Money Matters

  • Ifthikar Bashir
  • Publish Date: May 7 2018 10:14PM
  • |
  • Updated Date: May 7 2018 10:14PM
Money Matters

I have been investing in equity mutual funds for sometime now. I have observed that most large cap funds have similar holdings. How do I pick the best ones? 

Sajad Bashir, 

via email


Looking at holdings is not the way to go. You should primarily look at long term returns and how volatile they have been. If you look at the large cap universe, you will come across 70-80 funds, 20-30 of which will not even be matching the returns of the index. In the middle, there are index funds and above them the long term winners. These funds are able to beat the benchmark by 8-9% annually over a 5-10 year period. At any point, their portfolio looks alike.

Fund managers add great value by keeping you away from some stocks while emphasising others. Don’t look at portfolios because all large cap portfolios will always look alike.


I have invested in a few equity mutual funds. What should I do if my top-performing funds start underperforming? 

Ali, via email

You should stop comparing performance of various funds every now and then. You should choose one or two funds, give them some time and, in that time, not look at others. If you watch funds on daily basis you only regret it. Alternatively, you will be unnecessarily happy seeing your fund doing well at that particular time. I don’t think you should be happy or sad about the day to day noise in the market. Choose a fund and do this evaluation after a 3-5 year period. Watching its performance more often is a futile exercise.


What should be the proportion of large, mid and small cap funds in one’s portfolio?

Mudasir Rashid, Sopore


Ideally, entrust your money to someone who is allocating it properly. But, generally, 65-70% should be in large caps, 20% in mid caps and 10-15% in small caps. If you analyse the equity universe in India, this is the break-up you get. Large caps account for 65-70% of the Indian market’s capitalisation and if your portfolio reflects that it will be a reasonable representative of the market. But at the same time, there will be great selectivity. There are thousands of listed stocks but your portfolio won’t typically contain more than 100 stocks. 


I am interested in investing in mutual funds via an SIP. Is it better to invest manually every month instead of through an automated SIP?

Suhail, via email


I don’t see any value in doing that. SIPs are able to eliminate the emotion of being selective with your dates. Say, next week the market goes down by 4% on two specific dates. What will you do? Will you have the courage to invest after the first day? And will you have the same conviction on the second day? In 2008, there were many days when the market went down by 5% in single sessions. There have been similar situations on the upside too. You will start regretting, you will pause. That is where an automated plan like SIP comes in. It eliminates the anxiety and the indiscipline of the human mind.


Does the thumb rule of “100 minus my age” provide the right debt equity allocation in a portfolio? 

Mahir Mir, via email

This is too simplistic. The general idea was that as you get older you will have to depend on your investments for your living expenses and, hence, you should reduce your equity exposure. But things have changed dramatically. Not everyone has the same level of expenses. You should only have a fixed income to the extent that it supports your needs in your retirement. The rest of your money should be, to a reasonable extent, in equity so that the worth of your capital is maintained.

The formula most investors should follow is this: if you have 5-10 years before you need the money, put as much of it in equity as you can without compromising your living standard. Most investors are not comfortable with 100% equity. Having some fixed income provides stability and protects you from the cyclical nature of the markets. PPF should be considered part of debt allocation as it provides guaranteed income in a tax-efficient way.


Which category of debt funds can suitably replace fixed bank deposits?

Mohammad Zubair, Nageen, Srinagar

I would suggest you to keep it simple: don’t move beyond short term debt funds. If your fixed deposit was going to be for a very short term, say six months, consider liquid funds. If it was for up to a year, consider ultra short term debt funds. If the deposit was going to be for three or five years, stop at short term debt funds. Don’t venture anywhere else because of the ups and downs of the market. When interest rates go up, bond prices go down and you will actually see a loss. Navigating through debt funds in a manner that you do not face an interim loss is important. So, stop at short term debt funds.


To buy mutual funds as a Non Resident Indian, do I need to maintain an Investment and Services Account or a Demat account which charge a certain amount per quarter, excluding service tax, education cess. Is there any way to buy mutual funds without maintaining these costly accounts? 

Firdous, via email


To invest in mutual funds, an NRI needs an NRE or an NRO bank account. An Investment and Services Account is not required or a Demat account. Such accounts incur charges which are an unnecessary expense. You can invest in mutual funds, offline and online, without having such accounts.