‘The Eighty Twenty Investor’ Arun Kumar and his investment insights
11 min read . Updated: 15 Dec 2022, 10:31 PM IST
PremiumFundsIndia’s Arun Kumar invests in 5-6 funds at the overall portfolio level, and doesn’t try to time the markets.
From starting his blog, ‘The Eighty Twenty Investor’ in 2015, Arun Kumar, head of research at FundsIndia, is set to publish his investment insights in a book next year. He believes that investing is all about focusing on the “20% that drives 80% of the results".
His book will cover investing levels —from saving, spending, emergency funds and insurance, to short-term and long-term investing—interspersed with the behavioural aspects surrounding each of these aspects.
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Kumar talks about his personal investment journey in an interview with Mint as part of the special Guru Portfolio series. Edited excerpts:
How did you get into blogging? Why did name your blog ‘The Eighty Twenty Investor’?
I was a part of the research team at Wealth Advisors (India). So, I had access to almost all the best fund managers in India, and every week we would get to listen to some of these really intelligent investors. And we were also internally doing a lot of work around asset allocation and how to build portfolios. On top of this, we had the vantage point of actual clients and so we were able to see the behavioural pitfalls in practice. A lot of this was not being discussed outside and I wanted to share it with others. I also realized that almost everything related to investing was about picking stocks, and nobody was writing about how to pick funds, outsourcing it to a good fund manager, etc. And, most of it was US-based and there was no Indian fund related literature out there. So, I thought maybe I’ll put together all this together in my blog which I started in 2015.
The name of the blog is derived from the Pareto Law—20% of efforts give you 80% of results. I could see this happen over and over. Investing doesn’t need to be too complex. People don’t need to work really hard to figure out their investment portfolios. Just focus on getting the small critical things right, automate them, and then investing can be effortless. And at the same time, you can probably get 80% of the results.
What’s your current asset mix?
My portfolio has always been roughly 80% in equity and 20% in debt, plus or minus 5%.
Under equity, do you go for direct stocks, or only mutual funds?
When I started initially, I thought why should I do mutual funds (MFs) as they are diversified across 40-50 stocks. So, I’m better off picking stocks. Then, I realized that this required too much effort, and beating a fund manager or an index is insanely difficult. I also did not enjoy stock picking. I am mostly a fund investor by heart.
Around 10% of my equity portfolio comprises direct stocks. These are a few very well-known large stocks which I picked at an earlier stage. Right now, 90% of my equity portfolio is in MFs but I think eventually it will touch 95% because I am not adding more stocks unless I find something really interesting.
What is your exposure to large-, mid- and small-cap stocks?
My portfolio is mostly into flexi-cap kind of strategies which don’t have a constraint of going into mid-, small- or large cap stocks. But I have also done some analysis around mid- and small- caps and I found that, at least for a SIP portfolio, mid-caps actually make a lot of sense. I have them in my portfolio through flexi-cap funds but I am not directly invested in mid-caps. I probably want to build this as a structural part of my portfolio over the next 2-3 years.
What midcap funds would you pick?
In the mid- and small-cap space, I would want to go with reasonably good fund managers, and if they are going through some underperformance, then it makes me more interested in investing in their funds. So, funds like DSP Midcap Fund, or Franklin India Prima Fund would perfectly tick the box for me. I will also look at funds which are new but already have a track record. So, let’s say, I would look at WhiteOak Capital which has recently come into the MF space so it won’t have the size issue (constraints that small- and mid-cap funds can run into as the fund size increases) for some time. They have a good record. I’ll most likely pick one mid-cap fund.
Do you intend to take exposure to small-caps (in addition to your flexi cap fund portfolio)?
The problem with small-caps is that it’s a fairly illiquid space. So, the moment a small-cap fund does well, it becomes extremely big. And from there on, fund managers either increase their large-cap exposure, or reduce their churn or increase the number of stocks. So, we need to be a lot more active on these funds. And generally, I would say, diversify across two or three small-cap funds.
What happens in this social media world is that if someone says that fund X is going through some problem, then this news goes all over the place and there is nobody there to verify it. Then, if people panic and start exiting, then no one has any control over this. So, in such a scenario, when your underlying universe is a lot more illiquid, you need to be more alert. So, if you’re looking at small-caps, you need to have some triggers built in, saying that if there is a net outflow, which is crossing say 10% of the fund AUM (assets under management), then you need to quickly take a call. You have to be a lot more active, and which is why I generally stay away from small-caps.
What was your first ever mutual fund pick?
My first fund pick was Franklin India Tax Shield, an ELSS fund as I was forced to do this (for tax saving). Initially, I was thinking I shouldn’t invest in MFs if I am a stock picker. But the realization came after three years when I saw that the fund had beaten all my efforts at stock picking. So, that was probably my first humbling moment where I realized that it’s better to leave it to the experts.
Any fund picks that have not paid off?
I look at good fund managers. Since I have had the experience of interacting with many of them, I know their thought process. So, when they underperform, I tend to go big on them. But the one time where I moved away from this strategy was with international funds. One, I wanted to diversify, and two, these funds had been doing extremely well and the growth story was there. So, they did not tick my usual criteria of underperformance. But I thought this has gone on for a long time, so maybe there are gaps in my understanding. So, I started a SIP in 2019. But that has not played out as well as I expected so far. So, probably I entered at the top, or maybe it will take another three more years to figure out if I was right or wrong. But I think my recent investments in these funds should work out well over the next 2-3 years.
What has been your overall portfolio return since inception? What have been the key return contributors?
I started in 2014 but a large part of my portfolio got built after 2017. So right now, the return is around 18% (CAGR). And the major reasons are, one, I was able to invest a lot during the pandemic when I had some extra money. Two, I mostly invest in only a few funds, and two of these are those that I talk about publicly—Parag Parikh Flexi Cap Fund and ICICI Prudential India Opportunities Fund. Both these were not doing well when I invested but have worked out very well for my portfolio. Generally, I do 5-6 funds at an overall portfolio level, and I don’t try to time the markets. Once I am in, I generally let the investment run for a long time.
Where do you invest in debt?
This is purely through MFs and I usually look at it as a behavioural support system. So, I’m not there to increase returns by 1% by taking credit risk or trying to time the interest rates because at 20% (of my portfolio), it really doesn’t move the needle. The way I look at it is, let’s say, the market falls by 30-40%. If I don’t do anything, then I feel very anxious. So, I need some action on my portfolio and that is where I have kept some triggers: if the stock market falls by 20%, I will move x amount from debt to equity, if it falls by 30%, then I will move this much and so on.
My debt exposure is mostly through arbitrage funds or low duration funds which are very high on credit quality. I don’t do anything fancy on the debt side.
Your views on real estate? Do you consider it an investment?
I don’t consider it an investment. With every purchase, there is a functional aspect. In case of a house, this can obviously be met through renting. But there is also the emotional angle; there are always a lot of emotions associated with your own home and it can be a status symbol.
So, we wanted to first build our financial portfolio and once we hit the intended target, we were fine with buying a home. In fact, we recently booked a home. But over the last 10-15 years, we have built our portfolio and have not touched it. Once your corpus reaches a particular size, the compounding engine also kicks in. Now, we have sufficient cash flows to support this (home purchase) without touching our financial portfolio.
One mistake that I often see many people make is that they just reverse the process. The first thing they do when they get a salary is that they put it into a large home and then the EMIs go on for the next 15-20 years. So, by the time, they actually start their investment journey, 15-20 years have gone by. The hardest part of investing is that it takes at least 10-15 years to build that reasonably sized corpus and then you can see the compounding effect. Just to put that in context, if I run a ₹30,000 SIP, it takes me almost 12 years to get my first ₹1 crore assuming 12% return. The second crore will take only say five years and the third one crore will take only three years and so on.
Do you maintain an emergency corpus?
I mostly try to maintain at least six to eight months of expenses as an emergency corpus but inevitably, I always find that there are investment opportunities. So, my emergency corpus has also become my opportunity buying portfolio some times. This is mostly parked in liquid funds. An emergency corpus makes a lot of sense and I’m trying to be more disciplined about it.
Do you have health and life insurance?
For a health policy, I went for one which had the maximum number of hospitals covered in my city Chennai. And then within that, I took a very clean policy which had almost no disclaimers attached to it. My sense was when there is panic and things are really bad, these (clauses / disclaimers) are the last things that you want to trouble yourself with. I found that Apollo Munich had good coverage so I went for a ₹20 lakh health cover with them. If later I feel this is not enough, I can always top it up.
Initially I didn’t feel the need for life insurance. But then I met with a minor accident, which at that point of time seemed serious and I got admitted to a hospital. That shook me up, and at that time, my wife was also building her business so she did not have a proper income stream. So, once I got better, I took a life policy. I probably went overboard and took a policy (term cover) for ₹2 crore.
It makes sense to take life insurance if you have parents, and wife or kids, or if you have a loan, which I don’t. It’s reasonably low cost compared to the amount that you get.
Is your spouse involved in your personal finance decisions?
She’s more involved than me. She is a far higher risk taker than me because she runs a business. During the pandemic, I was a bit nervous but I told her, “here’s the plan (on investments) and even if I panic, you’re supposed to push me to stick to it". So, I think we complement each other. I am more of a ‘what will go wrong kind of person’ and she is more of a ‘what will go right kind of a person’. We are both very actively involved and know exactly what is happening.
We are nearing the end of 2022. Do you have any resolutions for the new year?
I’ve tried several things in the past but somehow it never seems to work. From the wealth point of view, things are reasonably structured and I’m happy about how it’s working. Now, the main focus is on health. So, maybe I’ll become a lot more regular at the gym, and take care of my diet. This is something which I will attempt yet again, this year.
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