Hum Do, Hamare Saou?

Sep 05, 2022
Author: Ajit Dayal

What is better 2, 10, or 100?

Our great, great grandparents used to have many children not because there were no internet, animated hostile TV news shows, or malls to go to (true, those consumer traps did not exist) but because life was unpredictable. What our ancestors were doing was basically playing the game of probability. Centuries ago, maybe 1 in 10 children died at the time of birth, possibly another 2 died before their fifth birthday and maybe another 5 died before they were twenty-one years old. With 2 out of 10 children - or some such ratio - surviving into adulthood to continue the tradition of looking after their parents, it made sense for our ancestors to sow as many seeds as possible. The logic being that some of these children will mature and look after the parents in their old age. But, unless our ancestors were kings with numerous brides, they did not end up with 100 children and hoped that 20 would survive: having too many children is also a problem as it is an emotional and financial effort to raise many children. There had to be a balance between the need to diversify for safety and concentrate on the best outcome.

Though life still is and always will be unpredictable with myriad tragedies unfolding, parents today recognize that the infant mortality rate is much lower: fewer children die at birth today than centuries ago. This, conversely, suggests that the rate of survival of an offspring is much higher. Hence, the fertility rate: the number of births per child-bearing female has declined from 6 in the 1960s to around 2. If more children survive and make it to adulthood, why is there a need to give birth to 100 children?

Advantage investor!

Given the lack of medical facilities, toilets, and other basic hygiene, our ancestors had no idea what the eventual size of their 'portfolio' of children would be. Today's parents have far superior access to information and infrastructure and can make well-informed decisions on this important aspect of life. 100 children may be too much for most to oversee (even if we have the physical capacity to procreate and find a woman to give birth to 25 sets of quadruplets!). Contemplating 10 children may have been about the right number in the 1900s while, in today's busier and advanced world, 1 to 3 children may end up as the norm in the 2020s.

Investors in mutual funds, too, can use the evolution of time and knowledge to their advantage to work out how many mutual funds they should have.

Financial theory proposes that our investment portfolios must be diversified to manage different economic and financial situations.

Firstly, there must be diversification across asset classes (see 12-20-80; baara; bees aur assi below but the base case suggested allocation is 12 months of your expenses in the safe liquid fund and then the balance is 80% in equity mutual funds and 20% in gold, and you can modify this to levels that make you feel comfortable).

Secondly, investors must own various kinds of equity mutual funds - investors must invest in a diverse range of investment styles: small cap, mid cap, large cap, blue chip, growth, value, ESG, etc.

And though these funds can all be from the same fund house - with different fund managers managing each of these styles. No fund manager should fool you: each of these equity 'styles' needs a different mindset and skill set. A long-term value investor cannot be expected to do satta in small-cap momentum and produce consistent performance over longer periods of time.

Having 100 equity mutual funds in your portfolio sounds intuitively silly. Having 1 to 3 sounds risky. Maybe the answer is somewhere in the 8 to 12 range.

Selecting your basket of mutual funds.

A sensible and thoughtful investor who recognises that they should NOT invest in one style of investing, in one approach, in one asset class, and who recognises the need to allocate your savings across a few asset classes to build long-term wealth has already won half the battle of long-term investing. The trick now is to figure out which of the thousands of mutual funds out there will work for you!

PersonalFN has guides and research reports that can help you select the best / safest liquid funds, equity mutual funds, and gold funds. (click here to see their mutual fund research)

Alternatively, QuantumAMC has built an easy-to-use calculator which has a base suggestion of 12-20-80, namely: (a) 12 months of expenses kept aside in safe, liquid, and lower return Quantum Liquid Fund; (b) keeping this money aside you have a residual pool of money; from this 80% of the balance in a bouquet of equity funds, and (c) 20% of the balance could be invested in the Quantum Gold Savings Fund. The elegance of the solution Is that you can change the mix with a few keystrokes to suit your level of comfort. For those investors who prefer the 'passive style' of investing and believe in the index-hugging, low-cost solution (rather than the claimed brilliance of fund managers who select stocks and build 'active-style' portfolios, QuantumAMC's Passive option is a click away. Enjoy the freedom to choose your path forward by using the easy-to-use calculator 12:20:80 (baaraa, bees, aur assi).

Table 1: Passively managed and factor-based equity funds cost 60% less than Actively managed equity funds

Asset class allocation illustrations as per QMF 12 20 80 % weight in an Actively Managed portfolio Expense Ratio % weight in a Passively Managed Portfolio Expense Ratio
Liquid Fund, safe money 12 months 0.16% 12 months 0.16%
Gold, after Liquid Fund 20% 0.06% 20% 0.06%
Equity, after Liquid Fund 80% 0.72% 80% 0.27%
Of which Equity Fund of Fund 75% 0.51% 0% -
Of which Value Fund 15% 1.29% 0% -
Of which India ESG Fund 15% 0.94% 15% 0.94%
Of which Nifty Fund of Funds 0% - 65% 0.20%
(Source: www.QuantumAMC.com)
 

Despite my bias toward value investing - a style that was taught to me by the late Tom Hansberger, the co-founder of Templeton, Galbraith, and Hansberger, I have diversified my own investments in the Quantum Mutual Fund complex. This approximates my holding and planned investments as of July 2022.

Table 2: Baaraa, bees, assi (12 20 80) - and my asli allocation as of July 2022

Asset class, QMF Base Suggestion Ajit Comment
Liquid Fund, safe money 12 months 21 months Partial Switch to Q Nifty ETF FoF
Gold, after Liquid Fund 20% 25%
Equity, after Liquid Fund 80% 75% I have the Multi Asset Fund that has some equity exposure
Of which Equity Fund of Fund 75% 25%
Of which Value Fund 15% 44% I have a 'Value bias'
Of which India ESG Fund 15% 30% I have a 'Values' bias
Of which Q Nifty ETF FoF Pending allotment
Other: Multi Asset Fund 0% 5% Alternative to an FD
 

If subscribing to PersonalFN's mutual fund research and Doing-It-Yourself sounds too complicated for you as you may not have the time and if the Quantum AMC 12-20-80 baaraa-bees-assi though easy and can be tailor-made to your specific needs is a little too much work for you, there is the Quantum Multi Asset Fund which covers all the asset classes in the ratio that the fund manager thinks is best. Furthermore, if you wish to know more about equity mutual funds but don't want to figure out which are the most suitable 8 to 10 equity funds on offer, the Quantum Equity Fund of Funds is what you could consider. Their month-end report details the portfolio and the performance.

In summary, stay Thoughtful and Deliberate, you don't need 100 mutual funds, though you certainly need more than a handful. Make balanced investment decisions for your family and yourself. Embark on your journey of protecting your capital and enhancing your wealth with the powerful tool of 12-20-80 (baaraa, bees, aur assi) or the research services of PersonalFN. And tell me what you think about it...


Ajit Dayal is the Founder of the Quantum Group which includes Quantum Mutual Fund and PersonalFn. Ajit has over 35 years of research and investment experience. An avid writer and speaker, Ajit has been profiled and interviewed by many international and local newspapers, magazines, TV channels and radio shows and is never shy of speaking The Honest Truth. Sign up here to get The Honest Truth delivered every week into your mailbox. It will change the way you think about your investments.

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