It is very difficult to meet some over enthusiastic investor (increasingly in my life, doctors) who have a very long list of what a portfolio requires. They start by saying market cap, style, diversification, direct equity, fixed deposits…and really my head goes for a toss.

So in very simple language what would I think are important in a portfolio?

  • Enough Liquidity
  • Diversification
  • Risk reduction
  • Minimum taxation
  • Low cost

An 87 year old man on the door step of Alzheimers / Dementia having a 82 year old wife has to think differently about liquidity than a 35 year old planning for retirement. So see what level of liquidity you need and plan accordingly. Keeping all the money in equities (for profitability) or 30 year gilt bonds (better yield, zero default risk) is not sensible if you have to pay for your child’s higher education next month. Nor do you have to keep Rs. 20L in the savings account ‘just in case’ – and be over planning for liquidity by compromising on returns.

Diversification especially in a diversified equity portfolio is not really easy to achieve. This brings me back to Indexation – one portfolio gives you the best 30 (sensex) companies or 50 (nifty) companies with zero SEARCH efforts. For the retail investor this makes a lot of sense. Unless of course you have the energy, willingness, time, enthusiasm to create your own portfolio. If I were a doctor (or any other professional) I would not. However, if you have a light job, lots of time, no hobbies and are willing to create this as a hobby, go and learn about investing and create your own diversified portfolio.

Understanding risk, inflation, real return, standard deviation, investment history, randomness, past busts and booms – help you in profiling your own risk. Your portfolio has to be in tune with your needs. No IFA will be able to profile your risk as YOU would be. How you feel when your portfolio is wiped out Rs. 5 crores or by 30%…is a FEELING that only you know. Maintaining an investment diary – and well filled up – writing down how it felt at the bottom of your stomach when the index was at 9000 (sensex, not nifty!)..helps you in profiling your risk. Do not listen to your ‘convenient’ inner voice – it does not understand risk the way your brain does.

Leaving money in a fund with 65% equity helps you from a tax point of view. The 35% debt portion also comes tax free – whereas if it were in a debt fund. However, the 65% equity means this fund needs to be treated like an equity fund in your return expectations. So instead of keeping Rs. 100 in an equity fund and Rs. 50 in a debt fund, it makes sense to keep the money in a balanced fund – even if the balance tilt is towards equity. Remember to invest even in equity oriented balanced  fund in a regular manner like a SIP or a STP.

The single biggest advantage of an Index fund – etf if you must – is that the cost is kept low. However, I am assuming that you know how to do asset allocation and are market cap agnostic (I am). Being a bottom up investor with a huge, huge equity bias, I am not impressed by people who look for large cap, mid cap, micro cap, especially while investing in a mutual fund. I am happy with ‘good quality sustainable shares which will create wealth for you in the long run…

To me, this is what I look for in a portfolio. Simple.

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  1. the tax advantage debt portion of balanced fund is completely wiped out by higher expense ratio of balanced fund compared to debt fund. the difference is 1.25 to 2.25 ie. expense ratio of balanced fund is more than liquid fund by this much percentage in a direct /regular fund, which is 20-30% of current annual yield on debt portion.

    we are better off in a liquid fund and hold it for 3 years or more. we will keep higher post expense, post tax return on debt portion.

  2. Margin of return between equity oriented balanced fund and debt fund is huge and it widens with time. So definitely there is tax advantage and better returns if you go for equity oriented balanced fund.
    Honestly, the comparison itself is wrong but I just wanted to put my view.

  3. Abhay u are SUFFERING from end point bias. In a bull run the debt products look lousy and a colossal waste of time. During a bear market, your ppf and debt funds at the shorter tenure can look awesome. Personally I like E oriented bal funds and have been a big advocate of Hdfc Prudence…when its aum was Rs. 3000 crores. Now if the selling continues we will see 2019 figure upwards of Rs. 40,000 crores…

  4. I meant investing in equity fund and debt fund separately with direct account and sticking with a strict 70/30 asset allocation will give better return than a balanced fund with 70/30 equity/debt portfolio, due to lower expense ratio of a liquid fund than balanced fund (and holding liquid fund for >3 years for tax benefit).

  5. I have 6 Mutual funds in my portfolio. 2 Multicap funds(70-30), 2 ELSS and 2 midcap funds. Beleive me the performance of midcaps is very good in a very short time. And the best has been the ELSS since they are oldest in my portfolio. But by sheer observation, I can say that a 70% equity – 30 % debt sort of multicaps give me that peace of mind.
    The kind of invest and forget sort of feeling. For and average investor, 70-30 multi caps are good enough. Have 4-5 of these in your SIPs and sleep well.

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