The year 2020 has been special in many ways. We have seen something that was unprecedented not only in my life, but even during my parents life. Who would have ever imagined a lock-down of the whole nation for example? Many things were a first in 2020. While the year was not too bad, I did have a few learnings. In this last post (hopefully) in the year review series, I want to go over my learnings. Pretty much all my issues and the resulting lessons were related to Franklin :).
Bigger emergency fund
One of the problems I faced when Franklin decided to wind-up 6 debt funds was that I was left scrambling for income that was not taxable. As you already know I have close to 50% of my debt corpus in Franklin Ultra fund. When the wind-up and the subsequent freeze on investments was announced, there was a lot of uncertainty. I did not know when the fund will pay back and if they do pay back, what will be the tax implications. At that juncture I felt that if I had more emergency fund it would have helped ease my anxiety.
Normally I keep around 3-4 months of expenses in my bank savings. As bank balance goes to less than 3 months worth of expenses (sometimes up to 2 months) I sell some short term debt mutual funds and refill my bank. In the Franklin situation, I felt that a bit more emergency fund would have suited me better. Now I am keeping closer to 6 months worth of expenses in the bank.
More diversification in debt funds
Another issue is quite obvious. I had too much invested in just one fund. While I do have 9 debt funds, I was mostly invested in Franklin Ultra for obvious reasons 🙂 — namely greed. At the end of 2019 I was planning to consolidate my debt funds into just 2 ultra short term funds. Good thing I was not able to execute on that fast enough. Otherwise there would have been more heart burn.
Now my plan is to split my debt investments into 4-6 funds with varying duration. But again this may change with the ever changing situations :). The idea is to invest in 2 funds (from different AMCs of course) in each of liquid, ultra-short/short and long duration (gilt) funds. The thought process for each category is along the following lines.
These will used mainly to fund short-term needs such as expenses up to a year. This is one category that I am not really sure if I want to use just because I might as well use my bank savings instead. The only advantage is that the funds are safer with AMC than with bank. Not that the bank will steal, but I am talking about the the risk of fraud from con artists (using Olx, Google Pay or something) who are looking to steal your money one way or the other.
The allocation here will be about 4% of my corpus since that is how much I intend to take out of my corpus for my annual expenses (read 4% rule).
These funds like liquid funds above are supposed to be safe while being volatile. They give better returns and I intend to keep these funds for a very long time so I am not too worried about the volatility. The hope is that liquid funds coupled with the gilt will give me returns similar to ultra-short term funds that I currently hold.
As you may recall, I will never go below 30% in debt allocation. So after allocating some 4% to liquid funds, I want to allocate 26% to Gilt funds. That should account for the 30% debt portion.
Ultra-short and short-term debt funds
As you may recall, I try to do some tactical asset allocation. So my asset allocation is not a perfect 70:30 equity:debt ratio. It keeps changing based on what I read about the market. And for those occasions I want to use ultra-short term or short term funds. This logic remains the same as before the Franklin fiasco. Except this time I want to go for more AAA rated papers than chasing returns.
If I see an opportunity in equity, the plan is to move these debt funds to equity and vice-versa. Currently I have 80% allocated to debt funds. So that would mean an allocation of 50% here. If I were to choose 2 funds, that means a risk of up to 25% in one fund. Still not the best plan, but I don’t want too many funds. Lets see what I actually do though. As of now this is all in the head. The execution will take some time and will entirely depend on when Franklin returns my monies.
Follow your gut feeling
The final learning from 2020 is to follow my gut feeling. I should have sold Franklin Ultra or at least a good portion of it when I had the feeling way back on November 20, 2019. I remember this day very clearly. On that day, an email from Franklin was waiting in my Inbox. The message was that Franklin wanted to include provisions related to creation of segregated portfolios in the
Scheme Information Document of several debt funds.
I had this gut feeling that something does not seem right. If the fund house is thinking of segregated portfolios, may be there was a hunch that some papers might go bad soon? I wanted to move my allocation out of the fund, but decided to wait and watch. Very bad move. I should have followed my gut. There would have been a huge tax implication, still it would have ended much better than the current situation. Oh well, perhaps next time :).
There you have it. My learnings from 2020. There is always something to learn, but adversities teach you the best lessons. And as long as you survived the adversity, you come out much stronger. On to the next interesting year where the bulls know no boundaries.