Last Updated on August 22, 2022 at 11:13 pm
Natesh asks, “I’m 24 and investing for my retirement goal which is around 30 years away. Asset Allocation: Equity 70% and fixed income 30%. Within the equity portion, Axis Nifty 100 Index fund – 75% and MO S&P 500 Index fund – 25%. Is this a good plan? Is it ok to use the Axis Nifty 100 fund instead of UTI twins to keep the portfolio simple and clutter-free or should I worry about the tracking error and expense ratio?” First of all, this much clarity at 24 is commendable. (A) you have thought about retirement at such an early age, significantly increasing the likelihood of financial independence before age 50 if you stick to your investment schedule. (B) You are investing with asset allocation in mind, something that even older investors do not do. (C) You have started your journey with index funds when you have so many choices in the active fund space. (D) You would like the portfolio “simple and cutter-free” which will make management and tracking significantly easy.
A general word of caution. From Feb 2018, the outperformance of index funds has been rather explicit and the tide could turn. At this point, index investors hopefully will not abandon passive investing fully or partially – add some active funds “just in case”. Passive investing driven be recent past performance is not likely to last. I am assuming that your choices have been made with a long-term view. Read more: Even before 2018, t was hard for half the funds in a category to beat the index. See: Poor performance of active mutual funds: Is this a recent development?
Your asset allocation of 70% and 30% fixed income is indeed acceptable for a need that is 30 years away. I would suggest redoing the calculation for the inevstment amount with a 50:50 allocation and then try to invest this amount in your 70:30 portfolio. While you can continue to hold 70% equity for at least the next 10 years, please be aware prolonged range bound markets can test your patience and affect your corpus more than sudden crashes.
Now, you would like to choose Axis Nifty 100 index fund instead of Nifty 50 index fund and Nifty Next 50 index (it is incorrect to assume that the UTI twins are the automatic choices here). I see that you prefer one fund instead of two as it would reduce the effort of maintenance.
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Given two different index funds, the choice between should not be made on the basis of expense ratio or tracking error. It would be best if retail investors ignore tracking error altogether as it is not intuitive. The choice should first be on the basis of the role the funds would play in the portfolio.
If you choose Nifty 100 instead of Nifty 50 and Nifty Next 50 separately, you are essentially investing in an 80-90% Nifty 50 + 20-10% Nifty Next 50 portfolio. There is nothing wrong with this, but it limits your choice of investing more in a higher-risk, potential higher-reward option like Nifty Next 50. If this is acceptable to you, it is fine but it must be understood Nifty 100 is a replacement for one combination of the two 50-stock indices. Read more: Combine Nifty & Nifty Next 50 funds to create large, mid cap index portfolios. Also see: Axis Nifty 100 Index Fund Impressive AUM but is it expensive?
As regards the extra effort and extra tax/load associated with maintaining two index funds, we have already shown that all investors need to do is to rebalance systematically (once a year) between equity and debt. There is no need for an additional rebalance bet Nifty and Nifty Next 50. See: Should I rebalance between Nifty and Nifty Next 50 systematically? Axis Nifty 100 fund is not a wrong choice. Just that its benefits (like with all choices) come with limitations.
Finally, we come to the 25% allocation to MO S&P 500 Index fund. Again I hope this “international diversification” was not on the basis of recent performance. This allocation should certainly help you reduce portfolio risk if only one of the two markets is range bound (big up or down movements should happen together). However, be sure to keep an eye on the weights. For example, if the MO index weight goes beyond 30% or below 20% rebalance the portfolio (either within equity or bet equity and debt). Also do not expect the US market to keep moving up! Read more: Motilal Oswal S&P 500 Index Fund: What return can I expect from this?
Redo your retirement calculation once a year using fresh inputs of expenses, return and inflation assumptions. Increase your investment amount as much as possible each year. Set up a portfolio de-risking strategy and initially rebalance if asset deviation by 5% as mentioned above. Wish you all the best Nates. Hope to read about your FIRE investment journey soon!
Link to related Web Story: Can I use these two index funds for retirement?
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