Can you review my index fund portfolio?

Published: September 27, 2022 at 6:00 am

A reader writes, “I want to ask you if this asset allocation in index funds is right or wrong. I am not good at finance. These are the index funds which I invest in every month. Nifty 50 – 35.71% Nifty Next 50 – 35.71 % Gold Index fund – 14.28 % Mid-cap index fund – 7.14 % Small-cap index fund – 7.14 % It would be of great help if you suggest any correction in the above allocation. Thanking you in anticipation.”

We will have to appreciate sooner or later that personal portfolio management is entirely personal. There is no right or wrong way about it.  You have a portfolio of five index funds. I probably would not have chosen some of the funds in it, but that is me. That does not mean that I am right and you are wrong. No one knows that.

If you are confident about your selection, please go ahead with it. Only appreciate that these weights will swing quite a bit in future due to market fluctuations. So managing them along with fixed income will take some doing.

What matters more is the asset allocation. How much of it is equity, and how much of it is fixed income? We know that it has some gold in it. The primary requirement is a good dose of fixed income. We recommend at least 40% to 50% of fixed income for long-term goals. Gold is optional. See: Can I add 10-20% gold to my 15-year investment portfolio?

If this is in place, we can look at the constituents of the equity index portfolio. There are many ways to build this, as we recently saw: Six equity index fund model portfolios. For example, from among your funds, this can be:

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  • Just Nifty (plus fixed income)
  • Nifty + some gold (plus fixed income) – gold is unnecessary, increasing management effort, but there is nothing terribly wrong with its inclusion.
  • Nifty + Next 50 (plus fixed income with or without gold)
  • Nifty + Midcap Index (plus fixed income with or without gold)

A small cap index is even more unnecessary than gold (again, no harm in its inclusion, though), so we cannot bring ourselves to include it. Managing it would be a nightmare (because of high impact costs), and it rarely beats a mid cap index or Nifty Next 50. See: Nippon India Nifty Smallcap 250 Index Fund: Can I add this to my passive portfolio?

The way ahead:

The following are our recommendations to the reader.

  • Do not include any other index fund, factor fund, active fund, thematic fund, ETF, etc. You have more than enough funds already! Never give in to a sense of missing out.
  • If you wish to retain gold, then keep an eye on its allocation. It has to be rebalanced along with equity and fixed income from time to time.
  • Gradually get rid of the small cap index fund. You can do this by first stopping investing in it. Its weight will gradually fall in the portfolio. You can switch it to other funds when the market falls without paying capital gains tax.
  • The Nifty Next 50 fund can be frustrating to hold. If you are okay with it, continue. Else you can increase the weight of Nifty 50.
  • You can leave the Mid cap index fund as is to satiate FOMO.
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