Quarterly Review – Changes to Prime Portfolios

Prime Portfolios are a set of 19 unique portfolios that meet over 30 different investor needs, aspirations, and timeframes. You will find them under the head Ready-to-use-portfolios (listed in the Recommendations menu, post login). In this article, we’ll explain the portfolios where we have made changes in this review cycle and the reasons for the same. We’ll also tell you what to do with existing investments in the portfolios.

If you’re new to PrimeInvestor, the first part may be of help as it explains Prime Portfolios. Else, directly go to the ‘Changes made this quarter’ section in the table of contents below.

Construction of Prime Portfolios

We have classified portfolios in Prime Portfolios based on popular financial needs/goals you may have. The basis for many of these would be the goal’s timeframe. We have therefore segregated many of these goals further into timeframe buckets. For those looking for passive investing options, check the Odds and Ends portfolios.

Prime Portfolios largely draw from Prime Funds, and mix funds with different strategies to minimize duplication within a portfolio. However, there may be exceptional cases where funds are outside of Prime Funds too. We use other products, primarily on the fixed income side, in portfolios where they will be good options.

The asset allocation in Prime Portfolios is done based on the ‘ideal’ allocation for a given timeframe, or a given goal. But this is not cast in stone. Assess your own capacity to take risk before choosing a portfolio. These portfolios are not ‘advisory’ in nature. They are bundled MF products with a mix of equity and debt funds with varying strategies for diversification.

Using Prime Portfolios

Prime Portfolios are useful in the following cases:

1. If you are new to mutual fund investing, or don’t know how to mix funds and want a readymade basket of funds to invest in
2. If you are an existing investor but have new goals and want an asset allocated portfolio for that purpose
3. If you wish to build your own portfolio by taking cues from the asset allocation and category allocation that we use
4. If you wish to add or modify your existing portfolios by taking cues from Prime Portfolios’ construction using  Prime Funds or MF review tool. You can read this article on building your own portfolio.

The following points need to be noted if you follow any of the Ready-to-use portfolios:

• We internally review these portfolios every quarter – after the review of our ratings, recommendations, and list of Prime Funds. So, this will typically take 2-3 weeks after the end of a quarter.
• In the review, where we make changes, we will explicitly specify whether a fund needs to be exited or only SIPs should be stopped, and investments held. Please take note of the same.
• If you wish to track changes to a portfolio, please click the ‘Follow’ button to ensure you receive alerts about the changes. Your Dashboard will also show you portfolios that have been changed.
• We typically send alerts on changes only for those who ‘Follow’ a portfolio. However, from this quarter onwards, we will also publish a blog on the same every quarter.
• We will mention only those portfolios where there are actual changes or portfolios to which we wish to draw your attention on any performance dip. Otherwise, you can assume that there are no changes.
• We will do a calendar year-end performance review of the portfolios. Once the portfolios complete 2 years (end-January 2022), we will also have the portfolio page display performance of portfolio since launch. We could not do this earlier, given the very short track record of our portfolios.
• Changes in portfolios involve fund or allocation changes. We make these changes based on the proposed portfolio. They are not recommendations on rebalancing the asset allocation in your portfolio. Based on when you invest, the asset allocation for your portfolio can be different from the original recommended portfolio. As we do not access your portfolio, we will not know the inflated or deflated allocation position in your holdings. Therefore, run a check on whether you need to rebalance once a year. The rebalancing concept is explain in detail in article on rebalancing, and we have built a calculator to tell you how much to invest/redeem in rebalancing.

Essentially it is important for you to read and record our emails for all of the above. So kindly make sure you find some time to do this for your own wealth building!

Changes made this quarter

In this quarter:

1. There are no changes to mutual funds in any of the portfolios.
2. There are changes to deposits wherever we recommended them as part of income needs. These deposits are available in our Prime Deposits section. We made significant changes to Prime Deposits after we changed our strategy on deposits recently on account of the interest rate stalemate as well as the changed law on deposit insurance. The latter issue has specifically increased the options for marginally better returning deposits at lower risk.
3. We have drawn your attention to just one equity-oriented portfolio that is going through a rough patch and explain why it is so.

Deposit changes

Prime Deposits has undergone a significant change to ensure your income needs are met with better earning options without compromising on risk. You can read more details about this in our Changed FD strategy article.

We have now added some deposits of small finance banks and other banks with better returns. The new law allows deposit insurance to kick in immediately after a bank is put under ‘directions for restricted withdrawal’ by account holders. The insurance payouts have to be within 90 days of such restriction. This, together with the Rs 5 lakh insurance per depositor mandated earlier, has prompted us to add some banks that we would have hesitated to add otherwise.

The following portfolios have deposits as part of your income generation requirement:

• Income & Growth portfolio (under Need Based portfolios)
• Regular Income portfolio (under Need Based portfolios)
• Capital preservation portfolio (under Need Based portfolios)
• Retiree income portfolios for different tax brackets (under Life Situation portfolios)

Of the above, only the Income & Growth portfolio and Retiree 20-30% Income bracket portfolio have seen some allocation (% to the product) changes. We will discuss these two portfolios below.

But before this, a general note on how to choose deposits for all portfolios where deposits form part of the allocation. We have Prime Deposits as a portfolio allocation but we have left it to you to choose which deposits you want to invest in, based on your need (payout/cumulative) or convenience. Prime Deposits are a mix of low-risk, moderate-risk and high-risk options. When you make your deposit choice, note the following:

• Make sure a chunk of your deposit exposure is in post office schemes (for regular income) or deposits which we have categorized as ‘Low’ in the risk column. This is to ensure that you do not take undue risks, the deposit insurance notwithstanding.
• For banks that carry a ‘moderate’ or ‘high’ risk label, restrict your investment to Rs 5 lakh per bank (the amount of insurance including principal and interest across savings and deposit per depositor per bank). Spread the investment amount over 2-3 options, where possible (such as if you have a large sum to invest). If you’re going for higher amounts than Rs 5 lakh per bank, be aware that it will not be covered under deposit insurance.
• Small finance banks should be used as top-ups and not the core of your deposit portfolio.
• At this time, stick to 1 or at most 2-year timeframe buckets in Prime Deposits as a longer lock-in might prevent you from taking advantage of any rate hikes.

Change to Income & Growth portfolio

This portfolio seeks to provide some income and also allow a part of your capital to grow. The income flow comes from 70% of your capital allocation while 30% goes into equity funds. In this portfolio we have increased the deposit allocation.

Here’s the changed portfolio:

The change:  In this portfolio, we started with a modest 20% allocation to fixed deposits since the interest rate has been low ever since these portfolios were launched in the second half of January 2020. However, with newer deposit options with higher rates added now, we have increased the allocation to deposits to 25% (from 20% earlier) and reduced Aditya Birla Sun Life Floating Rate’s exposure to 25% from 30% earlier. Please note that our view on the fund is favourable. The reduction in allocation is simply to take advantage of other low-risk, reasonable-return options.

What existing investors should do: You do not need to make any change in your existing investments. If you plan to add more to this portfolio, simply add more of deposits. If any of your existing deposits are coming up for renewal, go for the new list we have on Prime Deposits. Please follow the notes mentioned earlier on how to allocate across Prime Deposits and time frame to choose.

Change to Retiree portfolios – 20% & higher tax brackets

In this portfolio we have made a change in the deposit option and allocation. The goal of this portfolio is to give a measure of predictable returns with more tax-efficient options that can capture different rate cycles. This is the new portfolio:

The change: Until this review, this portfolio had a 20% allocation to 1–2-year bank deposits and a 10% allocation to deposits of 1-year deposits of Sundaram Finance or HDFC (of the corpus after making the maximum permissible investment in Senior Citizens Savings Scheme and the Pradhan Mantri Vaya Vandana Yojana). This was because, one, deposit rates across the board were low, and with the potential risks in credit due to the pandemic, banks seemed the safest option. For slightly better returns, we added deposit options from safe NBFCs.

But with the changes in our deposit strategy and recommendations, we have removed both bank deposits and Sundaram Finance/ HDFC deposits in this review. Instead, we put in a 30% allocation to deposits from the 1–2-year time bucket from Prime Deposits. Choose one or more deposits from there. Go for the Regular Income section if you intend to set up an income stream from these deposits. Else, go for Cumulative.

Follow the guidelines explained above to mix the high, moderate, and low-risk deposits. You can also substitute your own bank’s FD in place of State Bank of India recommended in Prime Deposits (Cumulative) if you wish to.

What existing investors should do: It is important that you note the removal of the NBFC deposits from this portfolio was solely due to the new deposit insurance rules that make other options more attractive. We have not removed the NBFCs due to any potential adverse event and they remain low-risk options. Therefore, continue to hold deposits already made in these NBFCs. Do not try to exit them early on any concern over safety.

If you are among the earlier investors in this portfolio, these NBFC deposits may come up for maturity in the coming months as we had given a 1-year deposit recommendation in the portfolio. You can reinvest this amount (or any other surplus you may get, say, from other maturing deposits) into the new higher-returning Prime Deposit options in order to benefit from the better rates.     

Deposit-based portfolios with no change in allocation

As mentioned above, there is no allocation change in Capital Preservation, Income, and Retiree 5% tax-bracket portfolios. You can retain all of your existing deposits. If you’re investing afresh or investing more into these portfolios, choose from the new list of Prime Deposits for the fixed deposit allocation we have in these portfolios along the guidelines mentioned above. The remaining instruments in the respective portfolios remain the same as before.

Tip: If you already hold or plan to invest in other bank deposits not in our Prime Deposits list, you can use our Bank FD comparison tool to know how safe your bank is. Those banks that are ‘high’ on the confidence level metric will deserve a chunk of your allocation. In others, make sure you keep it under the insurance cover of Rs 5 lakh as far as possible and spread the money over a few banks.

Performance alert on timeframe-based 5-7-year portfolio

We have not made any changes to this portfolio in this review. But we’d like to take stock of its performance for those who are investing in it, since it has funds that are current big underperformers which have weighed on overall portfolio returns.

Unlike our other Prime portfolios, this portfolio has seen more churn in funds. This unfortunate situation has come about primarily because of our cautious approach to equity; we aimed at choosing funds that were strong on downside containment and low-volatile because this timeframe was not long enough to allow for very aggressive moves and yet was not that short to bar equity participation.

As a result, funds we chose underperformed in this rapid and heady market rally. Primary among these are Kotak Flexi Cap and DSP Midcap. We have discussed the reasons behind both funds’ poor performance in our Prime Funds review last week.

We have taken the call to retain both funds in the portfolio. DSP Midcap has already begun to course-correct and we’re seeing some signs of pull back from the steep underperformance. Kotak Flexicap’s underperformance is not too alarming and is not getting worse.

We are not usually in favour of frequent changes to portfolios. We are willing to give otherwise established, consistent funds a longer rope to recover, if they look like they are taking prudent calls and/or are trying to turn around through portfolio corrections. We did remove two funds in earlier reviews where the underperformance was too stark to let go. We also made smaller allocation changes in earlier reviews to reduce the impact of fund underperformance. For instance, we had previously reduced allocations to both Kotak Flexicap and DSP Midcap and reallocated to Motilal Oswal Nifty Midcap 150 – this mid-cap fund’s performance has helped compensate for DSP Midcap to some extent.

Therefore, we’ll continue to watch both Kotak Flexicap and DSP Midcap before deciding on any change. If there are signs of further deterioration or if there’s no improvement, then we will make the appropriate changes to bring about a pick-up in returns.