Getting future-ready with Horizon smallcases 🌅🌿

Introduction

Whether, in one’s 20s or 50s, retirement planning is a crucial financial goal. However, the landscape has evolved, with individuals in their early 20s & 30s now opting to retire early by opting for diverse paths, from cultivating remote lands to embracing gadget-free lives or establishing animal sanctuaries. These unconventional pursuits, though different from traditional retirement, mark significant life shifts, including personal goals like taking a sabbatical, building a house, or making a career out of Vlogs. In essence, savings are not solely reserved for traditional retirement but extend to encompass any life goal an individual may aspire to achieve. 

As 2023 draws to a close, it presents an opportunity for financial planning as part of the new year resolution for 2024. In this context, we present you with this article on how target-year investing can empower individuals to navigate and embrace these life-changing journeys. 🌅💼

Understanding Target-Year Investing

target-year investing is a strategic approach designed to help individuals build a financial corpus aligned with a specific target date, catering to any long-term financial goal. A target-year investment strategy allows you to invest systematically, build a corpus, and liquidate it by your predetermined target date.

Existing target-Year Investing Products in India

Asset Management Companies (AMCs) offer solution-oriented mutual fund schemes for retirement or child’s education. Most of these mutual funds (MFs) possess the following characteristics and we planned to create a more flexible and investor-friendly alternative.

Characteristics of existing target-year investing products:

Lock-in Periods: To encourage investors to stay invested and promote stability within the fund while ensuring liquidity, lock-in periods are introduced as a characteristic of mutual funds. Horizon Portfolios are offered as smallcases and inherently do not have lock-in periods.

Expense Ratios: The expense ratio is the annual cost of managing a mutual fund or Exchange-Traded Fund (ETF). It’s worth noting that while mutual funds may have an expense ratio capped at 2.25%, ETFs can have an expense ratio of up to 1%. This distinction makes Horizon smallcases a cost-effective alternative.

Limited Asset Class Exposure: target-year-based MFs have limited asset class exposure to equity & debt. In contrast, the Horizon smallcases includes four asset classes (Equity, Debt, Gold, Cash), offering significantly enhanced diversification. 

Wealth Protection: Wealth protection is as important as wealth creation, especially closer to the designated target year. While existing products don’t feature such mechanisms, Horizon smallcases employ a glide-path investing approach specifically to protect wealth closer to the target year.

In essence, Horizon smallcases are crafted to accommodate a spectrum of financial goals and timelines, recognizing the diversity of life objectives, it transcends the conventional a ‘one-size-fits-all’ approach. The subsequent sections delve into how Windmill Capital execute this strategy.

Current Composition of Horizon smallcases

Comprising Exchange-Traded Funds (ETFs) from various asset classes such as equity, gold, debt, and cash, Horizon smallcases offer a dynamic and diversified investment strategy. 

How Horizon smallcases Work

The Horizon smallcase philosophy is rooted in intelligent asset allocation, flexibility, target-year optimization and cost-effectiveness. In the initial stages, allocation is directed toward riskier assets like equity and gold to maximize returns. As the target year approaches, the portfolio strategically shifts to less risky assets such as debt and cash to protect the accumulated returns. This process is called Target-Year Optimization with the help of the Glide-Path Investing approach.

Target-Year Optimization Through Glide-Path Investing

Horizon 2035 Glide Path Graph: Explained

• The allocation in Equity + Gold is higher in the initial years (2020) for wealth maximization as the target year is 15 years away.
• As the target year approaches, there’s a systematic reduction in equity allocation to manage risk.
• In the last year (2035), the entire allocation is in cash to allow investors to liquidate their investments at the target year.

Horizon 2050 Glide Path Graph: Explained

• The allocation in Equity + Gold is high in the early years (2020) to maximize returns since the target year is 30 years away.
• Similar to the previous smallcase, as the target year approaches, there’s a systematic reduction in equity allocation to manage risk. For instance, by 2040, when the target year is 10 years away, cash equivalents are introduced, and equity allocation decreases.
• In the last 5 years (2045 to 2050), equity allocation rapidly decreases, and the entire allocation is moved to cash equivalents to ensure capital protection.

The Importance of Glide-Path Investing

Without a glide path, investors planning to retire solely through equity investments may face challenges. A market crisis in the years leading up to the target year could erode the accumulated wealth. Glide-path investing addresses this concern by progressively diverting from risky to less risky assets, making it an ideal strategy for time-bound goals.

The glide path of each Horizon smallcase varies, but the overarching theme is clear — the farther the target year, the higher the equity allocation in the early years. Cash allocation is introduced during the late stages, ensuring a strategic approach to wealth protection.

As the target year approaches, the annual rebalancing of the portfolio is initiated, reducing equity allocation by approximately 10% every five years.

Performance of Horizon smallcases

A crucial aspect of any investment strategy is assessing its performance over time. Naturally, the performance of the smallcases is tied to their asset allocation. With the aid of glide-path investing, portfolios geared towards more distant maturity dates, exhibit a heightened allocation to equity, offering the potential for greater returns – and conversely, a lower allocation as the maturity date approaches, aimed to protect the corpus.

Evidently, with a farther target year, the smallcase returns are enhanced, courtesy of glide-path investing.

A noteworthy observation is the nearly halved equity allocation in the 2030 portfolio compared to the 2050 portfolio. Additionally, the 2040 and 2050 portfolios currently lack a cash component, unlike the 2030 portfolio. Referring to the glide-path graph for Horizon 2050, you’ll observe the introduction of the cash component (yellow line) in the year 2040, a decade before maturity. 

Understanding this context is crucial in light of recent equity market trends. Given the broad outperformance of equity as an asset class, we foresee superior performance in the more distant maturity smallcases. However, this outcome could have been different if equities had underperformed. In such a scenario, Horizon 2030 might have outperformed Horizon 2050. This flexibility allows for an aggressive approach in the farther maturity portfolios, leveraging the continued strength in equity prospects.

A guide to choosing the right Horizon smallcase

When choosing the right Horizon smallcase for your investment goals, consider your target year, comfort with risk, and assess your financial objectives to align with the glide path that best suits your needs.

Let’s say you are in your early 30s, and your goal is to accumulate a substantial amount for a down payment on a house in the next 20 years. In this case, your target year is 2043. Considering the longer horizon, you might find Horizon 2045 or even Horizon 2050 smallcases suitable. These options, designed with an initial higher equity allocation, may align with your goal for potentially higher returns over the extended period.

On the other hand, imagine you are in your mid-40s, and your goal is to fund your child’s college education in the next 15 years. Your target year is 2038. For a more conservative and risk-averse approach, Horizon 2035 could be considered. This smallcase begins with a higher allocation to debt and cash, providing a more stable investment trajectory as you approach the target year.

In both scenarios, the flexibility of Horizon smallcases allows you to tailor your investments according to your specific circumstances and financial goals, offering a personalized and effective strategy for goal-based investing. If you have a goal with a predefined timeline, you can easily pick your Horizon smallcase here.

Conclusion

As we navigate the dynamic landscape of life, being future-ready for transformative decisions requires not just savings but a comprehensive and goal-specific investment strategy. Horizon smallcases stands as a testament to innovation in target-year investing, offering individuals the tools to navigate and embrace distinctive life-changing journeys. 🌿💼

Until our financial paths cross again! ✌️

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_{Windmill Capital TeamWindmill Capital Private Limited is a SEBI registered research analyst (Regn. No. INH200007645) based in Bengaluru at No 51 Le Parc Richmonde, Richmond Road, Shanthala Nagar, Bangalore, Karnataka – 560025 creating Thematic & Quantamental curated stock/ETF portfolios. Data analysis is the heart and soul behind our portfolio construction & with 50+ offerings, we have something for everyone. CIN of the company is U74999KA2020PTC132398. For more information and disclosures, visit our disclosures page here.}