MF-Query Board

MF-Query Board

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I have been an active investor in mutual funds for the last 6-7 years and have invested in 10-12 different funds with all types of categories. I track them very closely for the returns and I use IRR for return calculation and redeem my long-term units if they cross 15 per cent in equity mutual funds and 10 per cent in debt mutual funds. Can you suggest what should be the ideal IRR for redemption?

- Pankaj Sharma

It is very encouraging to know that you are managing your investments actively. Though this is a good thing, it has its own disadvantages as well. Active investment management stands on three pillars – knowledge, experience and time. These three things are really very crucial when it comes to actively managing your investments. Knowledge helps you to analyse, experience helps you in risk management and time helps you get better opportunities. Therefore, if you are actively managing your investments then these three things are must haves, else it is prudent to have a financial adviser in place to do it for you.

In your case, we are assuming that you have all the three things and therefore let us understand things one by one. To begin with, why at all do you require 10-12 funds for actively managing your portfolio? Frankly speaking, on the lower end you need a maximum of two funds i.e. index fund tracking Nifty 50 or S & P BSE Sensex and gilt fund. And even if you wish to have a diversified portfolio, you only need not more than 5-8 funds. This could be large-cap or index fund, large and mid-cap fund, liquid fund, short-duration fund and long-duration fund. Therefore, as a first step, try to bring down the number of funds.

Even if you are taking sectoral or thematic bets, your number of funds should not be more than eight. You can technically have 10-12 funds if your investment amount is quite big. So, if you are a high net-worth individual (HNI) investing minimum Rs 50 lakhs, then having 10-12 funds is fine. Secondly, we do not know on what parameters you have chosen to book profits at 15 per cent in case of equity and 10 per cent in case of debt.  qWhat we feel is that the expectation of return should be set right before you invest.

The above table shows you the average rolling returns of S & P BSE Sensex for different periods over a period of 10 years, from November 2010 to October 2020. As you can see, in no period the average rolling returns are 15 per cent. Hence, if you have set your returns’ expectation to 15 per cent, then there are high chances that you won’t be able to book timely profits. Let us now check the same thing with debt.

The above table shows the average rolling returns of CCIL All Sovereign Bond Index for various periods over a similar period as S & P BSE Sensex. Here we see that in the long-term i.e. for three years or more the return expectations from debt funds can be near 10 per cent. However, in the short-term period it may not help to get you 10 per cent returns. Therefore, these return expectations from equity and debt might change as we move ahead. Our advice is to not keep the return expectation constant for long periods of time. If we are not wrong, the return expectation of 15 per cent from equity is quite old now. The ideal IRR according to us for equity would not be more than 10 per cent and for debt it would not be more than 8 per cent.

Given the above, there can be periods where you may exit by booking profits at the respective IRR levels and the returns fetched in that period would be more. But in such cases you shouldn’t worry as these are outliers and no one can predict exact entry and exit points. Remember, when you are actively managing your investments, you can never catch 20 per cent of the upward movement and 20 per cent of the downward movement as these are governed by those having the advantage of early access to crucial information.

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