40-40-20: How one of India’s top money managers invests his own money

“So I have allocated 40 percent of my investible surplus to balanced advantage funds (BAF), put 40 percent in diversified equity, which is a combination of multi-cap and large and midcap funds, and the rest 20 percent in more aggressive products like small cap funds,” he told Moneycontrol in a candid conversation.

The beauty of this arrangement is that the first 40 percent portion manages the risk, the next 40 percent is for steady returns and the remaining part is meant for adding that extra zing to the overall portfolio.

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EQ beats IQ

It is perhaps revealing that at a time when retail investors are tripping over themselves to buy and sell stocks in a frenzied search for ‘alpha’, a market veteran like Singh prefers to take the MF route to equities.

Which begs the question – should the average investor buy stocks directly at all?

For Singh, the answer lies not so much in cognitive capacity as in emotional maturity.

“Typically what happens is that the small investor starts with good intentions. He or she starts with the intention of holding a strong and stable stock for 3-5 years and generating say a 12-15% CAGR. But very soon this degenerates into short term trading and in the worst case, day trading and F&O. And the slippery slope starts,” Singh pointed out.

“Slippery slope” is putting it mildly.

As per a widely-shared report by market regulator SEBI, 9 out of 10 individual traders in the equity F&O segment incurred losses in FY22, with an average loss of Rs 1.1 lakh.

Even for active traders (those who have traded in F&O more than 5 times in a year), if we exclude the outliers, only 6 percent managed to make a profit in FY22, with the average profit standing at a princely Rs 3,400.

Despite the dreary data, the retail frenzy for F&O trading shows no signs of abating. Singh, however, takes a rather laissez-faire view of the entire situation.

“See, as a fund manager, I cannot give advice to individuals whether they should or shouldn’t go for F&O. My only advice will be to look at the hard data, look at your own track record, and then decide accordingly. This, after all, is a free market,” he remarked.

The danger is that a free market can degenerate into a ‘free-for-all’ market in the absence of quality information and professional oversight.

Which is why Singh is unequivocal in his recommendation of the '40-40-20' approach to wealth creation for the common man.

“Of course the 40-40-20 ratio is not constant, it can be tweaked depending on your age profile. For example, if you are starting young, you can allocate more to smallcap stocks, but overall this method can be beneficial for the average investor,” he said.

His final advice for equity investors?

“You have to manage the risk, not run away from risk. As a stock market investor, you have anyways signed up for volatility, so do not be intimidated by it.”

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