Performance & Recommended Portfolio Update

2018 has been a tumultuous year so far. While the largest of the large caps have continued to hold and even gain some ground, the small and mid-cap space has seen a correction. For example, the NIFTY Smallcap 100 Index peaked on 15^th Jan 2018 and has since lost ~37% of its value in a drawdown that’s already close to 9 months old.

Interestingly, the NIFTY Smallcap 100 Index now is more or less back at its Jan 2008 level.

That’s too much excitement.

Amidst this backdrop, our all-weather portfolio recommendation has held its own quite well.

We recommended the following equity basket in Jan-2017. The funds in our equity basket have zero to minimal overlap and provide a low-cost well-diversified portfolio using low-cost index funds where possible.

Then based on the user’s stage of life risk profile (married, kids, home ownership etc) and duration of goals, we recommend an allocation into Equity and Debt basket above. This is based on the time-tested Mutual Fund separation theorem, which states “any investor’s optimal portfolio can be constructed by holding each of certain mutual funds in appropriate ratios”.

This is how our equity and debt basket schemes have performed,

Since recommending –

2018, Year to date –

Overall our recommended portfolio has held up well to the market turmoil and we can see that diversification is clearly working. Our allocation to large caps and international (US) funds, which seemed contrarian when we made them, have shown their diversification benefits this year.

This is not naïve diversification of naming 3 large cap schemes and 3 small cap schemes and so on and so forth. Our portfolio construction ensures that the investor is exposed to orthogonal sources of risk and thus overall portfolio variance is reduced considerably. The only miss is that we underestimated the pressure on the RBI to raise interest rates which impacted the performance of our long-term GSEC fund vs holding liquid or ultra short-term funds.

Let’s take an example now of a 30-year-old user, with average risk profile and a retirement goal, for which we would recommend a roughly 85% Equity and 15% Debt asset allocation.

The allocation for such a user would be like –

The performance for this asset allocation would be,

Since recommending –

2018, Year to date –

Shown another way, the scheme contribution to returns for the 85/15 equity/debt allocation would be,

Since recommending –

2018, Year to date –

We are happy with the performance of our all-weather portfolio and will continue with the same framework for now. We are making the following changes to keep the portfolio up to date to the latest scheme choices available. Our recommendation algorithms have been updated to reflect these changes –

Over the benefits listed above, the changes will lead to a net reduction of expense ratio of 7 bps in our equity basket and 10 bps in our debt basket.

The new recommendation will start showing in our app and website starting today. If you are following our allocation, then we suggest you stop your SIPs in the existing schemes and start in the new schemes. The existing units already bought, can we be left as is or moved to the new schemes over time after confirming exit load and tax status.

We are closely watching the small-cap space to see when the opportunity is right to start adding some direct small-cap exposure in our equity basket.

For now, we are happy to wait.

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