Difficult times teach you the best lessons.
As a team, South Africa has always been the team falling short of being ‘the best team’! And they were very very close to giving a befitting reply.
It was the 1999 World Cup semi finals. The stage was set with two of the best teams under the sun – South Africa facing Australia. Then, the climax. Sixteen runs were needed from 8 balls, and a final wicket. Let’s relive the moments. Skipping a couple of heartbeats never killed anyone.
Yes, the moral of the story is obvious. Do not build additional risk to your plan when it is not absolutely necessary.
Sounds simple. Sounds easy. But is it as easy to follow? Not really!
Let’s take an objective look at where we stand today. The last 6 years have been very good for Indian MFs. We have grown an odd 280% in size. All 3 points of the triangle have seen a number stretch – no. of AMC selling points, distributors, and investors. The focal point being the investors. If asked about their experience in this phase, they will probably answer with a smile, Mutual funds sahi hai.
One look at the oxygen behind all of this – the returns. The picture’s a happy one. To encompass maximum angles, let’s take a broader index, Nifty500. This is how it performed in the last 6 years:
Three blockbusters, 3 not-so-good years put together gave a wonderful CAGR of 15.9% for the stretch of 2012-2017 CY.
How about this year, so far? We are down by 3.97% already. (As on 2.7.2018)
We have:
- US fed hiking interest rate. Another 2 might be on the cards by the end of 2018. (https://www.usatoday.com/story/money/2018/03/21/fed-powell-hikes-interest-rates-consumer-loans/444986002/)
- RBI too might have the same direction to follow. (https://m.economictimes.com/markets/stocks/news/another-rate-hike-is-likely-in-2018-some-in-mpc-may-push-for-august/articleshow/64487410.cms)
- US-China trade war looming large.
- Oil price under considerable pressure.
- INR vs Dollar forecast is not too bright for the domestic currency.
https://walletinvestor.com/forex-forecast/usd-inr-prediction
So what if a correction knocks on our door this year? Did you realise what will happen to your hard-earned 6+1 (2018) returns even if the market corrects by 25%?
Your handsome 15.9% (6 years CAGR) loses 44% straight and comes down to 8.91% (7 years CAGR).
4 balls, 1 run and a run out.
The counter argument is obviously a valid one: corrections are part and parcel of the game, equity is for ‘long term’. Agreed, theoretically. But in an industry where the average staying tenure for an investor is still below 4 years, probably giving a smoother experience is what we should focus on.
What can be the possible solutions to offer a better interim experience to an average client?
- Relook at the asset allocation.
- Look at opportunities (read lose balls to score safe runs).
One such opportunity is the spread across yield curve.
- 10 year Gsec at 166 bps over repo.
- Sweet spots across 1-3-5 year corporate papers.
(Spreads are wrt Gsec of similar maturity)
How can these opportunities be used? – By locking the yields with Fixed Maturity Plans, commonly known as FMPs. What they do is:
- Block these high rates and offer returns without volatility.
- Indexation benefit post 3 years.
- 140 bps arbitrage over a similar tenure FD (3 year AAA FMPs ~8.10% vs SBI FDs at ~6.70%) (https://www.sbi.co.in/portal/web/interest-rates/domestic-term-deposits)
4 balls, 1 run needed. Here is your short run, FMP. It is not probably the heroic piece to add a 30% to your portfolio in any year. But again, our hero worshipping has always led us to chase the best asset class/ best fund/ best alpha generator. The idea rather should be to create a more consistent and need-focused portfolio.
An FMP now can be a perfect fit. A hero now might not be needed.
chakstalks 