has gone down, you might be better off holding a bit of money to capture that Alpha.
Assuming that five-year horizon, life stages are stable, age is there, professional life is there, and macro stock story is a very strong story – this is what my recommendation is.
I would suggest an SIP of Rs 1,30,000. You can break-up the amount into these themes based on the percentage that we have chosen and continue to review the schemes.
I might be wrong 18 or 24 months down the line. So, fund manager, fund performance, alpha the fund is creating over the index, macro story – these are important parameters that need to be revisited.
Do you reckon that having an all-equity portfolio – though you do have a Balanced Advantage Fund, so there is a bit of debt allocation depending on what the fund manager chooses to do – is a balanced approach in the current times?
Amit Kukreja: That's a calculated risk I'm taking on the growth story of our country. I am more optimistic about the macro story of our economy. The corrections in the markets outside India are far steeper than the correction in India. And if you look at the GDP story, we are still ranked number six in the top 10 GDP economies. Six is a good number and we have a lot of scope if we reach five. We will probably be third or fourth after China and the U.S. I am taking a call on that growth story.
If this changes 12 or 24 months down the line, we will obviously do the correction. But, as of now, I would still gun for it.
The takeaway from both experts' opinions is: a number between Rs 1,20,000 to Rs 1,30,000 or Rs 1,35,000 per month, as an SIP is probably that sweet spot. Both of them mentioned one particular fund – the PPFAS Flexi Cap – which has reopened for subscription. Is PPFAS a good scheme for people to start subscribing to again?
Prableen Bajpai: Definitely, it remains a good fund. There are two-three changes which we have to look out for.
A lot of people have been investing in this fund thinking that about 30% of their allocation is going into global equities and so, they need not buy an international fund separately. Going forward, let's say the limits are not enhanced – the AMC level limit is currently at $1 billion per AMC, they have already exhausted about $700 million – so, the room for them to invest abroad if the individual AMC limit is not increased remains less, which is about Rs 2,000 crore in Indian rupees. Dependence on this fund to take exposure outside India is something investors should not do anymore.
If the AUM grows substantially, then only the allocations to the current investments abroad sort of start to change – it is currently about 30%. Obviously, if the AUM increases or doubles up, the allocations would go down. But any new investors would also get exposure to that part of the portfolio because the NAV is calculated cumulatively.
One thing that investors need to watch out for is that currently about 85% is invested in large caps and that includes big technology giants outside. Now, if that allocation is not taken, will they increase their mid cap allocation, or will they increase their Indian large cap allocation? That needs to be checked. Otherwise, we have to give them time to continue with the good work they have done earlier.
I don't see any change as to why investors should stop or redeem or not invest in the fund as of now. It's been a very well-managed fund and they should hopefully continue with it.
Amit, what are your thoughts on this?
Amit Kukreja: I agree with her. The fund management and fund performance has been outstanding. They have leveraged the growth cycle in technology stocks and the growth economy outside India. Overall, it’s a good fund and I recommend that fund to be added to the portfolio. We need to watch how the overseas economies are doing with respect to India. If they're choosing to invest in Indian equities until the limits are revised, that's also not a bad call. It still goes as a highly recommended fund.
Would this be open to anybody who wants to make an investment? If somebody didn't have a previous exposure to PPFAS, it won’t stop that person from making a fresh investment.
Amit Kukreja: That is correct.
What is the difference between a Nifty ETF and an Index Fund? Which is better and why?
Amit Kukreja: Index funds have ETF as its underlying asset. Sometimes, there are index funds where the portfolio manager is managing the portfolio of the same stocks as the index. Generally, it's the ETF as the underlying asset.
If you want to maintain your equity portfolio with ETF, you need a demat account, you have to trade ETF the way you trade stocks. You pay the demat subscription fee, and transaction fee for buying and selling ETFs.
But if you are subscribing to index funds, it's like a mutual fund. At the end of the day, there will be an NAV assigned to it and that many units will be allocated to your plan. There is a bit of a tracking error, but that's okay. I don't attribute a lot of performance faults due to tracking error.
Given the simplicity and the fact that I can set up an SIP calendar, I can always keep index (funds) in my portfolio. I would go for an index fund as opposed to the demat-based ETF because that just creates additional expenses. And your index fund may have an additional expense ratio as well. But it's my preference, and I recommend it to my clients as well, that index funds are a better choice than an ETF.
The returns won't differ too much, except for the tracking error, is that correct?
Amit Kukreja: Not much. Now, if you prefer another ETF – there are other ETFs as well which are sectoral and thematic – then you can buy those ETFs.
But if you are talking about plain vanilla index – Nifty 50 or Sensex 30 – then go for an index fund. That's my view and people can choose to go the ETF way as well.
Prableen, do you choose the ETF over the fund, or do you choose the fund over the ETF?
Prableen Bajpai: It depends. I agree with the points which Amit has given.
Broadly, an ETF is nothing but a mutual fund which is tradable. That is one advantage which index funds don't have. There are investors who want to take advantage of the intraday dips and that is one place where ETFs score over index funds, because index funds are bought like regular mutual funds.
Savvy investors can look at ETFs if they are looking to do intraday trade orders. Aspects like limit orders are allowed in an ETF but are not possible in index funds.
Also, in terms of expense ratios, index funds would range from about 0.08 to 0.21 – that's about five funds that I took the average of – and it's much cheaper in terms of an ETF where it's 0.05 to 0.12.
So, for investors who have huge money and are looking to make those calls and take advantage of those specific dips, it makes sense to take an ETF exposure.
Otherwise, for regular retail investors, for their SIPs and long-term investments, index funds are equally suitable and can serve the purpose for which they are meant for.
Are there specific kinds of index funds or ETFs that are recommended?
Prableen Bajpai: ETFs can be active and passive. Even in the U.S., about 20% of ETFs are actively managed. When it's an ETF, they need to check whether it's an active or passive ETF, if it’s away from the Nifty 50. Even in terms of index funds, there are a lot of different beta strategies which have come in. So, if you're talking about just the Nifty 50 or Sensex, it's easy for investors to do the comparison and invest. Otherwise, there are different flavours offered by these two instruments. And then, they (investors) need to look a little deeper and take a call.
Prableen, tell us about the limit that is not unraveling for mutual fund houses, which means that they can't make fresh investments into overseas securities or take monies from investors for those funds. Are some fund houses allowed to do it? Is there an indirect way?
Prableen Bajpai: There are two baskets. One is the $7 billion basket, where mutual funds are investing abroad. The underlying product is either through a brokerage account abroad that the mutual fund is managing or through an active mutual fund abroad. They are ETFs domiciled abroad – it can be an Indian ETF, one that they created in India. That's one basket where there is a capping now.
There is a separate pool, which is of $1 billion, wherein any mutual fund can invest abroad up to $1 billion overall as an industry limit and up to $300 million per AMC, where the underlying ETF is an ETF domiciled abroad. For instance - iShares, NASDAQ fund ETFs and a few others. Here currently only four funds are existing, which are open for subscription – Kotak Nasdaq 100, ABSL Nasdaq 100, DSP Global Innovation and the Navi US Index which is going to track the Vanguard ETF. Navi is going to launch a Nasdaq 100 FoF again because it will track an ETF abroad. Even Mirae has filed for approval for three different ETFs abroad – one is artificial intelligence, one is for clean energy and one is for cloud computing. They will be investing in the Global X ETF which is another subsidiary of their parent – Mirae Global Investment Managers.
Currently the industry limit of 12.8% has been utilised. So, these four existing funds, have taken up about $128 million as of now, in terms of AUM. There is still scope for the industry and that’s how they are doing this.
I would definitely say that this (the capping) is very unfortunate, it has come at the wrong time. Global markets are finally seeing a correction, and this was a time to allocate a bit more. I think they (investors) should utilise the options available.
Amit, any final words on this subject?
Amit Kukreja: I hope the limits are revised soon. I hope that Indians feel the flexibility to invest overseas. The choices that Prableen was talking about, I think it's a good choice to have in the country now that we are gunning for the top five economies in the world. It makes us more investor-friendly, more flexible in deploying our money outside India.
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