How Marcellus’ Saurabh Mukherjea plans to build a ₹20-crore nest egg

Saurabh Mukherjea, founder of Marcellus PMS, believes that equity is the only asset class that sees significant compounding over the long term. Known for his Coffee Can investing approach, Mukherjea allocates 90% of his personal investment portfolio to equities, and just 10% for debt instruments, primarily for fixed deposits (FDs) for emergencies. He is also a National Pension Scheme, or NPS enthusiast due to its tax benefits and low fee structure.

Mukherjea disclosed his portfolio particulars at the annual Mint series, Guru Portfolio, which began in 2020, to explain the effects of the pandemic on the personal investment portfolios of leading financial services sector professionals. This series examines the performance of the respondents’ investments, modifications to their portfolios, and investment insights.

Has your asset allocation always been 90:10 equity to debt?

Throughout my working life, and especially after my wife and I became parents around 15 years ago, we have always been maintaining a 10% debt in the form of fixed deposits. I have never considered debt as an investment tool. These FDs serve as rainy-day corpus, providing a safe harbour in case of major financial emergencies. Equity is the only asset class that truly compounds. In India, neither gold nor real estate offers long-term compounding benefits.

Where do you invest in equity?

All of the Indian equity portfolio is with Marcellus, with just one exception. I am an enthusiastic participant in NPS, where I put in money every month. I also encourage Marcellus employees to contribute to NPS.

Why NPS?

First, I get tax relief for employer’s (Marcellus’s) contribution. Two, the fee is low. In fact, even an index fund may not get such a low fee structure. Third, and most importantly, I cannot touch the corpus till my retirement age because of the lock-in.

You have been an active portfolio manager. Have you ever invested in index funds?

In the initial days of my career, I was with tech and consulting firm Accenture, in the UK. I didn’t know much about finance then. The company had a corporate pension plan managed by a British index fund provider. I joined it, which I am still a part of. It continues to compound at a decent rate. In 2004, when I became an equity analyst, I started investing in active funds.

So, does your investment in index funds takes care of international exposure to your portfolio?

Yes, we have 20% of our equity portfolio in overseas equities. It is almost entirely invested in American and European stocks, which gives the portfolio a nice hedge, but it was created unwittingly (when the rupee depreciates, and investments in India underperform, our overseas investments do better). It actually worked out nicely.

What about your ownership in Marcellus?

When Marcellus was incorporated, my wife and I decided to have enough equity to see our kids through university—the costs which we will incur in the next 5-6 years. That equity part is being managed by Marcellus. Barring this equity investment and the 10% debt for emergency, the rest of our savings were pumped into Marcellus’s balance sheet in 2018 to incorporate the business.

My shares in Marcellus are unlisted and illiquid. I exclude them from my investments because their valuation could overshadow our public market equity portfolio.

Furthermore, we do not have any plans to sell them for several decades. It is interesting that in the current year, I have actually given up a part of my salary to get more Esops (employee stock ownership plan) in the company, as I want to have a bigger stake in the firm.

In the last few years, Marcellus’s funds struggled to beat benchmarks. Does it bother you?

I’m as interested as anybody else in Marcellus’s performance because my entire life savings are in it. And it is to finance my children’s education. But ups and downs in portfolio value are part and parcel of equity investing. If you want to do the best for your family, I think you have to take a degree of risk. Investors who tend to run away from risk in India are not doing themselves or their families a favour. If anybody reading this piece has a better way to finance their long-term goals than buying, HDFC Bank, Bajaj Finance, Kotak Bank, Titan, Asian Paints, TCS, Pidilite, Divis Labs, etc., please let me know. My parents, my family and Marcellus’ 9,000 clients are invested in these stocks through Marcellus’ portfolios.

I have financial discussions once a year with my wife and a separate discussion with my parents (retired couple who also invest in Marcellus equity portfolio). Since we are humans, they are also worried when investments do not fare well.

But the discussions are more around what we are trying to achieve over the next 5-10 years, and whether we are in a position to finance the goals.

Thankfully they don’t question me on why Marcellus sold Relaxo Footwears stock, a question, that half of India wants to ask me (he laughed).

What’s your view on real estate?

We own the house we live in, but beyond that, I honestly don’t think I can make a rational case for owning residential real estate in India. Rental yields in cities like Mumbai, Delhi and Bangalore are just 2-3%. While the cost of a home loan is 7-8%. Therefore, it makes no mathematical sense. Unless there is some rampant depreciation in real estate prices, it makes no sense to own residential real estate as an asset class. Commercial real estate is a better asset class than residential, but again, it comes with illiquidity, and the ticket size for prime commercial real estate, especially in Mumbai, is so big that it’s beyond what my wife and I could afford.

What has driven you to buy a house in the first place?

For the first 10 years of marriage, we didn’t buy a house. As my family grew, after my children—a son and a daughter—were born, we realized living in tiny flats and shifting every 2-3 years is not viable. That’s when we decided to buy a flat 15 years ago.

Could you walk us through your home-buying journey?

In 2008, my family and I relocated to India. However, we found that the prices of real estate were considerably high during the middle of 2008. I did the usual analysis, comparing the rental yield to borrowing costs. The cost of borrowing was around 10%, whereas rental yield was just 2%. Around the same time, the Lehman Brothers crisis occurred. Interestingly,it was because of my anticipation of this event that I sold my company in the UK in the first place.

Fortunately for us, the crisis led to a significant decline in residential real estate prices in the suburbs of Bombay where we lived at a rented accommodation back then. That is when we bought our first home in Powai, using the sale proceeds of my company, and a small home loan from HDFC Ltd. In the next four years, the value of that property doubled, but over the last 10 years, the value of the apartment has appreciated by 0%. Thankfully, we managed to pay off the mortgage on our home a long time ago, which relieved us of that financial burden.

Do you prefer to first repay a loan before deciding to invest?

In the first five years after buying the home, the priority was to pay the mortgage as soon as I could. I’m talking about the period when the cost of home loans was 9-10%. If we had invested in the Nifty, we would have generated 13%. If you knock off the capital gains tax from it, there would not be much difference compared to the cost of the loan.

Once we paid the mortgage, our cash flows were freed up. 2013-14 was when my journey as a coffee can investor, using Robert Kirby’s Can principle started.

Are you planning for your retirement corpus?

My wife and I had planned how to finance our retirement from age 60 to 85 (now 47), which could cost about ₹50 lakh per annum. The math based on discounted cash flows suggests that we must have a retirement corpus of at least ₹20 crore. So, once the kids are done with their university education in the next six years, we will target building our nest egg. Meanwhile, the investments in NPS and our investments in overseas equities are also accumulating nicely and hopefully that will contribute materially towards the ₹20 crore corpus. I believe it’s a privilege to live, and work in this country, so I would love to retire here.