Mutual Fund Corner: Experts explain 'luck factor' in wealth creation & investment income with an eye on retirement

In this episode of Mutual Fund Corner, we discuss two interesting topics; one on whether it is luck, skill or risks, which pivots the portfolio to great heights and two, the crossover point between active income or salary income and investment income and how do you decide whether you can live off your investments?

To throw more insight into the first topic, CNBC-TV18 caught up with R Balakrishnan, an independent investment analyst and for the second topic spoke to Anubhav Srivastava, partner and senior fund manager, Infinity Alternatives.

A Twitter poll done by CNBC-TV18 on what helps wealth creation - is it luck, effort, or skill? More than 50 percent of respondents said it was the effort that was the biggest factor, while 31 percent said it was a risk. Some said it was a combination. However, a popular blogger and investor R Balakrishnan said luck was underestimated.

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Balakrishnan said, "I always believed that luck was something which was created to explain misfortunes. But then having done this investment journey over 30 years, I realised that this is probably the most underestimated factor. Today, I have seen a lot of people putting in skill and effort, but then there is the luck factor of making the right choice. If I am an investor and when I start, I have a finite amount of money and I have to choose only a few stocks."

"For example, I have identified a theme and said that this company, which is starting today is going to be a great brand tomorrow. So let me start really early because I am not looking at an average return but looking at above-average returns. So I pick a brand but then I see there is one more brand so now there are two brands. So I have to be right. For example, at the time when the consumer durables space was going up, two new brands emerged, one was Maharaja Appliances, which had Whiteline brand, and Symphony. Now, if I was smart, I should have put money into both. If I was lucky, I should have put it into Symphony. If my luck was cursed, I would have put it into Maharaja as there was no way in which we could say is going to be good," he added.

"So luck is important. Of course, the more effort you do, the luckier you get as the more you dig into the company, the promoters, you will find out more and more things which improve your luck factor also," Balakrishnan said.

According to him, the important lesson for him in his investing journey is that you have to have a basket of stocks, "Do your research, find out as much as possible about a company and get in early as once a stock is discovered, then there is no joy as your starting point is already at a high level. So you have to get it in early. For example, he said, Infosys was a company at that time not all understood, but those who understood and bought even 100 shares in those days at listing are now sitting on a fortune."

"The important thing is to hang in there patiently and not lose your hope. If you pick a basket of 10 stocks, you will have three or four which will give you super-normal returns. Therefore, it is definitely a question of knowledge and skill but the luck factor is as important as anything else," Balakrishnan added.

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Srivastava said the first thing to note out here is that what your portfolio is generating may be affected by a few factors going forward, "The first thing to understand is your nominal returns, which are the returns that you are making right, a percentage of your capital is getting hit by inflation. So it's your real rate of return, which is your nominal rate of return less inflation is something that is taking care of your expenses today. Then you are broadly safe enough to say my passive income, that is the investment income is enough to take care of my expenses, and therefore, you can live off it and you may not be dependent on my active income."

Giving a hypothetical example, he said, "Let's say you have Rs 10 crore of financial assets with you. You are looking at 6.5 percent inflation and being conservative on that side is good, your portfolio is returning let us say 10 percent. So the Delta that you're making on this portfolio in real terms is 3.5 percent. That broadly gives you an income over Rs 3 lakh per month net. Now, if that's good enough to take care of expenses, then the answer to your question is yes."

"A couple of things to keep in mind out here would be one, you do need to take into account, what is the effect of taxation and the second bit of it is, how variable is your income, how risky is the portfolio in itself, because at 10 percent if it is running into a pure equity kind of setup, then you really want to rethink what you're doing," he added.

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