Last Updated on October 1, 2023 at 7:43 pm
This is the freefincal list of handpicked mutual funds for July-Sep 2020 (third quarter). New and old investors can use it according to their specific needs. Called “PlumbLine”, this was started in Sep 2017 for beginners to accompany the freefincal robo advisory template.
Foreword (do not skip!): The April-June edition of Plumbline was published on April 4th 2020. I had then remarked, “How the world has changed from Jan 2020 to April 2020!” While that was true (and sadly still is), what followed a couple of weeks later was bizarre, to say the least! Franklin closed six debt MFs, messed up in the lead-up and paid a heavy price: Franklin Templeton lost 28664 Crores debt fund AUM in 2020!
As Franklin Ultra Short-term Fund (one of the six closed funds) was part of the April-June 2020 Plumbline, I updated the article striking-through my recommendation with the following notes:
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While some readers/users may be critical of this recommendation, I sleep easy in the comfort that a significantly higher number of readers have exited such funds after appreciating the risk pointed out here and in my review of the fund (the irony!).
I regret not foreseeing the possibility of a mass exodus from debt funds at least at the time of writing this post when the lockdown had started.
I will have to repeal my favourable view of Franklin AMC. Yet another lesson learned.
The closure was as much a shock to me as anyone else. Reactions to Plumbline after the shutdown were diverse. About 70% of responses (from actual Franklin investors) were thankful (as noted above) for pointing out credit risk in such funds as they had pulled out after the Oct 2019 review: Franklin India Ultra Short Bond Fund Review: When and how to invest. Plumbline editions came with this warning: “This fund is not for everyone! Do not get lured by returns, invest and then repent!!”
The remaining 30% of reactions from non-investors were accusatory but steeped in ignorance of what happened and a convenient disregard of plumbline disclaimers. The responses were insightful. Very few people understood what went wrong. Notably most of those who went “I told you so” on social media. They equated the closure of the funds to credit risk alone. It was mass redemption risk triggered by a force majeure event (an act of God) and not actual credit defaults.
My mistake: I do not regret recommending Franklin Ultra-short (or Credit risk fund in previous editions). While I recognized the credit risk and associated liquidity risk when a single issuer gets into trouble, I failed to read history. If I had done so, I might have recognized that the 2020 redemption crisis was a repeat of what happened during the 2008 financial crisis and added a note about mass redemption risk associated with all debt funds particularly those that dabbled in credit risk during widespread market crisis.
This kind of risk is well recognized as a possibility in non-large cap equity funds. The lesson learned is that it extends to all debt funds (not just credit-risk). Please note that demand-supply mismatch led to a fall in all liquid, ultra-short and money market funds in March 2020. This is also a liquidity risk and a repeat of 2008. I have a borrowed a line from Quantum Liquid Funds scheme document in the plumbline disclaimer.
The reason I asked you not to skip the foreword is this: If you expect me to “see all ends” to borrow a line from Tolkein, or “know about everything” then this is list is not for you. Perhaps you may be better off with an “I told you so” hindsight expert. The plumbline disclaimer, “Mutual Funds are subject to ignorance risks” has become a self-fulling prophecy! This line is also suitably modified—end of foreword.
Do be sure to read the disclaimer and disclosure of which funds I am invested in from this list and what for what purpose. If you are seeing this for the first time, please take a couple of minutes to understand what this list is, how it has been compiled and how you should use it. If you are aware of this list, please do not just look for changes to fund names!
What is Plumbline, and how should I use it?
A plumb line is used to fix the vertical and therefore the horizontal. This list hopes to help new investors do the same. Pic credit: Mr. atm
1: PlumbLine is a boring list of mutual funds. Due to demand from readers, it will be updated every quarter. There are plenty of good mutual funds that are not part of Plumbline. If your funds are different, you are probably better off. Do not worry about it.
2: Do not use PlumbLine for confirmation of your choices! PlumbLine is meant for young earners and first-time investors after they have used the freefincal robo advisory template.
3: If tomorrow the funds in the list change, you will have to take a call on what you need to do, based on the fund performance from the date in which you invested. I cannot help you here, other than talk about how to review.
4: This is a handpicked list and will be subject to my biases. I invest with a bias to get things done and analyze without bias to present facts. So please bear that in mind.
5: This is a goal-based list and not a category-based list. That is, you will not find one fund per category. It will be one-fund per need (goal and risk-taking ability)
Disclaimer
On its own, this list has no meaning, and unless you are able to look at it in the right perspective and context, it will not help you. The hope is that the robo template will try and provide such perspective which still has to be processed and interpreted by you. Finally, I am only human and more than capable of making mistakes.
Also, I am a below average investor and fund picker or analyzer. I am not a fan of looking into the fund portfolio. I prefer funds with a narrow investment mandate. I am sure you will agree that most of the picks are lame and obvious, .and that this list is a no-brainer and nothing special. If the funds here stop performing in future or have credit defaults issues, all I can do is to modify the list (if required).
Note: All statements about risk being low or high are relative to other types of funds and not absolute.
To borrow a line from Quantum Liquid Funds scheme document (bold is my wording), “Reduced liquidity in the secondary market may have an adverse impact on market price and any mutual fund’s ability to dispose of particular securities, when necessary, to meet the scheme’s liquidity needs or in response to a specific economic event or during the restructuring of the Scheme’s investment portfolio”. This can lead to a redemption crisis as we saw in the case of Franklin.
I WILL NOT BE IN ANY WAY RESPONSIBLE FOR YOUR INVESTMENT CHOICES, CAPITAL GAINS OR LOSSES. If a PlumbLIne fund is present in your portfolio, it means nothing. If none of your funds is present in the PlumbLine list, it means nothing. MUTUAL FUNDS (and mutual fund recommendations) ARE SUBJECT TO IGNORANCE RISKS AND MARKET RISKS. PLEASE READ AND UNDERSTAND ALL SCHEME RELATED DOCUMENTS BEFORE INVESTING.
FAQ on Plumbline
1. Why are X, Y or Z funds not part of Plumbline —> Plumbline is my list. Don’t expect me to make a list that matches your expectations.
2. The funds you have listed are not even 4-star funds —> I don’t care. Star ratings are injurious to your mental and fiscal health. Comparisons are injurious to peace of mind, and Plumbline is just plain bad.
3. Plumbline does not feature the top funds from your monthly screener —> Yeah because I do not always consult it. Plumbline is a qualitative + quantitative assessment of a funds investment strategy, mandate and performance.
4. I find your list is biased and partial to certain funds and certain AMCs –> Okay then, thank you for not using it.
5. If you are a new mutual fund investor, download this Free e-book: Mutual Fund FAQ 100 essential Q & A for new investors!
Overnight mutual funds
To understand the basics, read: When to Park your money in overnight mutual funds. Also see: Overnight Mutual Funds also have risks! What investors need to know
- Investment Duration one day and above!
- Fund name You can pretty much pick any fund in this category with reasonable AUM and low expenses. L&T Overnight fund was the earlier recommendation. It is still fine. Axis Overnight Fund or UTI Overnight Fund has just 0.05% TER (as of now!) is perhaps more inviting.
- Nature ultra-conservative!
- interest rate risk: practically nil
- Credit risk non-zero but quite small
- Why? When I first recommended a fund in this category, this had the highest AUM. However, things changed rapidly, and many other funds have much more AUM. Clearly either the big investors have already moved from liquid funds to overnight funds months before the SEBI’s New Liquid Fund Rules, or the AMCs suggested that they move. For example, End-Aug 2018 HDFC Overnight Fund had just 146 Crores. End-Sep 2018 it became 3186.61Crores! End- Aug it is 7126 Crores! End-Nov 10,686 Crores!
- Suitable for the super scared who want to park money for a short while
- Disclosure: Not invested as it is not necessary for my needs.
- Returns You invest in this for safety, not for returns.
Liquid Fund
- Investment Duration Few months and above
- Fund name Quantum Liquid fund Direct Plan-Growth Option
- Nature Conservative
- interest rate risk: low (can give losses if RBI rate is suddenly increased by a huge amount, but will recover in days – the lastest such event was in Mar 2020). This was the only fund that was fully marketed to market. Now all liquid funds are. Meaning all funds will suffer a fall if there is a spike in interest rates.
- Credit risk low
- Why? Does not chase after returns by taking on credit risk (after SEBI recategorization, the differences among liquid funds could have reduced. Need to check)
- Suitable for Use for parking money
- Returns a bit more than SB account
- Con: There are funds with lower expense ratio. You can choose them, but be sure you understand where the fund will invest. See: How to Choose a Liquid Mutual Fund. Funds from SBI, HDFC and ICICI, should also be reasonably safe as they have too much AUM at stake to take unnecessary risks.
- Why is it rated two stars? (it was one in April 2019!) Do not chase after star ratings, especially liquid funds! It will come back and bite you. Funds that have not suffered a credit event and yet have low star ratings typically tend to have a safer portfolio!!
- Parag Parikh Liquid Fund is one-star rated. Look at its portfolio: 82%+ gilts, cash and some safe A1+ bonds. As long as It maintains this kind of portfolio, it can also be used. If they get worried about the star rating (and therefore lack of AUM), then it could be trouble as this means taking on more credit risk. So do stay alert.
- Disclosure: Invested in quantum liquid for emergencies (but only a very small amount)
Equity Arbitrage
- Duration 1Y and above (never use for shorter-term)
- Fund name ICICI Equity Arbitrage Fund-Direct Plan Growth Option.
- Nature Low volatility by construction. Volatile for less than a year. Quarterly returns can be negative. Volatile when the market is turbulent.
- Interest rate risk: low Applicable to bond part of the portfolio. This is largely an equity fund.
- Credit risk low Applicable to bond part of the portfolio.
- Warning: After the SEBI recategorization, arbitrage funds only need to hold 65% in derivatives. Rest are in bonds. So these funds can be subject to credit and interest rate risks.
- Other risks There are small but complex risks involved, but if you choose the investment duration right, the main risk will be fund delivering lower than expected return. So expect less!
- Suitable for use for parking money and generating income. See: Generating tax-free income from arbitrage mutual funds.
- Returns Expect about 6% ish pre-tax.
- Con: You need to understand how the product work. Try this How Arbitrage Mutual Funds Work: A simple introduction.
- Disclosure: ICICI Equity Arbitrage is part of the debt portfolio for my son’s education goal. My wife also separately uses it as part of our emergency fund.
- Why this fund? Large AUM makes the AMC responsible in debt holding due to HNI participation. See holding history in previous plumbline edition. Tends to avoid credit risk and direct equity exposure. There are other good options, as well.
Money market/ Ultra Short-term
- Duration 1Y and above
- Earlier Fund name Franklin India Savings Fund-Direct Plan-Growth There is nothing wrong with this. In fact, the fund has managed to stay afloat in spite of a 67% drop in AUM from Nov. 2019. This is a sign that at least the money market segment of the Indian debt market is reasonably liquid. However, very few investors would choose Franklin now.
- New Fund Names: ICICI Pru Money Market Fund See Review: When & how to use it. HDFC Money Market Fund is also an option.
- Nature Conservative but expect day to day NAV ups and downs.
- interest rate risk: low (due to investors pulling out from the debt market the fund fell about 1% from 11-25th March but when RBI removed excess liquidity by buying bonds and lowering rates by March 27th 2020)
- Credit risk low-medium
- Why? This will now invest only in money market instruments with low to moderate credit risk.
- Suitable for Use for saving money and generating income
- Returns Expect FD-like returns (lower tax if you want for 3Y)
- Disclosure: Not invested as it is not necessary for my needs.
Ten-year Gilt:
- Duration Strictly long term: More than 10Y, preferably much longer
- Fund name SBI Magnum Constant Maturity Fund. ICICI Prudential Constant Maturity Gilt Fund – Direct Plan has a much lower AUM but a more inviting expense ratio (0.17%, compared to 0.34% for the SBI fund)
- Read Review: A Debt Fund With Low Credit Risk for long term goals!
- Nature Invests in close to 10Y government bonds and some low-risk short term bonds
- interest rate risk: very high
- Credit risk low!
- Why? If you wish to minimize credit risk events but are willing to take on interest rate risk and willing to actively rebalance the portfolio at least once a year
- Suitable for Use as a debt component for very long-term goals
- Returns Should be close to long term FD average (but can suffer if there a long period of no rate cut or rate hike). NAV can gradually fall over months or can suddenly shoot up or down.
- Disclosure: Not invested as it is not necessary for my needs (My NPS has a good deal of gilts)
- Also see: Can we invest via SIP in gilt mutual funds for the long term? and
- Can we get better returns by timing entry & exit from gilt mutual funds?
Equity Tax planning
- Duration There is no need for ELSS mutual funds., but if you must use, use only for long-term goals with proper asset allocation.
- Fund name Aditya Birla Sun Life Tax Relief ’96 – Growth – Direct Plan or DSP Tax Saver Fund-Direct Plan Growth Option
- Nature ABSL fund has multi-cap tilt. DSP fund has large cap tilt!
- Performance Update: Using the Consistent Equity Mutual Fund Screener (June 2020) both these funds have a good track record wrt NIfty 200 TRI.
- Suitable for Use only if you have a proper asset allocation and if you cannot exhaust 80C with your expenses and fixed income instruments. Read more: Making the best Use of section 80C for tax saving: an example.
- Disclosure: Not invested as it is not necessary for my personal situation.
- First-time tax saver? That is if you have just started earning or just moved into taxable income bracket this FY you can consider Parag Parikh Tax Saver Fund. This is a new fund with a similar investment style to Parag Parikh Long Term Equity Fund.
- Why? Why not?! In any case, you need to learn how to review a fund. Check out:
Balanced fund (equity-oriented) or Aggressive Hybrid
- Duration Treat all such funds as pure equity funds, so strictly long-term. Use the robo template for allocation.
- Fund name
- HDFC Hybrid Equity fund Direct plan growth option formerly HDFC Balanced or
- ICICI Equity & Debt fund
- Nature, The HDFC Fund, is a bit more conservative than the other two. See change below.
- Risk Only a bit lower than diversified equity funds
- Why? The HDFC fund is neither inconspicuous, nor a star, but a consistent performer with good downside protection. ICICI fund has been included because of this review: ICICI Prudential Equity & Debt Fund (ICICI Balanced) Performance Review
- Also, see Three excellent aggressive hybrid mutual fund performers.
- Disclosure: I am invested in HDFC Hybrid Equity for retirement
Multi-Asset
- Duration Treat all such funds as pure equity funds, so strictly long-term. Use the robo template for allocation.
- Fund name
- ICICI Multi-Asset Fund
- Read Review: ICICI Prudential Multi-Asset Fund Review
- Nature Neither conservative nor aggressive
- Risk Only a bit lower than diversified equity funds
- Why? This fund will combine multi-asset allocation with market timing like ICICI Balanced Advantage. Should be suitable for new investors and those who are risk-averse.
- Disclosure: Use this for my son’s education goal.
Multi-cap
- Duration Strictly long-term with proper asset allocation. Use robo template for allocation
- Fund name Parag Parikh Long Term Equity Fund
- Why? Very good downside protection resulting in consistent performance Who should use? Only those with low expectations, patience. Not suitable for star rating fans and daily portfolio “trackers”
- Disclosure: I invest in both funds (& HDFC balanced for my retirement).
- Performance Update: Quantum Long Term Equity Value Fund-Direct Plan-Growth Option has just gone through a poor stretch of underperformance. This is worrying as it has failed to beat the Sensex over the last 7Y. I would recommend new investors to choose the Parag Parikh fund. Existing investors can either exit or give it a little more time if they can afford to. I have still not exited, but have reduced exposure for details see: My 2019 Audit.
- With the market imbalance almost removed, I expect funds like QLTE and ICICI Val Discovery to do better in the future.
Index fund (large cap top 50/30)
- Duration Strictly long-term with proper asset allocation. Use robo template for allocation
- UTI Nifty Index Fund-Direct Plan-Growth Option or
- HDFC Sensex Index Fund-Direct Plan-Growth Option or
- HDFC Index Fund-NIFTY 50 Plan(G)-Direct Plan
- Risks No downside protection
- Who should use? If you wish to adopt a passive investing strategy (eliminate fund manager risks), and wish to track a less volatile large-cap index
Index Fund Blend (large + midcap)- higher risk
- Duration Strictly long-term with proper asset allocation. Use the robo template for allocation. 50% Nifty 50 + 50% Nifty Next 50
- Fund name (NIfty 50) As above.
- Fund name (NIfty Next 50) UTI Nifty next 50 direct plan growth option or ICICI Nifty Next 50 Direct Plan-Growth Option See: What is the best way to invest in Nifty Next 50 Index?
- That is, 50% of a Nifty (or Sensex) fund and 50% of a Nifty Next 50 fund (let us call this the Nifty Blend 50:50).
- Who should use? Only those who appreciate the benefits of Index investing and will not chase after stars or compare with peers. See: Will large-cap mutual funds struggle to beat Nifty 100 Equal Weight Index?
- Warning: Do not expect double-digit returns from Nifty Next 50 index funds!
Index Fund Blend (large + midcap)- lower risk
- Duration Strictly long-term with proper asset allocation. Use the robo template for allocation. 70–80% of Nifty 50 + 30-20% of Nifty Next 50
- Fund names: As above.
- That is, 70% (or 80%) of a Nifty (or Sensex) fund and 30% (or 20%) of a Nifty Next 50 fund (let us call this the Nifty Blend 70:30 or 80:20).
- Who should use? Only those who appreciate the benefits of Index investing and will not chase after stars or compare with peers. See: Will large-cap mutual funds struggle to beat Nifty 100 Equal Weight Index?
- Those who wish to invest in less than 25% of Nifty Next 50 can consider Axis Nifty 100 Index fund. Read the review here: Axis Nifty 100 Index Fund Impressive AUM but is it expensive?
- Why? See: Combine Nifty; Nifty Next 50 funds to create large, mid cap index portfolios.
- Why no active funds? Because Only Five Large Cap funds have comfortably beat Nifty 100 and there is no point in using an active large cap fund anymore
Balanced Advantage (Dynamic Asset Allocation)
- Duration Strictly long-term with proper asset allocation. Use the robo template for allocation. Use a core part of the equity portfolio.
- Fund name ICICI Balanced Advantage Fund Direct plan Growth Option
- Risks low (compared to aggressive hybrid funds)
- Why This has a fantastic track record with low volatility. See: ICICI Prudential Balanced Advantage Fund: Performance With Low Volatility
Midcap & Small Cap
The recently published mid cap and small cap fund comparison with NIfty Next 50 makes me wonder if it is worth chasing after active funds in these segments too. Therefore from this edition of the Plumbline, I shall only be listing some consistent mid cap and small cap performers as a matter of fact and not recommendations
- Duration Strictly long-term with proper asset allocation. Use the robo template for allocation. Do not exceed 40-50% within the equity portion. That is, your total midcap + smallcap allocation should not exceed 40-50% of your total equity allocation. For eg: 60% large cap + 30% midcap + 10% small cap.
- At least in the case of small cap funds, additional tactical buying and selling may be necessary for lower risk (not higher returns): A tool for tactical buying and selling using moving averages.
Consistent Midcap performers
Consistent Smallcap performers
Closing Remarks
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To understand the debt fund choices, you need to learn more about interest rate risk, credit rating risk, floating-rate bonds, etc. You can download this free e-book if you are interested: Free E-book: A Beginner’s Guide To Investing in Debt Mutual Funds. It is not enough if you know how to choose a fund; it is important to review its performance. If you wish to know how to do this, see: How to review a mutual fund portfolio. You only need 1/2 funds to build a well-diversified equity portfolio.
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