Most people would be deeply disappointed with this article.
Why? Because, contrary to their expectations, I am not going to specifically name the best mutual fund schemes.
Frankly speaking, this kind of spoon feeding is not the right approach. In fact, it is extremely harmful.
First, each one of you is a financially unique person. So it would be wrong for everyone to "invest in a common set of funds". Each one's portfolio has to be tailor-made, to suit his or her unique financial profile.
Second, best performing mutual funds may change from time to time. So it would be wrong to "invest and forget". Regularly monitoring and restructuring your portfolio, is an essential aspect.
Therefore, I firmly believe in the following principle:
"Give a man a fish and you feed him for a day; teach a man to fish and you feed him for a lifetime."
We can classify various mutual fund schemes into broadly five categories.
The right approach is to spread your total investment across these "five types" of funds. (Practically) all investors should include ALL five types of funds in their portfolio. However, depending on the specific financial profile, how much percentage is allocated across each category, would differ from person to person.
What are these 5 types of funds:
a. Large-cap / Diversified Equity Funds
Funds that invest primarily in the large sized companies are classified as large cap funds. And funds that spread their corpus across all types of companies — from large to small — are termed as diversified funds. Given that the focus is on established companies and spreading the risks, these funds typically deliver stable and consistent returns over long term. They are able to successfully withstand the upheavals of a dynamic and volatile stock market. As such, these funds provide a strong foundation to any portfolio.
b. Mid-cap / Small-cap Equity Funds
As the name suggests, the investment focus of these funds is small and mid-sized companies. These types of companies have the potential to grow at a faster rate than their large-sized competitors. However, their small size makes them relatively riskier. In other words, these are high-risk, high-return funds.
c. Sector / Thematic Equity Funds
Gold funds, international or global funds, pharma funds, infrastructure funds are some of the examples of mutual funds that target a specific theme or sector. From time to time, certain themes or sectors become market favourites and hence deliver vastly superior returns in a very short period of time. But, they are equally susceptible to high probability of losses, if the market loses fancy for them. These too, therefore, are high-risk, high return funds.
d. Long Term Debt Funds
Debt funds invest in fixed income products such as bonds, debentures, commercial paper, treasury bills, Govt. Securities / Loans, etc. Funds that invest in such products, with around three or more years until maturity, are generally termed as long-term debt funds. These are a good alternative to bank FDs, post office small saving schemes, tax free bonds etc., especially for those in the higher income tax slab brackets.
e. Short Term Debt Funds
These invest in fixed income products, due to mature within a maximum of 2 to 3 years. One can consider them for parking money for short term, instead of the conventional bank savings account or fixed deposits.
Depending your financial profile, you must suitably allocate
a) Your total corpus between equity and debt funds
b) Equity corpus across 3 to 5 large-cap, 2 to 3 mid-cap and 1 or 2 sector funds
c) Debt corpus across 2 to 4 long-term and 1 or 2 short-term funds
For example, I have invested
- 70% of my money in equity funds and 30% in debt funds
- Equity portion is invested 60% in 5 large-cap funds, 30% in 3 mid-cap funds and balance 10% in 2 thematic funds
- Debt portion is invested 65% in 3 long-term funds and 35% in 2 short-term funds
Having decided upon the allocation across different categories, the next step is to choose the best mutual fund schemes within each category. For this purpose, the following ten rules will prove quite useful:
Rule 1 : Does the fund match your ‘financial profile’?
Rule 2 : Past performance
Rule 3 : Portfolio characteristics
Rule 4 : Is the AUM appropriate?
Rule 5 : The fund house / fund manager
Rule 6 : Risk parameters
Rule 7 : Annual Recurring Expenses
Rule 8 : Entry / Exit Loads
Rule 9 : NAV is a meaningless number
Rule 10: Dividend or Growth?
For a detailed write-up on the aforesaid rules, read 10 Rules on How to Choose the Best Mutual Fund.
Why? Because, contrary to their expectations, I am not going to specifically name the best mutual fund schemes.
Frankly speaking, this kind of spoon feeding is not the right approach. In fact, it is extremely harmful.
First, each one of you is a financially unique person. So it would be wrong for everyone to "invest in a common set of funds". Each one's portfolio has to be tailor-made, to suit his or her unique financial profile.
Second, best performing mutual funds may change from time to time. So it would be wrong to "invest and forget". Regularly monitoring and restructuring your portfolio, is an essential aspect.
Therefore, I firmly believe in the following principle:
"Give a man a fish and you feed him for a day; teach a man to fish and you feed him for a lifetime."
First Lesson: The Right Mutual Fund Category
We can classify various mutual fund schemes into broadly five categories.
The right approach is to spread your total investment across these "five types" of funds. (Practically) all investors should include ALL five types of funds in their portfolio. However, depending on the specific financial profile, how much percentage is allocated across each category, would differ from person to person.
What are these 5 types of funds:
a. Large-cap / Diversified Equity Funds
Funds that invest primarily in the large sized companies are classified as large cap funds. And funds that spread their corpus across all types of companies — from large to small — are termed as diversified funds. Given that the focus is on established companies and spreading the risks, these funds typically deliver stable and consistent returns over long term. They are able to successfully withstand the upheavals of a dynamic and volatile stock market. As such, these funds provide a strong foundation to any portfolio.
b. Mid-cap / Small-cap Equity Funds
As the name suggests, the investment focus of these funds is small and mid-sized companies. These types of companies have the potential to grow at a faster rate than their large-sized competitors. However, their small size makes them relatively riskier. In other words, these are high-risk, high-return funds.
c. Sector / Thematic Equity Funds
Gold funds, international or global funds, pharma funds, infrastructure funds are some of the examples of mutual funds that target a specific theme or sector. From time to time, certain themes or sectors become market favourites and hence deliver vastly superior returns in a very short period of time. But, they are equally susceptible to high probability of losses, if the market loses fancy for them. These too, therefore, are high-risk, high return funds.
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| Five best mutual funds that should form a part of every investor's portfolio. |
d. Long Term Debt Funds
Debt funds invest in fixed income products such as bonds, debentures, commercial paper, treasury bills, Govt. Securities / Loans, etc. Funds that invest in such products, with around three or more years until maturity, are generally termed as long-term debt funds. These are a good alternative to bank FDs, post office small saving schemes, tax free bonds etc., especially for those in the higher income tax slab brackets.
e. Short Term Debt Funds
These invest in fixed income products, due to mature within a maximum of 2 to 3 years. One can consider them for parking money for short term, instead of the conventional bank savings account or fixed deposits.
Depending your financial profile, you must suitably allocate
a) Your total corpus between equity and debt funds
b) Equity corpus across 3 to 5 large-cap, 2 to 3 mid-cap and 1 or 2 sector funds
c) Debt corpus across 2 to 4 long-term and 1 or 2 short-term funds
For example, I have invested
- 70% of my money in equity funds and 30% in debt funds
- Equity portion is invested 60% in 5 large-cap funds, 30% in 3 mid-cap funds and balance 10% in 2 thematic funds
- Debt portion is invested 65% in 3 long-term funds and 35% in 2 short-term funds
Second Lesson: The Right Mutual Fund Scheme
Having decided upon the allocation across different categories, the next step is to choose the best mutual fund schemes within each category. For this purpose, the following ten rules will prove quite useful:
Rule 1 : Does the fund match your ‘financial profile’?
Rule 2 : Past performance
Rule 3 : Portfolio characteristics
Rule 4 : Is the AUM appropriate?
Rule 5 : The fund house / fund manager
Rule 6 : Risk parameters
Rule 7 : Annual Recurring Expenses
Rule 8 : Entry / Exit Loads
Rule 9 : NAV is a meaningless number
Rule 10: Dividend or Growth?
For a detailed write-up on the aforesaid rules, read 10 Rules on How to Choose the Best Mutual Fund.
