5 model mutual fund portfolios for different investor types
Want to invest in mutual funds but don’t know which schemes to buy? Already invested in mutual funds but not sure if they are appropriate? Hold a large number of schemes and want to cut them down to a manageable number?
If these issues are troubling you, our seventh anniversary cover story could provide solace. We have designed five model fund portfolios for investors of different risk profiles and financial situations.
These five portfolios cover almost the entire spectrum of the investing population, ranging from aggressive investors who are willing to live with volatility to conservative investors who want reasonable growth with minimal risk. We also have a portfolio for retirees looking for returns that can beat inflation and provide regular income from the investments. Each of these portfolios have five funds. The funds have been chosen on the basis of their star rating by Value Research.
Choosing a portfolio
Which of these portfolios will suit you? As a first step, you must know your risk appetite, because this will determine your asset allocation and the type of funds that fit your profile. If the market volatility does not bother you and your investment tenure is more than 8-10 years, go for the Wealth Maximiser portfolio that invests entirely in equity funds and has a decidedly mid- and small-cap orientation. These funds have given spectacular returns in recent years, but also carry high risks.
Not everyone is comfortable with the high returns that accompany high risks. Those seeking comparatively stable but lower returns should go for the Stable Wealth portfolio that adopts a balanced approach and puts only 60-65% in equities. However, if the thought of losing money is completely unacceptable to you, go for the conservative Wealth Secure portfolio where the equity allocation is just 20-25% of the corpus. There’s no point in taking risks to earn high returns if it gives you sleepless nights and ruins your personal life.
We have included a tax saving fund in every portfolio because we believe the ELSS category is an ideal way to save tax for equity investors. There is a 3-year lockin period, which actually works in favour of the investor by keeping him invested even during periods of high volatility.
He can neither be tempted to get out when markets shoot up, nor lose his nerve and redeem when stocks prices head southwards. “In some cases, the three-year lockin period of ELSS funds actually inculcates investing discipline in individuals. They realise the benefits of taking a longer term perspective.”
The SIP approach
Most investors are familiar with the advantages and convenience of investing in mutual funds through SIPs. We have also recommended the SIP approach in our model portfolios. But don’t expect this to be a foolproof safeguard against losses. SIP only reduce the risk—they do not remove it altogether. An equity fund portfolio will certainly slip into the red if the markets recede.
Mutual fund suitability matrix
Find out where each category of mutual funds fits into the matrix
Therefore, the returns from these portfolios will depend, in a large measure, on the investing discipline of the individual. Domestic investors are pouring money into equity funds, and SIPs worth Rs 6,000 crore flow in every month. But some experts fear this can quickly change if markets witness a sharp decline.
Caution
“If there is a correction, domestic investors will falter a little, step back and be shy to invest again.” The small investor’s biggest problem is that she loses her nerve when markets tumble and stops her SIPs. This can be a costly mistake. It prevents the investor from buying at lower prices, defeating the very purpose of the SIP arrangement.
Reviewing and rebalancing
The investor’s work doesn’t stop here. Though you do not have to check your portfolio on a daily or weekly basis, it is necessary to evaluate it periodically and see if it is on track.
We will regularly monitor the progress of these portfolios and compare the performance of individual funds against their respective benchmarks. Underperforming schemes will be shown the door and replaced with more promising funds. The portfolios will also be rebalanced once in a year to ensure that the risk profile does not change.
We hope you will find these model fund portfolios useful. Happy investing.
I. Wealth Maximiser:
For the young and the restless
Wealth Maximiser portfolio is for aggressive investors who don’t mind taking risks.
This portfolio has been designed for investors who want high returns even if it means taking high risks. It has two mid-cap funds, one small-cap fund and one multi-cap fund. The SBI Small and Midcap Fund has consistently topped the small-cap category in recent years. It has risen 66% in the past one year. The Mirae Asset Emerging Bluechip is another winner, topping the mid-cap category with over 23% returns in the past three years.
But though mid- and small-cap funds have given spectacular returns in the past one year, the road ahead could be quite bumpy. The mid-cap and small-cap stocks are looking overvalued and this is why some funds in this category have stopped accepting new investments and others are taking only SIPs under some conditions.
We have included two multi-cap funds to bring stability to Wealth Maximiser. The multi-cap DSP BlackRock Opportunities Fund and the ELSS scheme Axis Long-term Equity Fund have nearly 70% invested in large-caps. These funds will not be as volatile as the mid- and small-cap schemes.
Volatility is inherent to stocks. It is here that the SIP approach proves beneficial for investors. Even if the market corrects and the funds slip, the investor stands to benefit because he can get more units with the same SIP sum. Still, only investors who have the stomach for volatility should go for this portfolio. They should also be prepared to remain invested for at least 5-7 years to earn good returns from this portfolio.
Wealth Maximiser
Aggressive portfolio with mid and small-cap orientation.
II. Wealth Builder:
Cautiously optimistic on markets
Wealth Builder suits those who want to invest in stable large-cap stocks.
Small- and mid-cap funds might have zoomed, but even large-cap funds have not done badly. The large-cap category rose 26% in the past one year, though the returns have not been very high in the past 3-5 years. Even so, this portfolio of large-cap equity funds has the potential to churn out decent returns for the long-term investor.
We have chosen funds that score high on consistency and the risk-reward matrix. The Franklin India Flexi cap Fund, for instance, has a standard deviation of less than 12, which makes it among the most consistent performers in its category.
The other funds in the portfolio have an equally impressive track record. The Aditya Birla Sun Life Frontline Equity has consistently outperformed both the benchmark and the category average by a wide margin. The Kotak Select Focus is another fund that has delivered consistent returns.
Will these large-cap funds be able to generate alpha for the portfolio? The Motilal Oswal MoST Focused Multicap 35 fund is best positioned to do that. This multi-cap fund earned more than 35% in the past one year and has delivered SIP returns of over 23% in the past three years. The ELSS scheme in the portfolio could also chip in here. The Tata Tax Savings Fund has 44% of its corpus invested in mid-cap and small-cap stocks.
Wealth Builder
Cautiously aggressive portfolio with large-cap orientation.
III. Stable Wealth:
Get the best of both worlds
Stable Wealth is for investors who want a balanced mix of debt and equity.
Even though they might be optimistic, not everyone is willing to bet big on the stock markets. The Stable Wealth portfolio is designed to give investors reasonable growth without too much risk. It has three equity-oriented balanced schemes, one ELSS fund and one short-term debt fund. All three balanced funds have impressive credentials. They have outperformed the category and their benchmarks.
Balanced funds divide their corpus between debt and equity, giving investors the best of both worlds. The equity portion generates returns when markets are doing well, and the debt portion acts as a cushion when equities are headed southwards.
The best part of a balanced fund is that although nearly 40% of the corpus is in debt, it gets the same tax treatment as an equity fund. So, 40% of the corpus in debt effectively earns tax-free returns for the investor.
The ELSS fund in the portfolio, IDFC Tax Advantage, is an equity fund. It has ranked among the top-performing ELSS funds in recent years. The debt fund in Stable Wealth lends stability to the portfolio. The Franklin India Short Term Income Fund has been a consistent performer, generating nearly double-digit SIP returns in the past five years. That makes it a better option than bank deposits and other fixed income instruments.
Stable Wealth
Balanced portfolio with lower exposure to equity.
< ..
IV. Wealth Secure:
When safety is paramount
Wealth Secure is designed for investors who don’t want to risk their money in stocks.
Some investors just can’t stand the prospect of losing money. For them, the Wealth Secure can be an ideal option. The fund has three short-term debt funds, one debtoriented hybrid fund and an ELSS scheme. The equity exposure is only 24% of the corpus, while the rest is in the safety of debt.
Another caveat is needed here. Though debt funds are not as volatile as equity schemes, it is a misconception that they can’t lose money. Debt funds are sensitive to interest rate movements and will lose money if interest rates go up. Long-term debt funds have lost 1.5% in the past six months. Their one-year returns are only 2.6%, which is less than what a savings bank account offers.
For the same reason, we have included only short-term debt funds in the portfolio. These funds are less volatile and focus on earning from interest accruals than on capital gains. The Baroda Pioneer Short-term Bond Fund and the Franklin India Low Duration Fund have generated almost 9% returns in the past one year. The hybrid scheme in the portfolio, ICICI Prudential Child Care Plan is a consistent outperformer, while the ELSS fund, Aditya Birla Sun Life Tax Relief 96 provides the necessary tinge of equity to the fund.
Wealth Secure
Conservative allocation with very low exposure to equity.
V. Income Generator:
Regular income in the golden years
Income Generator is for retirees looking for a monthly income from their investments.
Unlike the SIP inflows in other portfolios, income generator starts with a lumpsum investment and withdraws monthly sum for the investor. It has two medium-term income funds, two short-term debt funds and one debt-oriented hybrid fund. Every month, Rs 2,000 is withdrawn from each of the five funds by the investor.
Why should an investor go for this arrangement when he can get assured returns from bank deposits? One, bank deposit rates have come down and are likely to fall further. Debt funds yield slightly better returns than fixed deposits.
But the real benefit comes from the tax advantage that debt funds have over fixed deposits. The income from bank deposits is fully taxable. In debt funds, the gain is only a thin sliver of the redemption proceeds. A big part of the redemption is the principal amount which is not taxable. It keeps getting better as years go by.
After three years, gains are treated as long-term capital gains and taxed at a lower rate of 20% after indexation. Retirees should consider parking their retirement corpus in a good debt fund and then start systematic withdrawal plans to get a monthly income. The Income Generator portfolio does exactly this.
Income Generator
Meant for investors who are looking for regular income in retirement.
How to build your mutual fund scheme portfolio
The five model fund portfolios are not customised to individual needs. Some investors may be holding different schemes and earned very good returns. Others may have different views on the mutual funds we have selected. We invite readers to construct model fund portfolios for different kind of investors and send them to us. Here are basic things to keep in mind when constructing a mutual fund portfolio:
Asset allocation desired by investor
This is critical because it determines the risk profile of the investor. The portfolio should take on more risk than the investor wants. As we said earlier, there is no point in earning high returns if it gives you sleepless nights.
Keep goals in mind
The portfolio should be designed in a way that it aligns with the goals of the investor. If the goal is just 1-2 years away, even an aggressive investor should go for a 100% debt oriented portfolio.
On the other hand, the choice of funds will be very different when saving for a long-term goal such as retirement. Like Wealth Secure, even a conservative investor will be advised to put at least 20-25% in equities. A pure debt portfolio will not be able to beat inflation.
Consistency of returns
The funds chosen should have a sound track record. Don’t go by short-term performance alone. Go for a longer term track record. Also, look at the risk parameters of the fund.
Number of funds
Every week, the Portfolio Doctor section in ET Wealth gets scores of mails from readers. Many of them hold close to 15-20 mutual funds. One even had some 40 funds in his portfolio. There is no need to have so many funds. Just 5-6 schemes can give you all the diversification you need.
Taxation and loads
The taxation of the investment should also be kept in mind when designing the portfolio. Mutual funds enjoy very favourable tax rules, but some fund categories such as Fund of Funds suffer from discriminatory treatment. Avoid these unlucky categories. Also check the exit loads of the funds in your portfolio. Some funds can levy very high exit loads, which eat into the returns.
Happy investing
Source:ETWealth.com
Want to invest in mutual funds but don’t know which schemes to buy? Already invested in mutual funds but not sure if they are appropriate? Hold a large number of schemes and want to cut them down to a manageable number?
If these issues are troubling you, our seventh anniversary cover story could provide solace. We have designed five model fund portfolios for investors of different risk profiles and financial situations.
These five portfolios cover almost the entire spectrum of the investing population, ranging from aggressive investors who are willing to live with volatility to conservative investors who want reasonable growth with minimal risk. We also have a portfolio for retirees looking for returns that can beat inflation and provide regular income from the investments. Each of these portfolios have five funds. The funds have been chosen on the basis of their star rating by Value Research.
Choosing a portfolio
Which of these portfolios will suit you? As a first step, you must know your risk appetite, because this will determine your asset allocation and the type of funds that fit your profile. If the market volatility does not bother you and your investment tenure is more than 8-10 years, go for the Wealth Maximiser portfolio that invests entirely in equity funds and has a decidedly mid- and small-cap orientation. These funds have given spectacular returns in recent years, but also carry high risks.
Not everyone is comfortable with the high returns that accompany high risks. Those seeking comparatively stable but lower returns should go for the Stable Wealth portfolio that adopts a balanced approach and puts only 60-65% in equities. However, if the thought of losing money is completely unacceptable to you, go for the conservative Wealth Secure portfolio where the equity allocation is just 20-25% of the corpus. There’s no point in taking risks to earn high returns if it gives you sleepless nights and ruins your personal life.
We have included a tax saving fund in every portfolio because we believe the ELSS category is an ideal way to save tax for equity investors. There is a 3-year lockin period, which actually works in favour of the investor by keeping him invested even during periods of high volatility.
He can neither be tempted to get out when markets shoot up, nor lose his nerve and redeem when stocks prices head southwards. “In some cases, the three-year lockin period of ELSS funds actually inculcates investing discipline in individuals. They realise the benefits of taking a longer term perspective.”
The SIP approach
Most investors are familiar with the advantages and convenience of investing in mutual funds through SIPs. We have also recommended the SIP approach in our model portfolios. But don’t expect this to be a foolproof safeguard against losses. SIP only reduce the risk—they do not remove it altogether. An equity fund portfolio will certainly slip into the red if the markets recede.
Mutual fund suitability matrix
Find out where each category of mutual funds fits into the matrix
Therefore, the returns from these portfolios will depend, in a large measure, on the investing discipline of the individual. Domestic investors are pouring money into equity funds, and SIPs worth Rs 6,000 crore flow in every month. But some experts fear this can quickly change if markets witness a sharp decline.
Caution
“If there is a correction, domestic investors will falter a little, step back and be shy to invest again.” The small investor’s biggest problem is that she loses her nerve when markets tumble and stops her SIPs. This can be a costly mistake. It prevents the investor from buying at lower prices, defeating the very purpose of the SIP arrangement.
Reviewing and rebalancing
The investor’s work doesn’t stop here. Though you do not have to check your portfolio on a daily or weekly basis, it is necessary to evaluate it periodically and see if it is on track.
We will regularly monitor the progress of these portfolios and compare the performance of individual funds against their respective benchmarks. Underperforming schemes will be shown the door and replaced with more promising funds. The portfolios will also be rebalanced once in a year to ensure that the risk profile does not change.
We hope you will find these model fund portfolios useful. Happy investing.
I. Wealth Maximiser:
For the young and the restless
Wealth Maximiser portfolio is for aggressive investors who don’t mind taking risks.
This portfolio has been designed for investors who want high returns even if it means taking high risks. It has two mid-cap funds, one small-cap fund and one multi-cap fund. The SBI Small and Midcap Fund has consistently topped the small-cap category in recent years. It has risen 66% in the past one year. The Mirae Asset Emerging Bluechip is another winner, topping the mid-cap category with over 23% returns in the past three years.
But though mid- and small-cap funds have given spectacular returns in the past one year, the road ahead could be quite bumpy. The mid-cap and small-cap stocks are looking overvalued and this is why some funds in this category have stopped accepting new investments and others are taking only SIPs under some conditions.
We have included two multi-cap funds to bring stability to Wealth Maximiser. The multi-cap DSP BlackRock Opportunities Fund and the ELSS scheme Axis Long-term Equity Fund have nearly 70% invested in large-caps. These funds will not be as volatile as the mid- and small-cap schemes.
Volatility is inherent to stocks. It is here that the SIP approach proves beneficial for investors. Even if the market corrects and the funds slip, the investor stands to benefit because he can get more units with the same SIP sum. Still, only investors who have the stomach for volatility should go for this portfolio. They should also be prepared to remain invested for at least 5-7 years to earn good returns from this portfolio.
Wealth Maximiser
Aggressive portfolio with mid and small-cap orientation.
II. Wealth Builder:
Cautiously optimistic on markets
Wealth Builder suits those who want to invest in stable large-cap stocks.
Small- and mid-cap funds might have zoomed, but even large-cap funds have not done badly. The large-cap category rose 26% in the past one year, though the returns have not been very high in the past 3-5 years. Even so, this portfolio of large-cap equity funds has the potential to churn out decent returns for the long-term investor.
We have chosen funds that score high on consistency and the risk-reward matrix. The Franklin India Flexi cap Fund, for instance, has a standard deviation of less than 12, which makes it among the most consistent performers in its category.
The other funds in the portfolio have an equally impressive track record. The Aditya Birla Sun Life Frontline Equity has consistently outperformed both the benchmark and the category average by a wide margin. The Kotak Select Focus is another fund that has delivered consistent returns.
Will these large-cap funds be able to generate alpha for the portfolio? The Motilal Oswal MoST Focused Multicap 35 fund is best positioned to do that. This multi-cap fund earned more than 35% in the past one year and has delivered SIP returns of over 23% in the past three years. The ELSS scheme in the portfolio could also chip in here. The Tata Tax Savings Fund has 44% of its corpus invested in mid-cap and small-cap stocks.
Wealth Builder
Cautiously aggressive portfolio with large-cap orientation.
III. Stable Wealth:
Get the best of both worlds
Stable Wealth is for investors who want a balanced mix of debt and equity.
Even though they might be optimistic, not everyone is willing to bet big on the stock markets. The Stable Wealth portfolio is designed to give investors reasonable growth without too much risk. It has three equity-oriented balanced schemes, one ELSS fund and one short-term debt fund. All three balanced funds have impressive credentials. They have outperformed the category and their benchmarks.
Balanced funds divide their corpus between debt and equity, giving investors the best of both worlds. The equity portion generates returns when markets are doing well, and the debt portion acts as a cushion when equities are headed southwards.
The best part of a balanced fund is that although nearly 40% of the corpus is in debt, it gets the same tax treatment as an equity fund. So, 40% of the corpus in debt effectively earns tax-free returns for the investor.
The ELSS fund in the portfolio, IDFC Tax Advantage, is an equity fund. It has ranked among the top-performing ELSS funds in recent years. The debt fund in Stable Wealth lends stability to the portfolio. The Franklin India Short Term Income Fund has been a consistent performer, generating nearly double-digit SIP returns in the past five years. That makes it a better option than bank deposits and other fixed income instruments.
Stable Wealth
Balanced portfolio with lower exposure to equity.
< ..IV. Wealth Secure:
When safety is paramount
Wealth Secure is designed for investors who don’t want to risk their money in stocks.
Some investors just can’t stand the prospect of losing money. For them, the Wealth Secure can be an ideal option. The fund has three short-term debt funds, one debtoriented hybrid fund and an ELSS scheme. The equity exposure is only 24% of the corpus, while the rest is in the safety of debt.
Another caveat is needed here. Though debt funds are not as volatile as equity schemes, it is a misconception that they can’t lose money. Debt funds are sensitive to interest rate movements and will lose money if interest rates go up. Long-term debt funds have lost 1.5% in the past six months. Their one-year returns are only 2.6%, which is less than what a savings bank account offers.
For the same reason, we have included only short-term debt funds in the portfolio. These funds are less volatile and focus on earning from interest accruals than on capital gains. The Baroda Pioneer Short-term Bond Fund and the Franklin India Low Duration Fund have generated almost 9% returns in the past one year. The hybrid scheme in the portfolio, ICICI Prudential Child Care Plan is a consistent outperformer, while the ELSS fund, Aditya Birla Sun Life Tax Relief 96 provides the necessary tinge of equity to the fund.
Wealth Secure
Conservative allocation with very low exposure to equity.
V. Income Generator:
Regular income in the golden years
Income Generator is for retirees looking for a monthly income from their investments.
Unlike the SIP inflows in other portfolios, income generator starts with a lumpsum investment and withdraws monthly sum for the investor. It has two medium-term income funds, two short-term debt funds and one debt-oriented hybrid fund. Every month, Rs 2,000 is withdrawn from each of the five funds by the investor.
Why should an investor go for this arrangement when he can get assured returns from bank deposits? One, bank deposit rates have come down and are likely to fall further. Debt funds yield slightly better returns than fixed deposits.
But the real benefit comes from the tax advantage that debt funds have over fixed deposits. The income from bank deposits is fully taxable. In debt funds, the gain is only a thin sliver of the redemption proceeds. A big part of the redemption is the principal amount which is not taxable. It keeps getting better as years go by.
After three years, gains are treated as long-term capital gains and taxed at a lower rate of 20% after indexation. Retirees should consider parking their retirement corpus in a good debt fund and then start systematic withdrawal plans to get a monthly income. The Income Generator portfolio does exactly this.
Income Generator
Meant for investors who are looking for regular income in retirement.
How to build your mutual fund scheme portfolio
The five model fund portfolios are not customised to individual needs. Some investors may be holding different schemes and earned very good returns. Others may have different views on the mutual funds we have selected. We invite readers to construct model fund portfolios for different kind of investors and send them to us. Here are basic things to keep in mind when constructing a mutual fund portfolio:
Asset allocation desired by investor
This is critical because it determines the risk profile of the investor. The portfolio should take on more risk than the investor wants. As we said earlier, there is no point in earning high returns if it gives you sleepless nights.
Keep goals in mind
The portfolio should be designed in a way that it aligns with the goals of the investor. If the goal is just 1-2 years away, even an aggressive investor should go for a 100% debt oriented portfolio.
On the other hand, the choice of funds will be very different when saving for a long-term goal such as retirement. Like Wealth Secure, even a conservative investor will be advised to put at least 20-25% in equities. A pure debt portfolio will not be able to beat inflation.
Consistency of returns
The funds chosen should have a sound track record. Don’t go by short-term performance alone. Go for a longer term track record. Also, look at the risk parameters of the fund.
Number of funds
Every week, the Portfolio Doctor section in ET Wealth gets scores of mails from readers. Many of them hold close to 15-20 mutual funds. One even had some 40 funds in his portfolio. There is no need to have so many funds. Just 5-6 schemes can give you all the diversification you need.
Taxation and loads
The taxation of the investment should also be kept in mind when designing the portfolio. Mutual funds enjoy very favourable tax rules, but some fund categories such as Fund of Funds suffer from discriminatory treatment. Avoid these unlucky categories. Also check the exit loads of the funds in your portfolio. Some funds can levy very high exit loads, which eat into the returns.
Happy investing
Source:ETWealth.com
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