When people learn about diversification, mostly they do not understand that there is a difference between asset diversification, and fund diversification. Frankly in my head even asset allocation is not necessary for a young investor in the accumulation phase. If you believe that Equity will give the best returns over say a 50 year period, why even bother putting money in other asset classes EXCEPT for the expenses (or drawdown) that you need in the next say 5 years? Many people who believe in asset allocation also believe that they are well diversified if they invest across many funds. Actually they may have DIWORSIFICATION  and not enough diversification.

Here I am going to talk about fund diversification. People are not happy with one or 2 funds. Most people like at least 5 or 10 funds at the MINIMUM. I seriously wonder why. I just met a friend in the UK who has only ONE fund, a big amount, and other than that has direct equity, gold and a bond fund. However, the fund in which he has invested may not be available to you and me, so for us it is only a fantasy.

Which is this fund? It is the Vanguard FTSE All Cap Global Index fund. It covers 43 countries, 6 regions, 11 sectors, 6000+ companies. This is a really well diversified fund, and has (obviously) very little exposure to India. Would I recommend this to Indian resident investors? Yes. Yes, of course. I have no clue how to buy it. My friend has been doing a SIP in this fund for a long time, and hopes to encash it to buy annuities when the is 80 years of age. Currently, he is just 43.

He has no other fund. I wish SEBI allowed foreign funds to open sales offices in India so that Indians could get well diversified, low cost funds. There is a currency risk, but remember it invests in 43 countries. So if I could do a SIP of say Rs. 1L a month for 20 years, I would surely choose this fund. Alas, we cannot. Alas, our ‘manufacturing friends’ will not allow this so easily. They need another 230 years to build barriers. Hopefully, I would be dead in 23. So it does not matter.

The one fund portfolio – say like PPFAS does – is very helpful if it is truly a multi cap fund with equity across the globe. However even a fund with 65% in Indian equity, and the balance in the abovementioned Vanguard fund will be good enough for me. Having just one fund means you need to track only one fund, have very little paper work, this fund is low cost (hey this post is not sponsored by Vanguard, just a small disclaimer). My friend keeps looking at his bank account, and whenever he has a surplus he puts it into the same fund. He thinks that as he has been in this fund for a long time, he does not have to have an emergency fund. His credit card is his emergency fund, and he thinks that he is happy to pull out money from this fund on a regular basis – as and when he needs, just in case he is on an emergency basis. So far he has not withdrawn from this fund.

Hey Sebi please allow Vanguard to come to India and sell his funds – why should he need a full fledged office? ceo? cio?…..we the SMALL INVESTORS ARE the only ones suffering.

 

 

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  1. I do not see the point of encashing it at age 80 (37 years from now) to buy annuities ? only the insurance company will benefit

  2. Subra sir, both asset diversification and fund diversification is required in India, is it not? Asset diversification to hedge against the market systemic risk and fund diversification to hedge against the mutual fund house risk. What if mutual fund house sinks and they run away with money? what if there is a spook in market and redemption is high and MF-house is strapped for cash or they suspend depository service for few days ? A do-it-yourself investor saw DHFL and Yes bank has no fundamental flaw until 4 months back. if fundamentally well researched stocks A B C D is expected to give returns 5% 10% 15% and 18% in my opinion, it is better to diversify equally in all 4 and get 12% overall. Talking about asset diversification, In India, now the dumb investment in Gold is giving handsome returns, temporary albeit..

  3. sir, the vanguard fund has 56% exposure in US companies. the next 12% in Japan & UK (the 2 most stable economies, less volatile than US even). so 70% is going to “large caps” of the world.
    for indian investors, proxy funds like Franklin India Feeder – Franklin US Opportunities Fund are there, whose top 10 holdings mirror the vanguard fund mentioned in this blog. These is DSP India Feeder fund too.

    Although I personally am invested (10% of my equity) in the Franklin US Fund for last 3-3.5 years now. And despite being less volatile, it is not upto the mark vis-a-vis Indian equities in performance. So I only see it as a “hedge” investment in my equity portfolio

  4. Agree with SS on all the points on diversification. Gold is a fantastic asset to hold. You should write on why gold is a must have in portfolios to dampen volatility.

  5. Currently with how things ar- Iam glad we are diversified and not stuck in just a few funds…. imagine if we held just 3 or 4 and then all of them had exposure to a triple A rated DHFL… wht would be the state of affairs now?

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