Thank you Sudipto. Appreciate your thoughts. Portfolio may go in for some time correction for a year or so but then I hope it will give at least 15% plus if not 20-25%.
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Thank you Shailesh. Appreciate your frank opinion.
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I did not mention rental income. I may get basic home expenses from it once it goes as per plan. I will certainly supplement this with your advice and may go in for some bonds. Equity may still remain at > 70%
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It is not correct that Fixed income instruments do not appreciate. Ask any retiree who is dependent on such instrument. Post Tax and Inflation, there is hardly anything left as income. So you need to keep eating out of your principal. If I need at least 3% income net of real inflation (8%) on lower side and taxes (2% at least), I need an yield of 13%. Now which instruments provide that? Ultimately I will consume principal and then I wont have enough money left at late stages.
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Most retirees and their advisors forget this basic or do not want to understand. Result - dependence on your kids despite having earned enough.
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HU had no eps/profit growth since 2003 to 2007. One has to see if profit is growing or not. The stocks in this portfolio are having eps growth of 20-30% on an average. I do monitor this closely. I do not understand security analysis, but by and large, if eps is growing, stock price ought to. There could be a time correction though. However, I will scout for opportunities to lower overall valuation. But such scrips are simply rarely available and if so, highly risky.
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I am not sure why people suggest mutual funds. There are 1000s of these and most cannot get even 15%. You have an exit load of ~3% in addition.
Appreciate but different ways of thinking make human society.
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Nice discussion. My 2 cents. Firstly I am not a expert but want to share something. My learning place is only valuepickr 
Yatharthji, As you have mentioned, you are near to retirement. And also mentioned that the rental income and dividend from shares is sufficient enough for daily living.
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I support the debt investment ( May be tax free bonds / Liquid / short term bond funds ). Allocation towards the debt fund should not be in percentage of total asset. But Im my opinion any expenditure which going to occur apart from daily living in next 7 years should go to debt fund. I have read somewhere about 7 years. And if you see the cycle downturn of equity market is around 7/8 years. So at emergency or your travels or gifting someone or buying a new car ( whatever you plan for next 7 years) you should not touch the portfolio.
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After allocating the amount discussed in point 1, From rest amount one can allocate around 10% to Gold. Gold is not for appreciation but it work as the insurance to equity. When equity goes down gold goes up.
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Rest amount can kept on equity. Although some safe cash around 20% to 30% can kept to average out and buy at bargain. Some people stay invested fully also. This 20% can put again at liquid or ultra short term bond funds, which can be used to buy at bargains. This is optional, if you have more margin of safety for the cost price of your stocks.
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We can not depend only on EPS growth. We need to know when to buy and when to exit. I am very bad at selling. Mr. Market behaves on his own. You can not take a exit decision for 1 or 2 quarters. And if you are targeting growth companies with 2 quarter share price will be halved. Take example to Hawkins, Kaveri, Kitex. See the history of price movement and see whether you are capable enough to exit at right time. So it is very important to buy at right price. That is why people are suggesting to buy mutual funds where some expert will mange your portfolio.
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Mutual funds are good as it is not concentrated. Less risk so less return. I do not think there is any exit load. May be 1% if exited within a year. You have to do research for choosing right mutual fund also. Like Fund house, AUM size, Age of the fund, Past returns. compare your last year portfolio return with best funds. One can choose a diversified fund with small cap or mid cap. (Looking at your script choice). One can choose the direct plan for less expenditure ratio.
Thanks for you time.
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Thank you. I am learning. New tricks for an old dog. Why I dislike Mutual Funds. Sorry I meant Expense Ratio (not exit)…
Expense Ratio for Mutual Funds
"Securities & Exchange Board of India stipulated a limit that a fund can charge. Equity funds can charge a maximum of 2.5 per cent, whereas a debt fund can charge 2.25 per cent…
Expense ratio matters especially in case of debt funds. Till last year, when bond funds were giving a whopping 14.5 per cent return, nobody cared about expenses. But that’s history now. The days of double-digit returns are over. With an all-round reduction in interest rates, bond funds are expected to give a return of 7-9 per cent this year. Thus, in a low yield universe, every penny will count. And as expenses are deducted from the fund before calculating the NAV, it is likely to be a major differentiating factor among bond funds where returns vary marginally…"
Dear Yatharth,
Thanks . I know you will get lot of advise now , but do what suit your personality and risk profile .
On point No1 : Great you mentioned rental income . But pl budget for following costs and risk . Maintainence charges ( which increases over time ) and Rent losses when tenant shifts and the period when you may not get any tenant
On point 2 : Fixed Income gives good post inflation purchase power if they are invested in right instruments . Pl go value research online site to see returns ( near tax free if invested for 3 years . I have got near 10.5% to 11% ) given by debt mutual funds . But the important part here the liquidity option when markets are down . I found that very useful . Realty cannot give that liquidity option . .
On point 3 : You are right . As highlighted earlier don’t invest more than 25% - 30% in Fixed income . Long term appreciation is limited
On point 4 : Exactly that is the point . Till 2003 HU record was good in terms of sales and EPS Growth , ROCE etc . It had Strong Moat + Indian consumption story and potential market size was equally strong . Then why it did not grow ?? Competition . Think why things will be different for Page , Eicher , cera , gruh and all others at such PE valuation … In these shares positive are already in price … . You need to find new page , eicher and cera in possibly other sectors … if you want to grow your wealth …
In India active mutual funds have done well over long period of time. Exit loads are almost nil if you invest > 1 years in most of funds …
Regards
Shailesh
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Thank you, Shailesh. WoW. Worth read a couple of times.
Dear Sir
There are many ways to cut a cake and most of the good ones are already covered. I want to re-emphasise the risk mitigation aspects - by using common mental models.
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A “black swan” event. This could be a personal or an economic black swan (disease, war, terrorist attack on stock exchange…). In such a scenario a concentrated portfolio will not provide the “anti fragility” that is needed to tide over trying times without collateral damage.
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Also, another important factor to keep in mind is the combination of the deadly duo - (a) Ego (the thrill of doing the research and investing in quality common stock) and (b) Cognitive decline with age (please take no offence sirji - we are all looking at this sooner or later!). These are a highly inflammable combination - enough said!
So my suggestion is to have a roadmap on how you will handle this (unseen, inherent) risk in the sunset years. In my view, looking beyond just the portfolio composition and accounting for physical and mental changes is key.
My objective is to provide you food for thought and a different perspective.
Very humbly
VD75
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There’s already a good amount of views and wisdom in this thread. I may not be able to add much.
- Do you have adequate health insurance? Based on my experience of managing three senior citizens in the family, I feel that this is a very important layer of protection.
- Focus on liquidity. I have been budgeting family expenses for the past decade and a half. From my experience, things hardly go the way we plan. There’s always some gray swan event (health, maintenance, repair, replacement) that takes us way off the planned budget (we get a few better years too). Would your rental income and (expected) dividends have some cushion for these?
- You can think of keeping an emergency fund in a fixed deposit or liquid fund (direct route) that will be tapped only in case of a short-term liquidity crunch. Do not think much about returns here, think of it like an insurance. A fixed deposit is a good option if you need funds the same day (medical emergencies?). A liquid fund or an ultra short term fund is better because it gives you the option to add or withdraw partially and leave the balance compounding in perpetuity. But, in the case of liquid funds, you get the money only the next working day. For debt funds, you get money in two working days. For both options, I would suggest the direct route (either through the registrar like CAMS, Karvy or directly through the respective AMC or MFUtility) as long as you are comfortable with the additional workload.
- An Equity portfolio to me always means a combination of stocks and cash. When I say 75% of my net worth is in equities, it could be 66% stocks and 9% cash or 74% stocks and 1% cash. So, consider ‘equity cash’ as yet another ‘stock’ and don’t mix it with your ‘liquidity portfolio’. If that is what you meant by 75% allocation, there’s nothing wrong with it.
- As far as mutual funds are concerned, I feel the work needed to maintain a mutual fund portfolio is somewhat similar to maintaining a direct stock portfolio, though lighter in workload. Unlike stocks, you may not get bombarded with stock quotes every minute, but just like stocks, mutual funds fluctuate in performance ( See Moneylife: Picking the Right Equity Scheme). You just need to make the decision to add/hold/sell based on a different set of parameters. In a stock, you can decide that based on past track record, management quality and current business environment to decide if it is worth holding (or adding more) through a temporary period of pain, or if there is an opportunity cost involved in holding it. You don’t have that visibility in a mutual fund going through a lull. Instead, you need to place faith in the fund manager(s). Over long periods, holding a good quality stock or an equity mutual fund (in direct mode) should give returns (though individual stocks can be far better). You just trade the satisfaction of filtering, selecting, monitoring and deciding on each individual stock for a lower workload.
- For now, just track your stocks closely and keep track of your performance. The important thing is whether you can put in the same kind of effort for years to come. It is futile to judge just based on age. I have come across physically and mentally fit octogenarians and those who were very active in their 40s, but slowing down when they hit 55. I can’t even predict how I will be in 10-15 years based on my current health (though there’s a high probability I will be good barring some wear and tear in the body machine). So, my suggestion is to stick with stocks for now. You always have the option to switch to mutual funds after five or ten years when you no longer feel it is worth the effort.
From the Moneylife Article
We analysed the rating of mutual fund schemes by CRISIL between 2007 and 2015. CRISIL publishes the ratings each quarter; so we compiled the rankings of the December quarter of each year. The rating agency assigns a rating from 1 to 5 to mutual fund schemes: where rating 1 signifies ‘very good performance’ while rating 5 represents schemes with ‘relatively weak performance’. Considering only those schemes which have been rated in five periods or more, we found that, of the 34 schemes which were ranked 1 in any given period, 19 schemes subsequently fell to a rank 4 or 5. As many as five schemes improved their ranking from 4 or 5 to rank 1.
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Therefore, fund ratings, too, fluctuate, based on the past performance of the scheme and provide no indication that the scheme will continue to do well in future. Some schemes may continue to do well, but many factors need to be looked into apart from performance over fixed periods.
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We analysed the returns of equity diversified schemes over the past 10 years. Taking a three-year rolling period with a quarterly frequency, we ranked schemes according to their percentile in each quarter. We found that, out of the 92 schemes, 45 schemes or nearly half the sample, appeared among the top decile in at least one three-year period. Of these 45 schemes, 20 schemes appeared at least once in the lowest decile as well. As many as 43 schemes appeared in the bottom decile at least once.So, the relative performance of a scheme can vary widely over a 10-year period. Only a few have performed consistently.
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There is a certain set of schemes whose performance can be extremely random. Take a look at the performance of Sundaram SMILE. The mid-cap scheme shot up from the lower quartile to the top quartile, but it could not keep up its performance and soon fell to the bottom of the list before shooting up, once again, over the past couple of years. SBI Magnum Midcap was consistently in the lower quartile in the first few years. The performance improved in the next few years, though it was volatile. However, over the past two years, it has been consistently in the top decile.The performance of schemes such as HDFC Top 200 and UTI Dividend Yield has declined over the years. These were once top decile funds and have now fallen to the lower quartile. SBI Emerging Business did well only over the three-year periods ended September 2011 to October 2013. The scheme was unable to keep up its performance after this period.
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Though it can be difficult to predict which scheme is expected to outperform its peers over the next few years, can below-average performers be avoided easily? Out of the top-40 schemes which were consistently present in bottom quartile in the first half of the period, only 12 schemes went on to rank among the top quartile of schemes in the second half of the period. The remaining 28 schemes were below-average performers.Is the reverse true as well? Among the top-40 schemes which ranked consistently among the top quartile, about 12 schemes (30%) were present in the lower quartile in more than 20% of the periods. About half the schemes were above-average performers; 17 schemes did not appear in the bottom quartile, even once.
Therefore, picking schemes based on their consistent performance over the past few years may not guarantee picking the best schemes for the future, but it can help improve your chances in picking a scheme which can deliver above-average returns.
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Thank you for wonderful insights. Yes, ego and dementia… deadly combination. Appreciate…
Great checklist, Santosh. To be read again. Thanks.
Yytharthji, Just to clarify direct equity funds charge about 1.5% annual expense. There are several funds who had given market beating performance over a long period of time
Eventually, you need to identify what are the goals that you are investing for and to meet those goals what kind of return do you expect. Then if MFs meet your required return, it is never a bad idea.
Thanks Butun
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Thank you. This is extremely useful. Sincerely appreciate. Great help to me.
As advised, put in some money in liquid funds. Thanks.
However, my portfolio is stagnant since last 1 year. just 7% y-o-y. And almost mirroring ( slightly above ) NIFTY since past August 2015.
Could you advise which ones to sell off? or reallocate within these stocks. Or simply leave it as it is.
Please guide as I am relatively very very new to this minefield.
Yatharth,
I am no expert, so cant guide you.
firstly, really impressed with this portfolio. keep it up. I like all businesses except granules ( dont ask me why).
Now I understand the pain of portfolio being stagnant when every junk is going up. Its easy to say one should hold a great business forever. But the irrational market makes it difficult to implement. Market takes them highly overvalued territory. Had these stocks gone up at the same rate as eps growth ( and a bit of rerating), investing would have been easy. That is why i consider 2014/early 2015 a very bad year.
Btw I too have been investing heavily in liquid funds and long term pure debt funds. ( proceeds from my sell or the fresh capital)
Gautam ji,
Compared to 7% growth in Market cap of my portfolio in 1 year, the ratios are as below:
Year on Year quarterly Sales Growth - 21%
Whole (financial ) year Sales growth - 16%
Average CAGR Sales - 3 years - 26%
Year on Year quarterly Profit Growth - 35%
Whole (financial ) year Profit growth - 32%
Average CAGR Profit - 3 years - 36%
Average Return on Equity of PF - 29%
Average PEG - 1.2
Price to Earning (P/E) Could be bad )- 34.9
This is average of entire portfolio. May be P/E is very high. Don’t know much about impact of these ratios but keen to study and learn…
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How did you calculate these figures at the portfolio level? This is something I have been contemplating to do for my portfolio.
You may create a spread sheet of all your stocks and take weighted average based on current value. In my case, weighted and normal averages are similar. The problem is my expectations. Not able to sit quite on high P/E stocks or able to sell as these are the stocks that will jump up once growth further improves. This year, from growth perspective, looks good and Q1 has been good.
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Your companies will continue to grow at high rate but long term return i.e. 10 years -expectation should be 15-18 percent with capital safety. It is reasonable expectation
Last month, added RBL Bank, Motilal Oswal Financial, Equitas & Ultramarine to portfolio.
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Also, Fiem Industries.