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The Mutual Fund Show: Simplicity Is The Key To Ideal Mutual Fund Portfolio

The starting point for investors in mutual funds should be to identify their financial goals.

That’s the word from Dhirendra Kumar, founder and chief executive officer at Value Research, who said investable surplus should be broadly classified into three categories—emergency money, money needed for short- to medium-term goals and the money needed for long-term goals.

Kumar suggested investing in multi-, large- and mid-cap funds, value funds and tax-saving funds. “Long-term investors with limited resources (around Rs 1.5 lakh) should invest in tax-saving options, while others (more than Rs 1.5 lakh) should consider large- and mid-cap funds,” Kumar said on BloombergQuint’s weekly series The Mutual Fund Show.

Kumar’s Suggestions

  • First-time investors: Hybrid-aggressive equity funds
  • Low-risk profile, medium-term investment: corporate bond funds
  • Low risk profile, long-term investment: Equity income funds, conservative hybrid funds and balanced funds

Emergency money should ideally be parked in liquid funds and ultra-short duration funds, Kumar said.

The Securities and Exchange Board of India last year asked mutual fund houses to recategorise their existing schemes to avoid duplication and simplify choice for investors.

Watch the full interview here:

Here are the edited excerpts from the conversation:

If somebody wants to plan for retirement, what’s the ideal combination of funds that he or she should start investing in, irrespective of the age?

Dhirendra Kumar: Market is very complex. Getting started and staying the course is very difficult. I have different prescriptions for different people. I will just take two dimensions to simplify it. If you have never invested in anything to do with equity, then all long-term investors should only be doing their systematic investment plans and should start only with aggressive hybrid funds what used to be erstwhile balanced funds.

Don’t even think of investing in an all equity fund to begin with. After two-three years, once you are experienced, it will be easier for you to absorb the ups and downs of the market. The moment you invest in anything exotic, something which is doing very well, investors chase the recent past performance. If you choose best funds which have done well in the recent times you end up with disappointment. So, it is important to start this way.

If you are a tax payer and getting started, then start with tax-saving funds. The three-year lock-in period here forces you to think to get locked in and generally, the experience is not disappointing if your holding period is three years. Once you have done this then just keep doing an SIP in diversified vehicles. You get limited service the moment you choose to invest in a sector fund or a large-cap fund because then you are giving a limited mandate to the fund manager to invest the money only in large caps or small caps or pharma companies.

Paying full price and getting limited service is not a wise thing. Gaining diversity, getting convenience and being methodical is the key to success. The reclassification helps here because you know that this has to remain diversified at all times.

If you are a low-risk investor and looking to invest for a long term, then I believe Dhirendra’s recommendations are equity income funds, conservative hybrid funds and balanced funds. Why this shift and this is I am sure not the all encompassing one but a few things or a few funds that people should have in their portfolio?

These funds should actually be the basis for anybody desiring income from investments and at the same time wanting to protect their money from inflation. This is because if you are a conservative investor and a bank depositor and you invest all your money, say, Rs 15 lakh in senior citizens savings scheme and if you consume all the returns then your capital remains constant and in 5-10 years’ time you will become poor.

The income generated from that will remain constant, your capital remains constant as you have consumed all the returns. So, you need to invest in a vehicle which has some allocation to equity and you are withdrawing not a substantial amount from it.

Equity income funds and these hybrid categories are desirable vehicles. If you mount a withdrawal plan on investments made in these funds and if you have a withdrawal rate of 5-6 percent, there is a possibility that you will be able to protect your money and the value of money getting eroded at the same time. This will also give you the potential, enhancing your income over time because the capital grows. These are conservative vehicles for investors seeking income and also wanting to protect the worth of their capital.

For emergency funds, you are recommending liquid funds and ultra-short duration funds. The question is that when I want liquidity at the back of my hand, then may be my savings account is the best bet, but that’s not the right answer.

No, your savings account is the best bet for a limited amount. But if your emergency fund for some reason is little more than Rs 10,000-15,000, you earn 4 percent on a savings bank account.

Liquid funds will generate 1.5 times more than that and have been able to generate that much so far. If you have a need for having a larger emergency fund or if you want some money to be handy which should be accessible anytime, then you should look at liquid funds or ultra-short duration funds. These two categories have the potential to enhance your returns substantially compared to savings bank account and the money is accessible anytime. You get the money in almost 24 hours on your redemption request. And at the same time, today you have apps available for ultra-short-term bond funds where money can get back into your account in about half an hour.

For example, if somebody has a goal to attend an event or to buy a car and can save on a monthly basis, but the time duration is not too long but somewhere in between 4-5 years. Is an equity-linked fund better to invest in or would you believe there are other options available or a mix of slightly risky and certain funds?

I will look at it very objectively. I will look at the goal and I will try and figure out the negotiability of the same. If it is buying a car or going for a holiday, then I will take a chance and invest in a balanced fund or even an equity or multi-cap fund. And maybe I would be able to achieve my goal earlier-than-expected and if that period gets longer, say 5 years instead of 4 years, then I don’t mind.

If it is for a non-negotiable goal, say, if I want the money in exactly 4 years from now, then I will go for conservative debt funds because I would definitely like to have 90 percent of money at that point than the possibility of not having it or a substantially lower amount.

For three to four years’ time, we have seen not so very long ago, that you could be down 30 percent on a four-year time frame with an all equity vehicle. It depends on the negotiability.