## Case Study – Combining HDFC Top 200 & Recurring Deposit – Part 4

This is the fourth and final part of the SIP Case Study which made use of HDFC Top 200 as the chosen fund. In previous post, I had evaluated the impact of considering the interest accrued on Market Crash Fund. You can read that analysis here.

In this post, I am evaluating the impact of changing the trigger point to one which is dependent on P/E Ratio of the index rather than NAV of the mutual fund (HDFC Top 200 in this case).

So after much deliberations and reader feedbacks, I came up with the following scenario to evaluate:

Scenario 1:

Investment of Rs 10,000 will be split between MF SIP & Recurring Deposits on basis of following conditions:
• If index PE between 17 and 22, SIP=Rs 5000 and RD=Rs 5000
• If index PE>22, SIP=Rs 0 (i.e. SIP stops) and RD=Rs 10,000
• If index 15<PE<17, SIP=Rs10,000 (i.e. SIP doubles) and RD=Rs 0
• If index PE<15, SIP=Rs 10,000 and RD=Rs 0; and Market Crash Fund (MCF) is utilized as follows – As soon as PE goes below 15, accumulated MCF is split into 3 parts. First part is deployed immediately and remaining two over the next two months.

Simple speaking, MCF Trigger point will be at 15PE. At this point, money accumulated will be split into 3 parts and deployed over next 3 month. SIP investments will stop if PE>22. SIP investments will double if PE<17.

The graph below shows the amount invested in SIP and amount added to MCF for all months starting 1996. I have also added the index PE for the day to show the correlation between the PE and amounts going into SIP and MF (as explained in scenario above).

 Correlation between Index PE & SIP+RD Amount (monthly basis)

As usual, the above ‘complex’ scenario was compared with a simpler one below:

Scenario 2

Investing Rs 10,000 every month, without any regard for markets movements, PE levels or for that matter, anything.

Note – Since the chosen fund – HDFC Top 200 started in 1996, I required index PE data starting from 1996. But problem I faced was that index PE data is available starting only from 1999. Hence, from 1996-1999, I chose SIP+RD (Rs 5000 each) irrespective of index or PE levels.

Final Results of Analysis
In first scenario, the total money outgo (put in SIP, used from Market Crash Fund and money still lying in MCF) is Rs 23.1 Lacs. Of this, Rs 12.8 lac is invested as SIP, whereas around Rs 5.5 Lacs was invested in parts, at regular intervals, as and when a trigger points were reached. The money currently available in MCF is around Rs 4.8 lacs, where interest has been considered @ 8% per annum and has been calculated and added to MCF after completion of 12 months. Wherever trigger point is reached in less than 12 months, interest has been ignored for that 12 month period.

There is no change in second scenario and the entire Rs 21.8 lac is invested as SIP of Rs 10,000 every month.

I have chosen the SIP investment (& PE) dates as the first trading day of the month (whether 1st, 2nd, 3rdor 4th…)

So results are as follows:

This time, the pure MF SIP (Scenario 2) delivers Rs 2.46 crores. And a combination of SIP+RD (Scenario 2) delivered Rs 2.47 Crores. If we were to include the money currently available in MCF, it would be Rs 2.52 Crores.

 Scenario 1 & 2 Comparison

So…let see what it means…

It might seem that SIP+MF combination has beaten the pure SIP this time. But in reality, it’s not true. Why?

I have not considered the penal charges & tax implications of liquidating the MCF (via RDs). Though it might not be significant, it still brings down the returns over a period of almost two decades. Another thing to note here is that I have considered interest on RD as 8% calculated yearly. This itself can fluctuate depending on prevalent interest rate scenarios during the last 20 years.

But most importantly, this outperformance of Rs 1 lac (or Rs 6 lac if you consider the accumulated MCF), requires you to monitor PE ratio all through these 20 years and be ready to calculate how much to invest (if PE breaches 15 on lower side or 22 on upper side) every month. Also the charges of starting / stopping RD, and for that matter SIP is also something which needs to be taken into account.

By the way, if you are interested in having a look at the exact numbers, click on the image below:

 Full Analysis

So this analysis has once again proved (like previous parts 1, 2and 3) that, for average investors, it is more than enough to continue investing as much as possible every month in a good diversified mutual fund. They should not pay much attention to ups and downs of markets and whether markets are overvalued or undervalued. No need to put your money regularly in a Market Crash Fund (MCF) solely for purpose of investing in MF when markets are down.

 PE Ratio of Index & Amount Accumulated in Market Crash Fund

But if you are lucky to have some surplus funds when markets are trading at low valuations (around PE15), then make it a point to invest. Don’t be afraid. People around you would try to convince you not to invest. They will try to tell you that markets will go down further. Please don’t listen to them. Even if it goes down (even upto PE12), remember that it will soon revert back to mean (17-18) and then you will be happy that you invested during the downtimes.

What Will I Do?

Personally, I do maintain a Market Crash Fund (MCF) which is funded by interests, dividends and any surplus income which I generate. And I use this fund for buying direct stocks (as and when I feel that stocks I like, are trading at low valuations). I generally don’t use this MCF for MF investments.

So what will I do going forward?

The above analysis clearly shows that there is not much point in taking such an approach. And that is because the additional returns generated by this approach do not justify the efforts put in last two decades. But when not buying individual stocks, I might still use my personal MCF to buy MFs in lumpsum. But I will do it only when I am not absolutely sure of which stocks to buy… but I am pretty sure that markets are grossly undervalued and should be invested in.

## Case Study – Combining HDFC Top 200 & Recurring Deposit – Part 3

This is the third part of the SIP related Case Study where I compared the performance of following 2 scenarios:

Scenario 1: Investing regularly (Rs 5000) & periodically making lumpsum investments when markets are down. This lumpsum amount would be an accumulation of an additional amount of Rs 5000 every month (+ annual interest@8%), which will be used at one-go when markets are down (at a pre-decided trigger point).

Scenario 2: Investing regularly, double the regular amount (Rs 10,000) over a period of 20 years in a decent, well diversified mutual fund.

The part 2 of the case study was more about reader’s reactions… where many of my assumptions were questioned. And I was glad that readers were very vocal about it as it pushed me to do further analysis. If you haven’t read the feedbacks, I recommend you do it right away here.

In this part (3) of the study, I test a few other scenarios.

Please note that I initially started this study to prove that there ‘should be’ a structured solution, which could make use of following two facts – (1) It doesn’t make sense to stay out of markets at any time – Why? (2) It seems more logical to invest ‘more’ when markets are down.

But as I progressed with my analysis, it started becoming clear that it might be better to stick with simple SIP of mutual funds rather than thinking too much about investing more using a market crash fund. I am using the word ‘might’ as its still possible that people might be using a similar approach and making profitable investments when markets go down.

But for average investors, it might be a sensible to stick with SIPs.

But nevertheless, I will complete what I started….

Re-Analyzing To Include Interest Component of RD (Market Crash Fund – MCF)

In first scenario, the total money outgo is Rs 21.9 Lacs. Of this, Rs 10.95 lac is invested as SIP of Rs 5000 every month whereas rest is invested in lumpsum at regular intervals as and when a trigger point is reached. The interest on RD has been considered @ 8% per annum and has been calculated and added to MCF after completion of 12 months. Wherever trigger point is reached in less than 12 months, interest has been ignored for that 12 month period.

There is no change in second scenario and the entire Rs 21.9 lac is invested as SIP of Rs 10,000 every month.

After inclusion of interest component, there was expectation that second scenario would be trumped by first one. But still the second scenario seems to have an edge. And this time, the MF+RD combination delivers Rs 2.23 crores whereas a simple MF delivers Rs 2.43 Crores. (without interests, the SIP+RD number was Rs 2.14 Cr)

Trying Out 75%-25% Split for SIP+RD Scenario

A reader had suggested that I should also try out a scenario where SIP+RD combination is more skewed towards SIP. So I tested a scenario with 75%-25% SIP+RD combination. But here also, there were no earth-shattering differences in results. A SIP+RD of 75%-25% resulted in a corpus of Rs 2.33 Cr, which falls short of Rs 2.43 Cr of simple 100% SIP.

________________________________________

I think a lot of effort has already gone in analyzing these scenarios 🙂 But I will like to try out one more scenario. And that is of changing the trigger point to one which is dependent on P/E Ratio of broader markets rather than fund NAV. I will be analyzing this scenario in 4th and last part of this case study. My tentative scenario for evaluation is as follows:

MCF Trigger points will be at 15PE. At this point, money accumulated will be split into 6 parts and deployed over next 6 months (if PE remains less than 18). For pausing investments in regular SIP when 22PE is achieved, the money which was supposed to flow into SIP will be added to MCF. Once markets go down below 22PE, regular SIP will commence. But trigger point for MCF deployment will remain at 15PE.

Let me know if this scenario sounds fine to you all….or if something more needs to be added here.

PS – I know I am complicating things. But lets just finish what we started. 🙂

## Case Study – Combining HDFC Top 200 & Recurring Deposit – Part 2 (Reader’s Reactions)

The Case Study post where I tested the following scenario (hypothesis) generated quite a lot of discussion.

Investing regularly (Rs X) & periodically making lumpsum investments* when markets are down, will fetch higher returns than regularly investing double the regular amount (Rs 2X) over a period of 10-15 years in a decent, well diversified mutual fund.

* This lumpsum amount would be an accumulation of Rs X every month, which will be used at one-go when markets are down (at a pre-decided trigger point).

After going through all comments, I thought it would be beneficial, to do a follow up post highlighting the major points brought forward by the readers.

At the end of the post, I had posed a few questions as I myself was not sure how to interpret the results achieved.

– How is it that a simple MF of Rs 10,000 a month beats a combination of Rs 5000 a month MF and lump sum investments when markets are down?

– Is it something about the assumptions that went wrong?

– Is it that trigger point should have been either more than 20% or less than that?

– Is it wrong to split the investment amount into 50%-50% for SIP & RD in first scenario?

– Is it because of the extraordinary bull runs of 2003-2008 that this analysis went for a toss?

– Is it that HDFC Top 200 has been a stellar fund and any other fund would have given results in line with hypothesis?

– Is it entirely wrong to do this comparison at all?

Readers of the post had a lot of views about all the questions above. This post shares those thoughts and ideas….

So over to readers…for reactions and brickbats 🙂
On Ignoring the Interest component of RD (Market Crash Fund)

Shan: You can’t ignore interest.

Saurabh: Definitely interest should be factored in the calculation. And that is because we are considering very long periods of RD 1996-2000, 2002-2008, 2009-2011 and 2012-14. Even at a conservative 9% (it use to be higher in the late 90s), that would mean that the money would have compounded by 1.4 times for every 4 year period.

Jay: I know a lot of readers have mentioned RD interest component but that’s beside the point that you are trying to make and my guess is even if included won’t amount to a whole lot which was the expectation to begin with.

Dhanesh: You haven’t added any interest for reserve money for simplicity. I think it is highly distorting the conclusion.

In next part of this case study, I will be redoing the calculations where interest in recurring deposits will be included.

On Choosing 50-50 Split

Jay: The split too sounds good to begin with. I guess you could try a 75-25 (SIP-RD) as well.

Ajay: I think a simple SIP in HDFC Prudence for full amount would have provided a Rs 2.17 Crore return. A RD cannot be broken without penalty at given time (that is when the trigger point is reached). Also the interest is taxed. A 25% Debt folio takes care of the equity to debt and vice versa shifts without any tax implications and hassles to investor.

In next part of this case study, I will try out the 75-25 combination. As far as Ajay’s idea is concerned, I think it’s a practical way of achieving what I wanted to using a combination of MF+SIP.

On Choice of Fund

Anand: To start with, having a MF (and that too one tracking top 200 stocks) may introduce too many variables (basically active management comes into picture). Instead, you might want to do same analysis with a pure index fund.

I could have tried using an index fund for further analysis. But I think it would have still resulted in similar results…with only difference being the degree of over- or under- performance.

On Choice of Trigger Point

Anand:  Instead of NAV, you might want to use the PE ratio.

Dhanesh: One major problem with your model is your trigger point. You are using historical high value as trigger point which I believe is wrong anchor. Historical high is like 52W High / Low price of stock, buying a stock comparing 52W High and current price will give mediocre return. I think appropriate trigger point should be NSE200 or BSE200 PE. Your old post on PE ratio should be a good guide to choose appropriate PEs. I like PE -15 as a good trigger point. Once trigger point is reached, I think money should be systematically transferred to Equity over 6 month’s period. I also think there should additional trigger at PE 22, which should warn investors to systematically withdraw money.

Ajay: One of the options is to see the entry points via PE of index, but here always low PE is always accompanied by bad news so no one goes and invest more at that point. If the investor is ready to base it only on PE, a investor should stop investing in equity at 20PE and should start investing in debt funds and wait for investment opportunity below say 13PE lumpsum investment. But getting it below PE of 13 or so is not that frequent in our market. If you look at records, it is only few time it touched that level and at that point you are flooded with negative news, so do one dare to invest.

This was an interesting thought of choosing a trigger point based on market valuations. I would personally have done this too but as explained in comments of previous post too, I decided to stick with data points which were all linked to the chosen fund. But nevertheless, I tried analyzing the results using following scenario:

Trigger points will be at 15PE. At this juncture, money accumulated will be split into 6 parts and deployed over next 6 months (if PE remains less than 18). As far as pausing investment post 22PE is concerned, I will see if I can include that in my analysis due to lack of time at my end. 🙂 (I hope you all will understand)

General Reactions /Suggestions by Readers

Saurabh: Based on their age, people should keep a part of their money in cash and multiply it using FD/RD. Another part should constantly be used for doing MF SIP. And another part should be used to pick stocks if the person knows what he is doing. For a 30 year old, I’d do a 10-40-50 split. I don’t have the data but I feel that money kept in MFs as SIP for 20-30 year period should do very well because some of the best money managers know where to park the money during bad days so that they outshine during the good days.

Abinash: It is always a good idea to continue running SIP and separately make a 2 year fund, And when markets crash, put one year fund as lumpsum… I know if you consider the RD interest component in your analysis too, it will definitely beat the return.. But truly how many of us can do this?

Govar: While I agree that SIP would be the best approach for a period of 20 years, the problem is you don’t know if you can really leave the money alone for 20 years. There are several milestones that could disrupt the process. So I don’t do a SIP in an over-valued market (PE of 21+). My plan is to systematically accumulate cash (via arbitrage funds since LT returns are tax-free) and balanced funds when market is hot (PE 21+), invest in Equity MFs below PE 21 and pump in cash when valuations are really down (18 and below).

Jay: Instead of having a single trigger to dump all RD monies, we can have sequential triggers for step wise deployment. But it may make things complicated, so why not stick with pure SIP.

Abhijit: As far as I can think, the reason behind surprising results in previous analysis, is the fact that half of the invested amount earns less than what stock market earned during period. Ex – Even if you start investing when NIFTY was around 1000 in June 2003, it runs up to market peek in 2007 and crashes to around 2700 in December 2008, the CAGR is 19% (even after crash). If you would have put 50% of invested amount in cash/FD earning lesser returns, you are losing on the total returns even though that amount gets invested at 2700. The most probable reason of your results being surprising seems to be the great bull run from 2003 to 2007. Had the market traded sideways or moderately bullish then your results could have been as expected. i.e., Equity + Crash fund returns greater than pure equity.

I think everyone made quite a good number of suggestions and I think Abhijit’s reasoning of surprising performance makes a lot of sense.

…………

[Edited on 13-Jan-2015 After Publishing]

Ajay: This is in reference to point made (underlined above) about comparing lump sum returns of investments made with Nifty (@1000) in 2003 and upto 2008 with Nifty (@2700)

Argument of 1000 to 2700 here is for a lumpsum investment. Who has got all the money and guts to invest for goals on a given day towards the goals? You can invest as a lumpsum without bothering too much about valuations only if you are investing for 10 or 15 or 20 years period. And then there would be no need to do any SIP.

The discussion here is about SIP. If one had invested in HDFC TOP 200 from 1st June 2003 to 1st Dec 2008 and see the return on 2008 Dec (say equal value of 5000 throughout this period) then the returns are as follows:

SIP Mode
No. of Installments – 66, Total Investment 3,30,000 and Fund Value on 01-Dec-2008 is 4,54,041, IRR 11.5%

Lumpsum Mode
3,30,000 invested on 1st June 2003, the fund value on 01-Dec-2008 is 13,39,429 (nearly 4 times the return due to bull market followed by a crash)

If the SIP end date is changed as 1st March 2009 and value as of 11th March 2009 are as shown below:

SIP ModeNo. of Instalments – 70, Total Investment 3,50,000 and Fund Value on 11/03/09 is 4,39,368, IRR 7.85%

Lumpsum Mode
3,50,000 invested on 1st June 2003, the fund value on 11/03/09 is 13,17,941 (still nearly 4 times the return due to bull market)

Moreover, the index moved from 1006 to 2669 by Dec 08 and 2620 by March 2009. Also, instead of looking 1000 and 2700, the PE ratio at 1006 was 11.59 and PE ratio at 2669 was also 11.76.

Any lump sum investment made at this very low PE entry point will give substantial return over the next 5 to 7 year period. However those entry points are rare occurrence. So, it is unfair to use it for justifying the lumpsum investment mode. If you do the same with the entry point on 1 Jan 2008 period (at peak valuation, even the lump sum return after 5 years will look meagre).

If one had invested in HDFC TOP 200 from 1st Jan 2008 to 1st Jul 2013 and see the return on July 2013 (say equal value of 5000 throughout this period) then the returns are as follows:

SIP Mode
No. of Installments – 66, Total Investment 3,30,000 and Fund Value on 1/07/13 is 4,30,696, IRR 9.6%

Lumpsum Mode
3,30,000 invested on 1st Jan 2008, the fund value on 1/07/13 is 4,14,914 (it is a meagre return).

Index on 1st Jan 08 was at 6144 and PE ratio was 27.64 and on 1st July 2013 it was at 5898 and PE was 17.87.

This proves the point that unlike SIP, for lump sum investing market valuation and index value is very important.

…………

In next part, I will share the analysis of various other scenarios.

## Case Study – Surprising Results of combining HDFC Top 200 & Recurring Deposit (Market Crash Fund)

We always think that it is best to invest when markets are down. But how often are we able to do it? Not regularly.

Why?

There are 2 reasons.

First – The markets don’t go down regularly.

Second – When they do go down, we don’t have the guts to go out there and invest. And that is because, either we don’t have the money to invest AND / OR we don’t know where to invest.

And frankly speaking, both are genuine problems. It happens to me, you or almost anyone I know.

I was just thinking about this whole scenario of investors feeling handicapped when markets go down. They want to invest. But don’t know where to invest. And if they do know where to invest, then they don’t have funds to do it.

So is there a solution to this problem?

I think there is. Atleast I thought there was. 🙂

I am not sure though.

And if there is a solution, then it is ought to be based on the following two thoughts:

First is that it does not make sense to stay out of markets at any time. I covered this topic a while back at – Why You Should Invest, Even if You can’t Beat the Market.

And Second is an extension of the above thought – it seems wiser to invest ‘more’ when markets are down.

So how do we use these these two (thoughts) in combination to gain the maximum benefit?

I came up with a very primitive hypothesis:

Investing regularly (Rs X) & periodically making lumpsum investments* when markets are down, will fetch higher returns than regularly investing double the regular amount (Rs 2X) over a period of 10-15 years in a decent, well diversified mutual fund.

* This lumpsum amount would be an accumulation of Rs X every month, which will be used at one-go when markets are down (at a pre-decided trigger point).

To test this hypothesis, I chose HDFC Top 200 as the fund. The choice of fund was because it is a stable, well known and proven fund. And my guess is that If you had to choose a fund blindfolded, chances are you would choose HDFC Top 200. Ask anyone and almost always, this fund’s name pops up.

So coming back to the analysis, I went ahead and used last 20 years data to prove my hypothesis.

There are 2 scenarios being compared here:

First is where Rs 5000 is invested every month in HDFC Top 200. An equal of Rs 5000 is also parked every month in a Recurring Deposit which I call Market Crash Fund. (I am ignoring the interests accrued for simplicity). The money keeps accumulating in this market crash fund till the time a trigger* point is reached.

Second scenario is where Rs 10,000 is invested in HDFC Top 200 every month. Plain and simple.

*The trigger point for utilizing the market crash fund is when the average monthly NAV of the fund is at more than 20% discount to highest average NAV, which has been achieved in last 3 years. For example, if the fund reached a maximum NAV of Rs 100 in last 3 years, and the current NAV touches 79 (i.e. 21% discount) – then entire money accumulated in Market Crash Fund is used to buy units of Mutual Fund at lower NAVs.

So with these assumptions, lets see what happened.

Starting October 1996, the total money outgo in both scenarios is Rs 21.9 Lacs. In first scenario, Rs 10.95 lac is invested as SIP of Rs 5000 every month whereas rest is invested in lumpsum at regular intervals as and when a trigger point is reached. In second scenario, entire Rs 21.9 lac is invested as SIP of Rs 10,000 every month.

But here comes the surprising part. The returns of above strategies are not in sync with my expectations. My expectation was that the MF+RD combination which shifts money from RD into MF when markets go down, will beat a simple MF SIP of amount equal to MF+RD monthly investment.

But results are completely opposite.

The MF+RD combination delivers Rs 2.14 crores whereas a simple MF delivers Rs 2.43 Crores.
 Value of Investments in HDFC Top 200 in both scenarios
In the graph below, the dark blue line indicates the value of Market Crash Fund which accumulates Rs 5000 every month till the trigger point (Current NAV < 80% of Max NAV in last 3 years) is reached. The light blue area graph shows how low is current NAV (in %) with respect to maximum NAV in last 3 years.

 Lump Sum Investment Trigger Points (On Basis of current & last 3 years NAV)

Big figures indeed for small Rs 22 Lac investment. Isn’t it?

But what about the hypothesis?

How is it that a simple MF SIP of Rs 10,000 a month beats a combination of Rs 5000 a month MF and lump sum investments when markets are down?

Is it something about the assumptions, that went wrong?

Is it that trigger point should have been either more than 20% or less than that?

Is it wrong to split the investment amount into 50%-50% for SIP & RD in first scenario?

Is it because of the extraordinary bull runs of 2003-2008 that this analysis went for a toss?

Is it that HDFC Top 200 has been a stellar fund and any other fund would have given results in line with hypothesis?

Or

Is it entirely wrong to do this comparison at all?

I am not sure if I know answers to these questions.

What do you think? Do let me know of your thoughts about the idea of splitting money (MF & RD) as done in first scenario and also about my assumptions regarding trigger points.