4 P's Approach to Mutual Fund Selection

4 P's Approach to Mutual Fund Selection
When it comes to choosing a Mutual Fund, investors are faced with an enormous task of picking a set of schemes that suit their needs from a large universe of funds in India.

At this stage, which comes after assessing their risk profile & evaluating their financial goals, investors are subjected to a lot of noise & often get mired amid investment tips and recommendation based on short term events.

A lot of this is a distraction & is irrelevant when it comes to choosing a mutual fund for achieving important long term goals like retirement planning, building a corpus for children or simply creating wealth.

Overcoming Myopia : 
When it comes to analyzing a mutual fund track record, even a 3 to 5 year performance may not be long enough & can be misleading at times, as several market themes play out over a much longer period.

This was the time of the great bull run in the markets as the equity markets rallied for over 5 consecutive calendar years.

These were euphoric times & the toppers of the mutual fund performance chart during the period might not have been the winners in the subsequent period & vice versa.

An analysis of 19 equity oriented mutual funds (ones that are currently classified as Large Cap, Flexi Cap & Multi Cap schemes which were in existence then) shows that the top 3 performing funds during the bull run of 2003 to 2007 ended with a ranking of 14, 12 & 11 respectively during the subsequent 5 years. The message is simple – Winners keep changing.

The two calendar years of 2018 & 2019 were favorable for Large caps in contrast of Mid & Small caps. During this period, a fund with a relatively higher weight to large caps within a category would likely have outperformed, but may not have continued to do well in subsequent periods.

The key message from these data points is that a particular trend in the market or a market cycle could persist for 3 to 5 years or even longer, effectively rendering us myopic while we choose a mutual fund.

Another example would that be of growth style of investing outperforming value style, a trend that prevailed over almost entire last decade.

So how do we go about when it comes to choosing among mutual funds? One may argue that instead of just looking at returns, analyzing risk-adjusted returns would help. However, it is difficult to overcome the problem of short to medium term trends overstating the potential of a particular fund, even with risk-adjusted returns as most research agencies consider just preceding 3 to 5 year time periods.

The solution to overcoming this myopia is to look for really long-term mutual fund performance over the last two decades.

The relevance of 20 or 25 years of track record : 
To begin with, one must remember that a strong track record over say, 25 years, means a particular fund has successfully sailed through good & bad times, multiple market cycles, geo political events & crisis periods like the Dot Com Event, the Global Financial Crisis & the recent Covid induced volatility.

A successful long term track record is also a testimony of the 4 P's - investment team’s robust Processes, risk management Policies, a stable set of People & a sound investment Philosophy at the core. It is these 4 P's that enable a fund manager through tough times in reducing the possibility of emotional decision making.

It is important to note that these 4 P's are common for a fund house & not just a particular scheme. Hence, experience matters & it would be advisable to choose a scheme managed by a fund house with long term track record. When your financial goals are long term in nature, select mutual funds based on long term track record. Here long term would signify 20 or 25 years.

Choose not only the scheme, but fund house as well : 
A better approach as a first step in scheme selection is to consider the fund house. Investing is a life long journey requiring you commit your hard earned money & placing your trust on a capable partner. This is where the 4 Ps – Processes, Policies, People & Philosophy can guide you to make effective decisions when it comes to mutual fund investments.

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FIRE (Financial Independence/Retire Early) Movement & Planning

The FIRE (Financial Independence/Retire Early) movement has got quite famous for the last couple of years in India. Every investor I meet these days wants to achieve FIRE asap. I would like to discuss some important points related to FIRE movement & types of FIRE today with you all.

What is FIRE Movement? : FIRE or Financial Independence Retire Early is all about creating enough wealth for yourself as early as possible, so that you are financially independent and free from worries of money. Once you achieve FIRE, your wealth is enough to generate an inflation-adjusted income for you which lasts your lifetime.

Let take an Example : Imagine a 30 yr old person with the monthly expenses of ₹ 75,000 per month (or 9 lacs a year) who has ₹ 18 lacs of current corpus & is ready to now aggressively invest ₹ 80,000 per month for the next 15 yrs & will increase the SIP by 8% each year. The investments growth will happen at 12% & the inflation assumed is 7% (pre-retirement) & 6% post-retirement along with post-retirement returns of 7%.

How will his corpus grow & where will it at age 45 (in 15 yrs time) : He will achieve FIRE at the age of 45 with a Corpus of ₹ 7.2 Crores. At that time his expenses would be around ₹ 22.8 Lacs approx & his corpus will be around 32X (32 times his expenses).

Do you actually stop working when you achieve FIRE? : Actually NO
It’s your choice if you want to work after FIRE or not. You can stop working if you wish, but if you still want to work, you can & any money you earn will be a cherry on the top and will only add up to your FIRE goal.

Top 3 reasons why people want to achieve FIRE?
1.It’s getting tougher & tougher to be employed till 60 these days & hence people don’t want to depend on the fact that they will keep earning for a very long time.

2. Once you achieve FIRE, life is less stressful & you get power in you to live life on your terms. People want to create a situation where they don’t have to dance to the tune of their managers & employers.

3. People also want to get out of stressful & demanding jobs by the time they hit a mid-life crisis & that means moving to a job that is more enjoyable, even if it pays very little. This is possible only when you have already created enough wealth

But, FIRE is tough!! Is it very easy to achieve FIRE? : NO, is the answer
1. Forget FIRE, even normal retirement at 60 is not possible for many people in India. We can clearly see that a big number of investors will have a bad retirement because they are not living their financial lives in the right way & are not on the path to creating sufficient wealth.

2. FIRE in that sense will only be achieved by a small minority.
a. Most of the people who achieve FIRE do that not because of fantastic returns, but very aggressive saving & deploying that money in meaningful investments.

b. If you keep your expenses in check & keep it on the lower side, it simply means that it becomes easier for you to achieve FIRE because FIRE is not just about wealth, but both wealth & your expenses

c. Most of the people who achieve FIRE are those who earn quite well. If you earn ₹ 1 Lacs a month & your expenses are ₹ 50 k per month, You are earning 2 times of expenses every month. That helps a lot

d. Most of the people who are not able to control their lifestyle & keep upgrading their life find it tough to achieve FIRE despite having good wealth as the goal post keeps shifting.

In simple words, if you want to know how does a person who achieves FIRE looks like, its like this :
1. The person has a very good income

2. The person saved a very big portion of that income (often more than 60-70%)

3. The person is not extravagant and mostly lives a frugal and simple life (but not compromising on fun and desires)

4. The person makes sensible investment choices (often earning at least more than inflation)

5. The person has mostly created liquid assets and not blocked his money, because you need to generate cash flow at the end

5. The person is quite confident of managing the money post FIRE & earning decent returns (he won’t keep all money in FD)

What is COAST FIRE? : There is one more concept called Coast FIRE, which is something many of you may have already achieved.
A person is said to have achieved Coast FIRE when he/she has enough corpus already which will grow to FIRE corpus in the future without the need for any new investments. This simply means reaching a point, where you just have to earn money equivalent to your monthly requirements and wait for 5-10-15 yrs to achieve the actual FIRE.

This discussion above is just for basic knowledge. I would love to know what you feel about FIRE & what are your thoughts about it?

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EPFO subscribers are entitled to free benefits worth ₹ 7 Lakhs

EPFO subscribers are entitled to free benefits worth ₹ 7 lakhs.
All EPFO members are automatically enrolled for the EDLI Insurance Scheme which provides an assured life insurance cover of up to ₹ 7 lakh to legal heirs or nominees in the event of death of policy holder

All members of the Employee Provident Fund Organisation (EPFO) are also entitled to a free life insurance cover worth ₹ 7 lakh under the retirement fund body’s Employees’ Deposit Linked Insurance Scheme (EDLI).

The EDLI-EPFO comes with the benefit of an assured life insurance benefit of ₹ 7 lakh at no cost or premium paid by the members.

The nominee or legal heir of EPFO active member gets upto ₹ 7 lakh insurance cover in case of demise of the account holder during active service.

EPFO account holders are automatically enrolled for EDLI insurance under Employees’ Provident Fund (EPF) & Miscellaneous Provisions Act, 1976. There is no premium or other formalities involved to avail the facility. There is no exclusion & the insurance cover is decided by the salary drawn by the beneficiary during the last 12 months prior to demise. It is to be noted that employer pays 12% out of which 8.33% is diverted to Pension Fund. An employer also pays 0.5% of pay in EDLI Scheme.

The EPFO body time & again tweets about the facility & its features to make subscribers aware of the salient features of the scheme.

Few things to know about EPFO-EDLI Scheme : 
1. Maximum Assured Benefit : The maximum death benefit upto ₹ 7 lakh to the nominee or legal heir in case of death of the EPFO member during service. The maximum sum assured earlier was ₹ 6 lakh which was increased to ₹ 7 lakh subsequently from April 2021.

2. Minimum Assured Benefit : The minimum assured benefit for legal heir or nominees of an EPF subscriber is ₹ 2.5 lakh under the ELDI 1976. Sum assured is based on salary during the 12 months prior to the death.

3. How is sum Assured Calculated :  The claim amount under this scheme is 30 times the average monthly salary in the past 12 months subject to a maximum of ₹ 7 lakh. The average monthly salary is calculated as the Basic + Dearness Allowance of the employee. A bonus of ₹ 2.5 Lakhs is also applicable under this scheme The employer can opt-out of the scheme in case he takes a higher paying life insurance scheme for employees under Section 17 (2A). There are no exceptions to the insurance coverage provided by EDLI. It protects the insured person round the clock

4. Free for Employees : This life insurance benefit being given to the EPFO member is free of cost for the PF/EPF account holders. Their employer will pay 0.50 per cent of the monthly wages up to the ceiling of ₹ 15,000.

5. Auto-Enrolment : There is auto-enrolment provision for PF or EPF account holders. They become eligible for EDLI scheme benefit once they become an EPFO member or subscriber.

6. Direct bank Transfer : The EDLI scheme benefit will be directly credited to the bank account of the nominee or legal heir of the EPF or PF account holder. Note that an EPFO member is only covered by the EDLI scheme as long as he/she is an active member of the EPF. His/her family/heirs/nominees cannot claim it after he/she leaves service with an EPF registered company. There is no minimum service period for availing EDLI benefits. The employer has to make the contribution for EDLI & no fee can be deducted from the employee’s salary.

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