These are the freefincal handpicked list of mutual funds for Jul-Sep 2023. New and old investors can use it according to their specific needs. The list is called “PlumbLine” and has been published since Sep 2017 for beginners to accompany the freefincal robo advisory tool.
Most important! Plumbline is a mix of my opinions + skin in the game (where I invest) plus quantitative picks (performance-based). It is not meant to satisfy everyone! It is intended to match up with my integrity. The reader new to Plumbline should read the following two sections carefully before proceeding to the fund names.
The objective is to identify “some” funds for every possible investment duration as part of a diversified portfolio.
If you want to choose equity mutual funds in categories of your choice by consistent performance alone, or if you want to choose debt funds by the quality of their portfolio, you can use our monthly equity mutual fund, mutual debt fund, index fund or ETF screeners.
What is Plumbline, and how should I use it?
A plumbline is an alignment device to fix the vertical or the horizontal. This list is called Plumbline to indicate the need for fund choices to align with specific requirements.
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1: PlumbLine is a boring list of mutual funds 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 investors after using the freefincal robo advisory tool.
3: If the funds in the list change tomorrow, you will have to take a call on what you need to do, based on the fund performance from the date you invested. I cannot help you here other than talking 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 this distinction 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. You will find at least one fund per need (goal and risk-taking ability)
Disclaimer: On its own, this list has no meaning, and unless you look at it from the right perspective and context, it will not help you. The hope is that the robo tool will provide such a perspective that it 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 the future or have credit default issues, all I can do is modify the list (if required). Note: All statements about low or high risk are relative to other types of funds and not absolute.
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. It means nothing if none of your funds is in the PlumbLine list. 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 with Plumbline are injurious to peace of mind.
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 fund’s investment strategy, mandate and performance.
4. “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!
What about the change in tax status from 1st April 2023? Will it affect the list? Invest products should be chosen based on need and if their risk is acceptable for a need, not because of a change in tax rules. Experienced investors can consider options, but they all come at a price. Also see: New debt fund tax rule: How to change my investment strategy?
Liquid Fund
- Investment Duration Few months and above
- Fund name Quantum Liquid fund Direct Plan-Growth Option, Parag Parikh Liquid Fund
- You can also choose funds from established AMCs like ICICI, SBI or HDFC.
- Nature Conservative; these funds invest in short-term bonds up to 91 days in maturity.
- Interest rate risk: low. The NAV can fall if there is a sudden demand-supply mismatch in the market. For example, in March 2020, the demand fell below supply. The NAV can also fall if the RBI rate suddenly increases significantly (e.g., July 2013). In both cases, the recovery usually would be swift.
- Credit risk: low
- Suitable for Use for parking money
- Returns: a bit more than an SB account
- Caveats: Debt fund portfolios change each month; while both funds tend to avoid credit risk, investors can occasionally check the credit quality of the portfolio
- Disclosure: Invested in quantum liquid for emergencies. A small cash segment of my retirement portfolio is also here.
- Also, see: Can I use liquid funds for long-term goals with equity MFs?
Equity Arbitrage
- Duration 1Y and above (never use for shorter-term)
- Nature: These are hybrid funds now! They can invest up to 35% in bonds! The majority of the portfolio (65% plus) is arbitrage like “cash and carry arbitrage” (linked below). The funds have debt fund-like volatility by construction. Volatile for less than a year. Quarterly returns can be negative. Volatile when the market is turbulent.
- Many arbitrage funds from the same AMC invest in debt funds to boost returns. These debt funds may carry credit risk!
- There is nothing special about the fund mentioned below. More than a recommendation, it is mentioned because it is what I use. For alternatives, use our debt mutual fund screener.
- Fund name ICICI Equity Arbitrage Fund-Direct Plan Growth Option. (There is nothing special about this; there are other good/better funds in the category)
- Note: There will not be much difference in risk and reward between a 5-star arbitrage fund and a 3-star rated one.
- Interest rate risk: low Applicable to bond part of the portfolio.
- Credit risk is reasonably low (applicable to the bond part of the portfolio), but credit events are certainly possible. You can use our debt fund screener to screen for bond quality in these funds. The ICICI fund typically has a small exposure to AA-rated bonds occasionally. If that bothers you, then do not invest in this.
- Warning: After the SEBI recategorization, arbitrage funds only need to hold 65% in derivatives. The rest are in bonds. So these funds can be subject to credit and interest rate risks. Occasionally the equity allocation may drop lower than 65%.
- Other risks Uncertain periods, like after a crash, could reduce arbitrage opportunities and returns. If you choose the investment duration right, the main risk will be the fund delivering a lower-than-expected return. So expect less!
- Suitable for parking money, medium-term goals and generating income. See: Generating tax-free income from arbitrage mutual funds.
- Returns Expect about 4-6% 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 uses it separately as part of our emergency fund.
Money market/ Ultra Short-term
- Duration 1Y and above
- Funds: ICICI Pru Money Market Fund See Review: When & how to use it. HDFC Money Market Fund.
- This is one category where there is not much difference in the credit rating profile of the fund portfolios. So there is nothing special about the above funds.
- Nature: Conservative but expect day-to-day NAV ups and downs due to demand-supply fluctuations. These funds invest in the money market – where cash is the commodity. The bonds are short-term in nature (low-interest rate risk);
- Credit risk is relatively low, but defaults are possible.
- Interest rate risk: low (due to investors pulling out from the debt market, these funds fell about 1% from 11-25th March but recovered when RBI removed excess liquidity by buying bonds and lowering rates by March 27th 2020)
- Suitable for saving money, generating income, for short-medium term goals
- Returns Expect FD-like returns
- Disclosure: Not invested as it is not necessary for my needs.
Gilt Long-Term
These funds are dynamic bond funds and will have variable interest risk, duration risk, and demand-supply risk.
- HDFC Gilt Fund Direct Plan-Growth Option
- ICICI Pru Gilt Fund Direct Plan-Growth Option
- SBI Gilt Fund Direct Plan-Growth Option
- Each fund in this category would have its style. So investors must study the history of investment style from factsheets before investing. See: How to choose a gilt mutual fund.
- Suitable only for long-term goals. For first-time investors, 10Y or more. The NAV will fluctuate rapidly here, too, but less than the 10Y gilt category.
- It can give years of poor returns! Only for those who are patient!
- Disclosure: I am invested in the ICICI Gilt fund. See: Why I partially switched from ICICI Multi-Asset Fund to ICICI Gilt Fund.
Conservative Hybrid
- Duration Strictly long term, at least 10Y or more, with proper asset allocation and periodic rebalancing.
- It can be used as an alternative to gilt funds* as a debt component in a long term portfolio.
- Parag Parikh Conservative Hybrid Fund Direct Plan-Growth Option
- *This fund invests in long-term state government bonds + a small amount of equity + a small amount in REITs. During stock market crashes, the NAV will fall! So be prepared for this. The NAV will be volatile even on normal days!
- Also see: Who should invest in Parag Parikh Conservative Hybrid Fund?
- Disclosure: I am invested in this fund. See: Why I started to invest in Parag Parikh Conservative Hybrid Fund.
- Taxation change implication: I expect this fund to be repositioned as a balanced hybrid fund (or perhaps the AMC would launch a new fund). We recommend waiting a month or two to evaluate any developments in this space.
Ten-year Gilt
- Duration Strictly long term: More than 15Y, preferably much longer with proper asset allocation and periodic rebalancing. Only for those comfortable with severe NAV fluctuations.
- It can give years of poor returns! Only for those who are patient!
- Fund name: SBI Magnum Constant Maturity Fund. ICICI Prudential Constant Maturity Gilt Fund – Direct Plan
- 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 rebalance the portfolio at least once a year, actively.
- Suitable for Use as a debt component for long-term goals; however, one cannot stay invested in these funds just before we redeem unless our corpus is quite high!
- Returns Should be close to a long term FD average (but can suffer if there is 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 unnecessary for my needs (My NPS has a good deal of gilt exposure). See, After 12 years of investing in the NPS, my return is 8.9%
- 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?
“International” Equity
(1) I don’t think it is necessary for investors to invest in international equity. All this talk about “diversification” is, well, talk. Most investors cannot measure the impact of international equity in their portfolios. They want a slice of something shiny, ignoring that both the Nasdaq 100 and the S&P 500 have seen years of sideways markets in the past, and it could happen again. Also see: Sensex vs S&P 500 vs Nasdaq 100: Which is better for the long term?
(2) Investing in international equity makes sense to me only it if comes with low maintenance and advantageous taxation like, for example, Parag Parikh Flexicap Fund.
Equity Tax planning
Before budget 2023, we opined that this category was unnecessary. Now it has become a fact. RIP the old tax regime. Welcome the new tax regime. Also see: Budget 2023 wants us to shift from tax-saving to wealth-creation mode – are we ready?
Hybrid Funds (equity-oriented)
- Duration Treat all such funds as pure equity funds, so strictly long-term. Use our robo tool for allocation.
- The following funds have a consistent track record against the Crisil Hybrid 65:35 Index.
- Canara Robeco Equity Hybrid Fund – Direct Plan-Growth
- ICICI Equity & Debt fund
- Mirae Asset Hybrid Equity Fund
- SBI Equity Hybrid Fund Direct Plan-Growth option
- ICICI Multi-asset Fund Direct Plan-Growth option (this holds a minimum of 10% of gold and 10% of bonds at all times but is equity-oriented due to legacy; I have been an investor in this fund since it was ICICI Dynamic Fund. The equity allocation will be determined using an in-house model similar to what they publish in monthly factsheets and used for funds like ICICI Balanced Advantage).
- Risk is slightly lower than diversified equity funds, so treat them as pure equity.
- Disclosure: I am invested in HDFC Hybrid Equity* for retirement and ICICI Multi-asset for my son’s future portfolio. *Its performance consistency is lower than those mentioned above, hence not included.
Flexi-cap/ Large midcap/Multi-cap
- Duration Strictly long-term with proper asset allocation. Use our robo tool for allocation.
- Fund name: Parag Parikh Flexicap Fund
- Naturally, there are other good funds in the multicap or flexicap category. You can use our monthly equity fund screener to list them.
- Disclosure: I invest in Parag Parikh Flexicap Fund for my retirement and Quantum Long Term Equity & HDFC Hybrid Equity. For a portfolio update, see Fourteen Years of Mutual Fund Investing: My Journey and lessons learned.
- Risk: There is too much reliance on the fund manager. All funds go through ups and downs in performance. This fund is too young to have seen a dip in performance. It inevitably will go through a rough patch like all funds.
- Warning: The fund’s AUM has swelled up quite a bit – the AUM of Parag Parikh Flexi Cap Fund grew by 147% in 2020! Whether this affects the performance or not immediately, it certainly limits the ability of the fund manager to churn (whether he wants to or not is another matter). So do not expect this fund’s past performance to repeat in the future!
Index funds (large cap)
- Duration Strictly long-term with proper asset allocation. Use our robo tool 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
- Who should use it? If you wish to adopt a passive investing strategy (eliminate fund manager risks) and want to track a less volatile large-cap index.
- Index funds do not provide downside protection (fall lower than the index) or upside performance (move higher than the index). Whether this is important or not is up to you. I wish to take a more balanced approach to passive investing instead of assuming all active funds will fail to beat the index. No, they do not, not even in the US today: 582 US Large cap funds outperformed S&P 500 over the last ten years.
- What we do know for sure is that about 50% of funds in each category struggle to beat the index. At the very least, this scenario is likely to continue in future. Therfore choose passive funds only if you appreciate that picking future active funds winners is impossible.
- Active funds provide downside protection more often than they beat the index.
Please note that to assume downside protection is useless if it does not result in more return is hindsight bias. Risk is in the journey. Returns are always in hindsight.
Note about Nifty Next 50: We recently noted the index’s poor performance. See: Is it time to exit from Nifty Next 50? However, we also have seen insufficient evidence to ditch Nifty Next 50 in favour of Nifty Midcap 150 or more fanciful options like UTI Nifty Midcap 150 Quality 50 Index Fund (click to read review). See the data presented here: Axis Nifty Midcap 50 Index Fund Review. We shall review the situation in the coming months. We have retained faith in Nifty Next 50 as a passive mid cap investment even if many investors have lost interest in it.
The bottom line is, if holding Nifty Next 50 makes you uncomfortable, increase exposure in Nifty or Sensex.
Index Fund Blend (large + midcap)
- Duration Strictly long-term with proper asset allocation. Use our robo tool for allocation. 80% of Nifty 50 or Sensex + 20% of Nifty Next 50
- Fund names: UTI Nifty Next 50 direct plan growth option or ICICI Nifty Next 50 Direct Plan-Growth Option. Large cap fund (Nifty/Sensex) as above.
- Who should use it? Only those who appreciate Index investing benefits and those who will not chase after stars or compare with peers.
- Those who wish to invest in less than 20% of Nifty Next 50 can consider Axis Nifty 100 Index fund. Read the review here: Axis Nifty 100 Index Fund Performance Report.
- Why? See: Combine Nifty; Nifty Next 50 funds to create large, mid cap index portfolios.
Disclosure: I am invested in UTI Low Volatility Index Fund – see UTI S&P BSE Low Volatility Index Fund Review. However, it requires more time to be considered for a generic recommendation. So it is on our watchlist. Also, see: Why are you recommending index funds but not investing in them yourself?
It should be no surprise that there are no large cap funds on our list: Only Five Large Cap funds have comfortably beaten the Nifty 100. So there is no point in using an active large cap fund anymore.
Mid cap & Small Cap
Small cap funds can be quite frustrating to hold. They lose almost all the gains from a bull run in the next bear run. So our recommendation is to avoid them altogether. See:
- Why a SIP in Small Cap Mutual Funds is a waste of money and time
- Only these 3 Small Cap MFs have outperformed the Nifty Next 50 consistently
- Why investing in small cap mutual funds does not make sense!
Unfortunately, contrary to popular opinion, mid cap mutual fund managers struggle to beat the index. Also,
- Only four midcap mutual funds consistently outperformed the Nifty Next 50.
- Only 3 out of 28 mid cap MFs consistently beat Nifty Midcap 150!
Therefore we avoid recommending any specific funds here. The little exposure to these categories from a Flexi-cap or aggressive hybrid fund is enough for most investors, IMO. You can consult the latest equity mutual fund screener if you choose consistent performers among active mid cap or small cap funds.
- If you wish to invest in small cap funds, blind SIPs will not work. Some strategies to periodically book profit may be necessary. In addition, you may also consider tactical entry as well.
- If you wish to buy a mid cap fund:
- Currently, avoid Midcap (or small cap) Index funds. See: Not all index funds are the same! Beyond the top 100 stocks, tracking errors are huge!
- Duration Strictly long-term with proper asset allocation. Use our robo tool for allocation. Do not exceed 40-50% within the equity portion. Your midcap + smallcap allocation should not exceed 40-50% of your equity allocation. For e.g., 60% large cap + 30% midcap + 10% small cap (if you must!).
Closing Remarks
The fund names mentioned above are of little use if your investments are not aligned with goals and you do not know how to evaluate them in a structured manner. We recommend that investors identify their goals, choose a suitable asset allocation plan, and consider investments. Here is an example: How Avadhoot Joshi evaluates his investment portfolio.
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