In an interaction with Mint, Kumar, known as the 80:20 investor, discusses his investment portfolio, his reasons for avoiding real estate, and why diversifying investment styles is as important as asset allocation.
He advocates for a focused approach to investing, leveraging the ‘Pareto principle’ (80:20 concept) to achieve optimal results with minimal effort. Edited excerpts:
What is the story behind the name 80:20 investor?
The name is derived from the principle of 80:20 investing, also known as Pareto law (or Pareto principle). It states that 80% of results in most areas of life come from 20% of efforts. For example, in your wardrobe, you likely use only 20% of your clothes regularly. Similarly, in investing, successful investors often focus on a few key stocks that drive the majority of their returns. The idea behind 80:20 Investor is to apply this principle to investing, focusing on the critical few investments that yield the most significant results.
What key factors have given you 80% of the results?
There are several key factors. Firstly, understanding and leveraging the power of compounding is crucial. For instance, if you invest ₹30,000 monthly at a 12% compound annual growth rate (CAGR), with a 10% annual step-up, it takes seven years to reach ₹50 lakh, but only another three years for the next ₹50 lakh, and so on. Compounding accelerates wealth accumulation over time. Secondly, choosing an asset class based on your risk appetite is vital, as no asset class guarantees returns. Maintaining a long-term investment horizon, around 10-15 years, and consistently investing is essential. Lastly, waiting patiently for the magic of compounding to unfold is critical.
There is a famous example given by ace investor Ramesh Damani on how to go from ₹10 lakh to ₹1 crore. He explains that if you can achieve a CAGR of 25%, it will take you approximately three years. While 25% might seem ambitious, if your portfolio yields 15% returns annually, you can still expedite reaching this goal by incrementally increasing your investment by 10% or more whenever possible.
The key is to prioritize increasing your investment amount, as this is as crucial as the rate at which your portfolio grows. Eventually, as your portfolio expands, the initial investment will become a relatively smaller part of your overall wealth.
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When did you start investing, and what has your journey been like?
I started investing in 2008 after joining Tata Consultancy Services (TCS), inspired by a colleague whose father was a famous Tamil author on stock markets. He gave a session to all of us about how things work. I eventually realized how one can benefit from compounding using a few wise steps and make good money with less work.
Initially, things appeared easy to me, but I learned about many things later. That’s how it started. Things were accidental, but later, I got hooked on how things work. After completing my MBA, I joined Wealth Advisors India, a Chennai-based wealth management firm. Since then, it’s been going on.
Have you seen the compounding effect on your portfolio?
Yes, particularly in the last five years. Initially, I focused on stock picking, but I found that mutual funds, like my Equity-Linked Savings Scheme (ELSS) fund, often performed better. By simplifying my strategy and sticking to selected funds, I achieved a 28% CAGR over five years with minimal effort.
The first realization came when my ELSS fund gave more returns than my stock portfolio. Initially, I thought stocks are always better than mutual funds and they make more money. I did ELSS only for tax purposes.
While we were advising clients, we also noticed patterns, we found that simple portfolios were beating the complex ones. By 2015-16, I got this realization, may be you can keep things really simple and still deliver phenomenal outcome.
This is surprising because most high-net-worth individuals (HNIs) think they should invest in portfolio management services (PMS), alternative investment funds (AIF), and all the fancy products if they have a ₹100 crore portfolio. Personally, I believe things should be as simple as possible. The hardest part was proving to people that simple beats complex. At that time, it was just a thought.
In 2018, I decided to pick two funds: ICICI Prudential Large and Midcap and PPFAS Flexicap. The idea was to select the two best fund managers and stick to them. I started a ₹30,000 Systematic Investment Plan (SIP) with a ₹10,000 step-up every year. Today, the five-year CAGR for my portfolio is 28%. This was the first level of validation for me. I simply reviewed it every six months, did not change funds, and the returns far exceeded my expectations with minimal effort.
At FundsIndia, we have a concept called “How do we build a portfolio?” One of the biggest challenges I faced was that many funds go through a cycle where they perform extremely well, and then you pick them. In the next cycle, they end up doing badly, and this pattern repeats. Most platforms today sort the best funds based on last year’s return. I started thinking about how to build a portfolio that doesn’t get caught up in current performance, as the next outperforming funds will likely come from those underperforming now.
We decided to pick four-five styles and the best fund managers in these styles to build a four-five fund portfolio. We started this in 2020, probably the worst year for equity markets, because two months after we started, we saw the covid crash. We picked a value fund, a quality fund, a midcap or small-cap fund, and a global fund. Now, we have also added momentum. The key point is that when we started, quality was doing well. Everyone suggested removing the value or small and midcap funds and allocating more to quality, based on past performance. In the following years, quality was one of the worst performers. Today, quality and growth are underperforming, while the other three strategies are doing well. The winners keep changing, so the overall idea is to invest in different styles.
Now I have proof and can show people that this approach works. As we grow older and accumulate more years of data, I will become more confident in this strategy.
How do you build a portfolio at FundsIndia?
We build portfolios by diversifying across different styles, such as value, quality, midcap, small cap, and global funds. This approach avoids getting caught up in the past performance of a single style and ensures a balanced portfolio that can adapt to market cycles.
In your own portfolio, do you have funds with the same style?
In my own portfolio, I have followed a slightly more aggressive version of this style. I try to identify good fund managers who have underperformed over a 3-5-7 year basis but have a low portfolio churn. Despite the underperformance, if the fund manager is not changing the portfolio, it shows conviction, and they believe those bets can outperform in the coming years. By selecting a few funds like this, even if one-two funds underperform, I will still end up making better returns. It’s challenging for many people to stick to these strategies because most people don’t like to invest in funds that are underperforming. However, it works for me because I am comfortable with that behaviourally.
What should investors do when a fund manager leaves the asset management company (AMC)?
It’s best to wait and observe the fund’s performance before making any changes. Ideally, choose schemes where fund managers have a long tenure and are less likely to leave.
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Do you invest in stocks, debt, or gold?
Most of my portfolio (70%) is in mutual funds, but I occasionally take tactical bets on individual stocks, when a large company is going through a crisis. One of the bets that worked for me was Meta in 2022. Similarly, I took a bet on Chinese markets when it fell almost 70% through a Hang Seng Fund.
I keep a small portion (5%) in debt and avoid gold. Real estate is primarily for personal use, not investment.
What about investing in real estate?
I have one house which is only for consumption. My parents bought real estate in 2003 for about ₹20 lakh, and it appreciated to ₹2 crore by 2008. Real estate has its own challenges. In 2004, my father was diagnosed with cancer. I was in my first year of college, one of my brothers was in 7th grade, and the youngest was 2 years old. My mom was a government employee with Indian Railways.
What I realized is that for the ₹2 lakh medical expenses, we couldn’t sell the ₹2 crore house. My father did not have life insurance. Although the house was a significant investment, it wasn’t useful to us at that moment. From then on, liquidity became my number one priority. For any investment that I have, I need effortless liquidity, and that’s why I don’t have National Pension Scheme (NPS), sovereign gold bonds (SGBs), Public Provident Fund (PPF), or anything that locks in my money.
Another unfortunate experience with real estate happened in 2010. We had a small place, apart from the house my parents bought. My wife ran a bakery chain from this place. When it went for redevelopment, the builder promised us a bigger house within the next two years. We haven’t received the house yet because the builder ran away due to some issues. Till date, the dispute is still ongoing.
So, we have experienced both making money and being stuck for more than ten years with real estate. For living, it’s fine, but from an investment perspective, I don’t recommend it.
What about insurance?
I didn’t have a term plan for a long time until one day, I met with an accident. I have a term plan with ₹2 crore cover and health insurance with ₹15 lakh cover, apart from my employer’s coverage.
How did you decide your health insurance cover?
We didn’t do any detailed calculations. We just thought broadly that this amount covers most ailments considering the cost of healthcare in Chennai. We might top up if the costs increase in the future. Honestly, the process of buying health insurance is quite complex, and you need to ensure it covers all essential parameters.
Tell us about your book?
My book, “80:20 Money Makeover,” is based on the 80:20 principle. It aims to guide individuals who do not know much about investments on how they can take charge of their entire financial journey.