A reader says, ” I am a long-time admirer and follower of your blog. I started investing in 2010 after getting a job and am continuing. I am 37 years old, and my portfolio allocation is 72% equity (80% direct equity and 20% MF) and 28% fixed income”.
“I wanted to invest for my newborn daughter for her education and marriage. Can you please suggest a single MF where I can invest peacefully without closely looking at performance? After reading your articles, I initially thought of a Nifty 50 index fund, but I am also considering Low Volatility Index Fund and a Midcap 150 Quality 30 Index fund”.
It should be evident that the ideal choice is a Nifty 50 index fund. The other factor-based funds, like low volatility or quality, can exhibit cyclic behaviour compared to Nifty 50 or their parent indices. That is, sometimes they would underperform (for example, the quality midcap index has underperformed the Midcap 150 over the last year or so) and sometimes overperform.
Then again, the same logic applies to Nifty 50 too! Sometimes it would be easy to find funds that outperform the Nifty 50, and sometimes not. So the performance of any fund will always be cyclic to something else.
So then, how do we invest in peace?
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- Shift focus from returns or performance to goals.
- Focus on the target corpus and the asset allocation required.
- Focus on how you intend to vary this asset allocation, that is, reduce equity exposure to manage the sequence of returns risk.
- Focus on how you will keep up with a fixed investment schedule and increase the amount invested each year.
If you can check the above points, where you invest – active fund, passive fund, or factor fund – is a tertiary consideration.
My portfolio has only active funds, most of which are old holdings held for at least seven years or more. Portfolio details here: Fourteen Years of Mutual Fund Investing: My Journey and lessons learned. I have continued to invest through ups and downs in performance because of the above goal-based approach.
So yes, you can invest in a Nifty 50 index fund, but appreciate that it would go through relative performance peaks and troughs. However, what is more, important is the planning for the goal.
- What are the current costs of college and higher education?
- What is a realistic inflation rate? At least 10%, but the higher, the better!
- What asset allocation am I going to choose? Please do not use 100% equity just because there is a lot of time left!
- How am I going to reduce portfolio risk over the years?
- How much should I invest, considering all of the above, and how will I increase the investment amount?
This guide will be of further assistance: As new parents, how should we start investing for our child’s future expenses?
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Dr M. Pattabiraman (PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over 14 years of experience publishing news analysis, research and financial product development.
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