Challenges to Long-term Financial Planning via MF SIPs…

POSTED BY shantharam ON May 2, 2013 10:18 pm COMMENTS (10)

I would like to point out here one caVeat of investing in MF.

When one sits to build a portfolio selecting 4 very well performing 5star rated funds , for each goal of his he fixes a SIP amount assuming 12 % CAGR.Say for a time frame of 25 years for retirement he chooses 4 funds expecting a cagr of 12 % for a predetermined corpus to be built.

During this block of 25 years am sure one has to exit from almost all funds if not all , following the strategy of exiting underperformers for couple of years and to put the accumulated corpus in liquid / debt funds and then do a STP into well performing funds.( I assume here that most of the funds do not perform consistently well over 25 years time frame).

What happens during such period of exiting and reentry in MF is a period of growth of say not more than 8 % , w

hich is detrimental to our whole purpose of initial calculation of financial planning goals / corpus build up.

One might counter argue. 
1. That well performing funds have delivered much more than 12 % – say sometimes around 15 – 30 % – and this will help in reducing the brief period of underperformance and retarded growth during exit and reentry strategy into other mf. But I completely disagree on this because of the advocacy for rebalancing of mf portfolio by industry experts , which in itself negates the overperformance by MF by investing the excess in debt. SO in effect by rebalancing , the excess returns gained in a year over 12 % in equity mf is invested in debt.
2. Aim for a cagr of 15 % so that in effect atleast a practical 12 % cagr is achieved – SOUNDS MOST PRACTICAL AND THE BEST OFF ALL SUGGESTIONS.

This is an area where ULIPS / misselling of insurance come investment products score over MF ‘s. Over long period of time say over 20 years the returns given by ulips / mixed products are more or somewhere near to what is promised initially at the time of policy initiation presentatioon , thus not hampering our long term goal.(THOUGH I AGREE HERE THAT RETURNS ARE COMPARATIVELY MUCH LOWER THAN IN MF ). 
Where ulip scores is in there top down approach and almost achievement of goals and the lack of need to require once in a year review/ PORTFOLIO rebalancing.

In conclusion I feel that without the expertise of certified financial planners – to plan for goal based portfolio via MF investment over long period of time , one is certain to not achieve optimal results in long term , based on mf investment. The story is completely different for medium term investments of say 5 to 7 years duration where mf score heavily over ulips. 


10 replies on this article “Challenges to Long-term Financial Planning via MF SIPs…”

  1. Dear Shantharam, should I add more after dear Ramesh’s reply.



  2. shantharam pai says:

    Ramesh Sir,
    You mean to say that the investment strategy in both the scenarios isn’t different?
    Poorly performing MF to me means a MF which was invested in keeping a certain long-term goal in mind and in the interim I find that the returns will not meet my end-goals. Whereas its peers are doing better.
    I did not say a ULIP will work better than MF. no doubt even a ULIP is market-based. What I meant is I can invest according to my long-term goal as I know how much to invest to reach the goal. Whereas in self-investment in MF, I dont know how much to invest.

    1. Ramesh says:

      The investment strategy is Same. No matter what is the amount and whatever the assets currently (in case 1, it is cash; in the case 2, it is equity), the overall return will depend on the asset allocation (and of course, the behavior of the asset classes).

      The individual instruments are just part of the asset classes (and with inter-instrumental variations). So overall, a Ulip equity fund and an independent equity MF will be called equity only from an investor’s point of view. But because of different expense (front or backload, or others, etc) and different quality of the management, their behavior will be a little different (the overall behavior will be more or less according to the respective benchmarks). Of course, the primary aim is to avoid a very bad instrument or a very bad MF.

      There will always be some fund which would be doing great in a short term but that does not mean your long term goal oriented fund is bad or poor. You cannot compare short-term performances for long-term oriented funds, unless there is significant deterioration of the management team (which is a qualitative aspect and not a quantitative one).

      Just because you can invest according to your long-term goal in a Ulip, it does not mean you will Get to that goal. Same with MF. Those are risky!!
      There is no question now to choose between MF and Ulip, with Direct Plans.

  3. shantharam pai says:

    Ashal Sir,
    I am not making any conclusions Sir. Just trying to get answers to my Query. To add on to the Question consider 2 scenarios:
    1. I have lumpsum os say 7lacs
    2. I have corpus of 7 lacs in a poorly-performing Equity fund which I want to exit.
    How come then the strategy to invest this 7 lacs is different in both the scenarios

    1. Ramesh says:

      It isn’t.

      And define a poorly performing MF (which was performing well in the past, since you invested in it). What are the criteria ?

      And also define what is a poorly performing Ulip fund and how a ulip fund can work and not a MF (in your original thesis).

  4. Dear Shantharam, you are free to make any conclusion based upon your understanding of the market. If you are happy the Eq. fund – debt fund – STP – Eq. fund, you should not complain about lower return in the process.



  5. shantharam pai says:

    Ashal Sir,
    If the Market goes up then everything goes well. The entire point of Discussion here was that it is difficult to predict the outcome and hence our long-term goals of say Retirement corps may take a beating. By all chances the Markets would have already tanked in the first place where I had to exit a certain Equity Fund. And in a scenario where the Markets have tanked, and my Equity MF has fared poorer than the others in the segment, is it wise to exit that and put the entire lumpsum in another Equity MF when the chances of further tanking are very high. In that case there may be negative compounding.

  6. Dear Shantharam, if FIBC ‘ll go down, it means the market is also tanking (not considering the immediate underperformance). I already told in my prev. reply, if we are merely shifting ,money from 1 fund to another, it should be immediate to reap the benefit of compounding on Eq. What ‘ll you do if opposite happens i.e. market goes up & up & up from the date of redemption?



  7. shantharam pai says:

    @ Ashal Sir,
    Thanks for the prompt reply. There are many advocates who advice transferring the lumpsum at one go from one Equity MF to other. And there are advocates against this too. What if in your case, I put the entire money in FIBC and realise that it was at its all-time high and there are chances that this will go downhill from that point of time? As we know its very difficult to time the markets. And that is why few advocate transferring it to Debt Fund and doing STP to Equity so that benefits of SIP can be availed.
    What is your take on this Sir?

  8. Dear Shantharam, all the thesis written by you is started with a flawed base. Where? Let me explain.

    Say I started my investment in HDFC Top 200 & after 5Y, there is a need to change it. Now point to be noted is – My money is already invested fully in Eq. & I just want to replace the fund. Say new opted fund is Franklin India Blue Chip. Now I ‘ll simply start fresh SIPs into FIBC & at the same time, redeem from HT200 & ‘ll invest all the amount in one go in FIBC. There is no need to opt debt fund & do the STP here as the lump sum amount is not your fresh money & you are merely changing your passenger train to Rajdhani 🙂

    Hope I’m able to answer your query.



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