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Announcing the “PlumbLine”: a handpicked list of mutual funds

Dear reader, the final step of an investment plan is the product selection. The freefincal robo advisory template will provide the user with all necessary inputs from asset allocation, investment strategy and suggest product categories. To accompany the robo template, I would like to  publish a handpicked list of mutual funds which will be updated on a monthly basis.

My wife suggested I call it the PlumbLine. Hopefully, it might help young earners and those new to mutual funds to find their bearings and stability to start their investment journey.  Needless to say, the PlumbLine is free for all.

The freefincal mutual fund screeners will also continue to be posted on a monthly basis. This is for DIY investors to screen mutual funds with unique metrics. I could not publish it last month (August) due to a hard drive crash.

The PlumbLine will simply list one mutual fund per category (in some cases other good choices will be mentioned). This is a handpicked choice in the sense that it is both quantitative (steady performance and good downside protection) and qualitative (in the case of arbitrage and debt funds).

Pic by John Morgan (flickr)

I do not look at star ratings, but I expect many from the list to be only 3-star funds with not too high or even low AUM. This is a nondescript list intended for the "slow and steady" investor.

I will provide a brief justification for each choice and will NOT provide additional justification if you question it. Plumbline is merely my opinion.

That said, please feel free to criticise the idea behind PlumbLine, or my choices, I shall be happy to learn. You can also mention  funds that I can/should consider.

If any fund in the list changes colour: performance or investment strategy, I will replace them. If you are already invested in such funds, the onus is on you to take a call.

A mutual fund is not an insurance policy to pay regular premiums and expect returns. The performance has to be reviewed periodically and changes made. Neither PlumbLine nor I will help in this regard. If you cannot learn to do this, do not use this list and seek the services of a fee-only SEBI registered financial planner

The PlumbLine is offered to "complete" the robo advisory template.  On its own, it 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).  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 ARE SUBJECT TO IGNORANCE RISKS AND MARKET RISKS. PLEASE READ AND UNDERSTAND ALL SCHEME RELATED DOCUMENTS BEFORE INVESTING.

Oh dear, I have rambled on for 500+ words. Without further ado here is ...

The PLUMBLINE for September 2017

1 Liquid funds: Quantum Liquid fund Direct option Growth.

Why? Does not chase after returns by taking on credit risk

When? Can be used for all durations and all occasions.

2 Short-term Gilt: DSP Black Rock Treasury Bill Fund Direct Option Growth

Why? Clear investment mandate:

"An open ended Money Market Mutual Fund Scheme in Income category, seeking to generate income through investment in a portfolio comprising of Treasury Bills
and other Central Government Securities with a residual maturity less than or equal to 1 year."

No credit risk.  But can respond to rate movements, but will recover in 1-2 months.

When? Can be used for investment tenures above one year by conservative investors and for all durations by those with a little more risk appetite.

Note: Investment strategy can change as this fund has low AUM and is unattractive to many.

3 Equity Arbitrage

Want to know more about these funds? Try this:

How Arbitrage Mutual Funds Work: A simple introduction

(a) UTI Spread fund direct plan growth 

Why? Pure arbitrage fund (aside from small short-term bond exposure, 10- 35%  under normal circumstances when arbitrage opportunities are available)

The investment objective of the scheme is to provide capital appreciation and dividend distribution through arbitrage opportunities arising out of price differences between the cash and derivative market by investing predominantly in Equity & Equity related securities, derivatives and the balance portion in
debt securities.

"The entire derivatives position for the scheme will be taken with a view to hedge the corresponding equity exposures entirely. The scheme, under no circumstances, will take a directional/unhedged position in either equity or derivative instruments"

(b) ICICI Equity Arbitrage Fund Direct Plan Growth Option.

Why? If you don't mind up to 5% of direct (unhedged) equity.

When? Any duration above 1Y. Nav will be a bit volatile with small up and down movements. Can lose money over a few months or quarters. Do not expect too much returns.

4 Debt: Ultra Short Term Franklin India Savings Plus Fund Direct Plan Growth.

Why? Minimises interest rate fluctuations with floating rate bonds. Maintains short term bond portfolio. The credit quality of bonds can down to AA and not below from what I have seen.

See this post for more details: Franklin India Savings Plus Fund – A Debt Fund For First-time Investors?

and also:  How Floating Rate Debt Mutual Funds Reduce Interest Rate Risk

The fund did suffer for a few weeks during the 2013 bonds crash. But being short term it will recover fast.

When? All durations above 1Y.

5 Debt: Credit Opportunities Franklin Corporate Bond Fund Direct Plan Growth Option.

Why? & When? If you can stomach a few months of poor (negative) returns due to credit defaults but can stay invested for several years (10Y and above) then this fund which walks on fire is for you.

But did this not get into trouble? Hey, if you must take credit risk, take it with Franklin. They have the money to buy back junk bonds 🙂 Yes it did get into trouble and since this invests in long term bonds, this will take months to recover from credit defaults and also interest rate movements. But if your duration is long enough, then this should be acceptable ... to the informed investor.

There are relatively lower risk options available with the same fund house, you can consider those if you don't want these. More on these in the coming months.

6 Dynamic Bond funds: Not a fan of this category, but eyeing Quantum Dynamic Bond Fund Direct Plan Growth Option.

Why? Like the fact that it primarily takes on interest rate risk (but hopes to dynamically manage that) and will not invest in corporate paper.

When? Use it only for long term goals, at least 5Y+, preferably more.

7 Equity Tax planning: Franklin India Tax Shield Direct Plan Growth Option

Why? Quiet, consistent performer.

When? There is no need for ELSS mutual funds. Don't believe the media BS about ELSS being better than PPF. If you have EPF, use VPF for tax saving or PPF. My point is that you can save tax using the fixed income portion of your asset allocation tagged to your retirement goal. Of course, you can also use the equity portfolio for saving tax and if want to take this route, then this fund is a decent pick.

8 Balanced fund (equity oriented): HDFC Balanced Direct Plan Growth.

Why?  Neither inconspicuous, nor a star, but a consistent performer with good downside protection.

How? Treat this as a pure equity fund. You can use the freefincal robo advisory template for specific asset allocation suggestions.

9 Equity multi-cap: Quantum Long Term Equity Direct Plan Growth Option (this can pick stocks from BSE 200, so don't mistake this for a large cap fund)

Why? Very good downside protection resulting in consistent performance.

How? You can use the freefincal robo advisory template for specific asset allocation suggestions.

10 Index funds

(a) Uti Nifty Index Fund Direct Plan Growth Option or  HDFC Sensex Index Fund Direct Plan Growth Option

Why? If you wish to adopt a passive investing strategy (eliminate fund manager risks), and wish to track a less volatile large cap index

(b) ICICI Nifty Next 50 Direct Pan Growth Option

Why? If you prefer a volatile index fund (with unmanaged risk) that has a very good track record of beating actively managed funds in all categories.

11 Equity Large Cap: Franklin India Bluechip Fund Direct Plan Growth Option

Why?  A large cap fund with predominantly large caps and an excellent track record with reasonable downside protection.

12 Equity Mid cap: Franklin India Prima Fund Direct Plan Growth Option

Why? Because in the mid-cap and small cap segments, it is crucial to choose consistent performers which no one is talking about.  This fund has a decent track record and has managed to have a mid-cap tilt for most of its 23+ year existence. You need to give it time to work.

Also impressed with HDFC MId-cap opportunities doing well at an AUM more than 3 times that of Franklin Prima.

Canara Robeco Emerging Equity has even lower AUM than Franklin Prima (meaning it has stayed out of the lime light) but has a good track record.

13 Equity Small Cap:  My two cents" Stay away from this category. It is not practical to try and compensate for our inability to invest more by taking on more risk.

There are other categories like debt oriented balanced funds (aka MIPs).  I shall try and cover them next month.

Resources to review fund performance

How to review a mutual fund portfolio

How to Review Your Mutual Fund SIPs

A Tool To Compare Mutual Fund Performance The Right Way!

How to handle Mutual Fund Underperformers


Use this form to ask Questions ONLY (For comments/opinions, use the form at the bottom)

And I will respond to them in the next few days. I welcome tough questions. Please do not ask for investment advice. Before asking, please search the site if the issue has already been discussed. Thank you.  PLEASE DO NOT POST COMMENTS WITH THIS FORM it is for questions only.

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35 thoughts on “Announcing the “PlumbLine”: a handpicked list of mutual funds

  1. niranjan

    VR lists Franklin India Bluechip Fund & Franklin India Flexi Cap Fund. how can we make out the diff between them as they both are largecap

    Reply
  2. Dinesh Singh

    In Plumbline there are 3 Quantum and 5 Franklin funds. Are they there by merit or your fancy for the two Fund Houses also has a role?

    Reply
    1. freefincal

      "I will provide a brief justification for each choice and will NOT provide additional justification if you question it. Plumbline is merely my opinion." Take it or leave it.

      Reply
  3. island

    Exactly what I was looking for. No justifications expected. Thanks for list. Everyone has their own opinion and selection. These are yours. Mine may be different. I am glad to see yours.

    Reply
  4. Anand

    Hello Sir, Thank you again for the informative article and curated list. More than the list itself, I am interested in the thought process.

    I see the robo advisory template mentioned a few times. Did I miss the post which published the template? If so, can you please share?

    Thanks.
    Anand

    Reply
    1. freefincal

      The robo template will be published in a couple of days. I wanted this in place before that. Yes I will share more of the thought process in coming plumbline posts.

      Reply
  5. Sreekanth

    Rather than trying to educate with thousands and thousands of articles and making them suffer with analysis paralysis, this no non-sense list is best to help them start at least (irrespective it turns good or bad in future). This is actually what helps people. It's not easy to educate investors and expect them to start walk on their own.

    Reply
    1. freefincal

      ha ha 1) it is those thousands and thousands of articles that made them suffer that offers this one post credibility.
      2) I don't think this will help much too as there is still quite a bit of context and processing.
      3) I have no intentions to educate anyone this list became a necessity as it will hopefully become clear soon

      Reply
  6. Ranjan

    I'm sure you'll still get many of the 'what fund should I invest in' questions even after this 😀

    Thanks for the list; your list seems to closely match funds I'm invested in. Guess we both prefer the slow and steady approach with Buffett's Rule number 1 & 2 foremost in mind.

    Reply
  7. kalyan

    Not a fan of fund recommendations in a DIY blog. I know it is your blog and I am not contributing in any way. But I have seen some great blogs lost for the community due to change of focus (e.g., Jagoinvestor). Fund recommendations is a slippery slope for DIY blog. Hope I will be proved wrong in this case.

    Reply
    1. freefincal

      It is a slippery slope for those who do not read disclaimers and I couldn't care less about them. Btw I have been making advisor recommendations for close to 4Y now and writing step by step guides for longer. So this is not exactly a DIY blog. If I am going to come out with a robo template (again anti-DIY), I had to complete it with this. Not everything I do will find acceptance and I am too old to try and please everyone.

      Reply
  8. Venkat

    Dear Prof,
    One of the reasons I trust Freefincal is because it is devoid of any kind of lists. So a little disappointed with this post. I agree this is your blog and we can take it or leave it. So I will still take your advice (the latter one) and leave it 🙂 .

    Reply
  9. Abhisek Tripathy

    Hi,

    I see a fund house bias (Franklin AMC) in this list. Is it that indeed this AMC has managed to beat all other AMCs in performance? Or Is there any other reason to this?

    Reply
    1. freefincal

      Is this hard to understand?
      "I will provide a brief justification for each choice and will NOT provide additional justification if you question it. Plumbline is merely my opinion." Take it or leave it.

      Reply
  10. kalyan

    Actually not a fan of Robo template too 🙂 But looking at the comments from others I guess it helps more people than the people that get help from just DIY guides. At the end of the day I trust your intentions are to help as many people as you can and so it may make sense from your point of view.

    Reply
    1. freefincal

      I have no such lofty notions about what I do or want to do. My goal with the robo template is to capture the training given to a financial planner as much as possible in an algorithm. Neither a robo template nor a financial planner can solve all financial problems. The subject is bigger than all of us.

      Reply
  11. Anil Kumar Kuppa

    Would you be adding Debt-Short term as well? VRO lists debt-short term as a category. So, wanted to ask.

    Reply
  12. Anish Mohan

    The list is a logical conclusion to a theoretical research. Till now, freefincal has researched through various dimensions and to prove that the research has yielded right results, it is required to reinforce with results. The results are examples which allow the researcher to validate research-tools against the theorem. Therefore, I find this thing most apt given the age of freefincal. Like research cannot go on on esoteric terms for years without adding anything in real value (economics, defense, crop diversity) of human mankind, similarly, freefincal cannot keep on researching without giving that research a much-awaited direction to the DIYer. This is absolutely the correct step and a much welcome step.

    Reply
  13. Saisundar Ramachandran

    Thanks for sharing the list. Wanted to appreciate the courage and honesty it takes to put out a list. One of the equity investing focused blogs that shares good gyan once put out a siilar list. The mismtach between practice and preaching was evident. This seems to reflect your philosophy.

    Reply
  14. Jignesh

    Hello Guru,
    Are the quantum funds will be in list even after TOP Head leave? or The performance will effected after their Founder Member Leave?
    Thanks

    Reply
  15. Jaimin

    Hi Pattu,

    Quite interested in your comment about ELSS category. Do you have an existing post on the topic that I might have missed? Would appreciate a link if so.

    Reply
  16. Pranav Surya

    If it were any other person, they'd be tempted to key in the returns the funds have achieved. And when you do that, skewed numbers of bull markets will look pleasing. That would mean the author wants to feel loved (nothing wrong everybody does). But as I went through the list, I had a small smile on my face. I paced about the terrace reading it, looked up at the sky and thought, "A mature, greater being that I have the privilege of knowing." And then your words were recollected - It's not the returns but the amount I invest that'll make a difference

    Reply
  17. Amit

    Thanks a lot Pattu. This is great. To know this comes from you who understands personal finance very well and is unbiased, gives me enough assurance to rely on your view. Surprised at the criticism - but I guess some people have become too attached to the blog and feels its their own.

    Reply
  18. Pradeep

    Sir,
    My opinion on the above selection of funds concentrated on just 2 AMCs is that there is a chance that most funds from an AMC may underperform for a sustained period if their strategy fails. We can see ICICI equity funds going through this phase currently. Debt funds can go through the same as well in case of any defaults like Taurus went through. So I am a believer in diversifying across AMCs to get better than average results.

    Reply

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