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How to allocate to Capitalmind Portfolios?
This post is for anyone who is new to Capitalmind and is either looking to make fresh investments across Capitalmind Portfolios or looking to re-align their existing portfolios.
Do you know your target asset allocation?
Asset allocation sounds like a big scary term. But all it means is: You invest in different things. Stocks are risky. Fixed deposits are not. Bonds are somewhere in between. Bitcoin is crazy. How much in each? That’s what Asset allocation means.
First things first, decide on your Asset Allocation. There is no one right answer here, but here are a few points to consider. Also, remember nothing is etched in stone, it can always evolve, getting started is the key.
If you don’t know what it should be, then start with a 50% equity, 50% debt allocation.
For example, you may have 10 Lakhs in Equity, another 8 Lakhs in PPF, and some 2 Lakhs worth of Gold. In this case, your asset allocation will be 50% in Equity, 40% in Debt, and 10% in Gold.
Here’s a crude rule of thumb to know if your asset allocation is off. If movements in a small set of securities cause you significant emotional discomfort, then you’re either over-allocated to that asset class or missing the forest for the trees.
We’ve written a lot about why spending time and energy on getting your Asset Allocation right is key for long-term investing success. You can read more over here.
- Forget stocks get your asset allocation right?
- How to think about asset allocation in India – Part 1
- How to think about asset allocation in India – Part 2
- Common sense position sizing for investors
Whoever said Perfect is the enemy of good, was perhaps talking about asset allocation.
Okay, back to the serious stuff. Here’s how you could go about it
- Put together the current value of all the assets you have on a spreadsheet
- Equity – Mutual funds, direct stocks
- Debt – Fixed Deposits, PPF (Public Provident fund), Debt funds
- Alternatives – Gold, Real estate.
- This tells you where you are over-allocated and where you are under.
As a beginner, aiming for an equally distributed asset allocation of 1/2 each in Equity and Debt or a 1/3 each in Equity, Debt, and Alternatives, is also fine.
What to do with existing investments?
There are two possible scenarios here,
- You have existing investments in Stocks, Equity Mutual Funds, or Debt funds.
- Or you may be starting with a clean slate.
If you already have substantial investments in Stocks – You would need to revisit what made you buy those stocks, was there a thesis that you believe in, do you have exit criteria if that thesis does not play out?
The point here is to decide on one thing: Should I stay invested in my stocks (given that Capitalmind also has stock portfolios) or should I just sell them and move on?
- If you’re confident of your stock portfolio for holding longer-term, keep ’em
- If you’ve bought them just as a way to participate in markets, perhaps on a friend’s conviction or your own, but don’t know what to do, sell and convert to cash.
- If you have a financial advisor, ask them what to do with individual stocks.
- Certain investments can’t be exited at all (PF, Pension plans etc.). Leave them as they are.
What about Mutual funds?
If you are SIPing into multiple Mutual funds, check if there are overlaps within them, say you have a Large Cap Mutual fund and an Index mutual fund? If that’s the case it’s better to stick with one, preferably an Index mutual fund would do. Over time if you wish you could turn that into a CM Passive like portfolio.
Alternatively, you can always, exit all your existing investments and start with a clean slate.
Either way, at the end of this exercise, you know two things:
- How much cash can be generated by exiting current investments and
- How much new cash can be invested
Add the above and you would have a sense of how much capital exists to invest across CM portfolios.
How to allocate to Capitalmind Equity Portfolios
We all know at least one friend who has taken up running long-distance. Maybe seeing strava maps of their 42 km runs even made you feel guilty enough to order your own pair of that special running shoes. Now they collect dust in a corner of your shoe closet. Turns out, you’re much happier playing squash for your exercise. Or maybe bicycling is your thing.
Different activities have different levels of time, equipment, and energy commitments. What’s right for you might not be right for me. What matters is finding the right set of lifestyle habits and sticking with them for the long haul.
Picking and choosing equity portfolios is a lot like finding the right lifestyle habits that work for you.
The basic guide to allocating to Capitalmind Equity Portfolios
- Start with 40% of your intended equity allocation to our CM Momentum portfolio. Yes, this needs a weekly rebalance, so do not do this if time is a problem.
- Why Momentum? – Momentum is a quantitative strategy, which by design has an element of market timing built into it, meaning, if the markets/stocks lose steam we get out of it and wait for the momentum to come back. Ideal for lumpsum investments.
- You could also add to the momentum portfolio every month.
- Don’t do anything less than Rs. 100,000 in the Momentum portfolio. Beyond that, any amount is fine.
- 20% goes to our CM Focused portfolio, it’s a long-term portfolio designed to generate wealth by investing in growth companies across sectors. It invests in market leaders with strong balance sheets and growth visibility over the next 3-5 years.
- You can choose to SIP into this portfolio.
- The way to do this is: You put the money into a liquid fund and roll it in every month for about 6 months.
- Yes, your portfolio at times may not match the model exactly which is okay.
- 20% into the CM Passive portfolio – Capitalmind Passive is a portfolio of 3 major indices Nifty 50, Nifty Next 50 & Nasdaq 100. The strategy is to buy the top 100 Indian & top 100 US Tech companies.
- It is a low-cost, low churn portfolio.
- It provides the much-required international equity exposure to your portfolio.
- Absolutely suitable for SIPing.
- Rest 20% in our CM Low Vol portfolio – Capitalmind Low-vol is a portfolio that selects stocks based on their volatility, stocks which don’t make wild moves, still over long periods a such a selection of stocks beats the NIFTY.
This is just one configuration for those who would prefer to dip their toes into all strategies.
Depending on your context and history with the markets, certain portfolios and their core philosophy will resonate more or less than others. Then allocate more to those and drop one or two others.
Maybe you have substantial exposure to an active Flexi-cap mutual fund that’s been doing well and you know you want to stay invested. In that case, maybe you don’t need the 20% Focused portfolio allocation. Or you have substantial holding in the N100 (Nasdaq 100) fund in which case you could consider assigning the 20% Passive portfolio allocation incrementally to the CM Low Vol portfolio.
There are no wrong answers, but switching back and forth between portfolios depending on recent short-term performance is probably one of them. The right answer is the one that lets you worry less about what levels markets are at on any given day and lets you go do things that matter most.
Capitalmind Fixed-Income Portfolio
Coming to the Debt part of asset allocation, we’ve got CM Fixed Income portfolio. Here, we keep a hawk’s eye on the credit risk and interest rate cycles, to take calls on bonds and debt instruments that go into this portfolio. If you are looking for:
- a safe place to park your money
- beyond fixed deposits for tax efficiency
- for a longer-term (>3 years)
- SIP friendly
- more optimized post-tax returns
But do not use it for short-term money, money that you need within the next 3 years. There are other ways to park for the shorter term. Given short-term interest rates, we just recommend parking money in a Savings Account.
Where do investment signals get announced?
All announcements are made on slack in the channels prefixed with #actionable. You will get an email for actions in the equity strategies – such as when we add or change stocks, or a rebalance (like in momentum).
Also available on smallcase
In Summary
A base case for investment is something like this:
- Asha has ₹ 15 lakhs in PF, and about 15 lakhs in savings, plus saves ₹ 100,000 per month.
- In about a year, she will have around 42 lakhs. Assuming a 50% equity to debt ratio, ₹ 21 lakhs should be in equity, the remaining in debt.
- That would mean taking around ₹ 6 lakhs of cash from the savings and putting into the fixed income portfolio.
- That takes debt to: 15 lakhs in PF + 6 lakhs in Capitalmind FI = Rs. 21 lakhs.
- The remaining ₹ 9 lakhs in savings goes to equity. So:
- ₹ 3.6 lakhs to Momentum (lumpsum)
- ₹ 1.8 lakhs to Focused (SIP over six months)
- ₹ 1.8 lakhs to Passive (SIP over six months)
- ₹ 1.8 lakhs to Low-vol (SIP over six months)
- The additional ₹ 1 lakh per month in savings then goes in the same proportion to the equity portfolios (40% Momentum, 20% Focused, 20% Passive, 20% Low-vol)
How to eat an elephant?
While this may seem like a lot of things to do, life’s never linear, there could be months where you may not be able to save or invest, and that’s okay.
Sometimes you may miss a signal by a few days, that okay too, don’t get too occupied with all of that and ignore the more crucial aspects of asset allocation, in a way missing the forest for the trees.
Second, start with understanding your personal constraints, typically there are three of them, capital, time, and knowledge. There are portfolios or strategies which require a higher minimum ticket size, there are portfolios that need a lot of your time, and then there are strategies that you may find hard to understand. Start with portfolios that are well within your constraints.
Third, you may want to think of Asset Allocation in terms of Core and Satellite parts. Core is where you would allocate a large 70 to 80 % of your savings, Satellite is exploring other strategies, and maybe occasionally scratch that itch.
When it comes to Asset Allocation, strive to be an “optimalist” instead of a perfectionist, focus on working towards an ideal asset allocation, a few percentage points of deviation here and there is absolutely fine, and won’t really matter in the long run.
There is only way to eat an elephant, one small bite at a time…
Or as the Roman emperor Marcus Aurelius, reminded himself in his private journal, “Don’t await the perfection of Plato’s Republic; be satisfied with even the smallest progress, and consider it an achievement”
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