Last Updated on December 28, 2021 at 6:38 pm
As readers may be aware Re-assemble is series on the basic of money management aimed at beginners and young earners. Since it now pretty much complete with a compiled free e-book released, I think it is time to move on to the next step. Introducing. Resolve: a series of steps on investing and portfolio management. In the first step, let us discuss how to quickly select equity mutual funds and build a diversified (equity) portfolio.
Resolve stands for “finding a solution” or “make firm decisions”. In this case, we shall find quick, simple solutions and make firm investment and portfolio management decisions. As always the series is meant for beginners to DIY with confidence and conviction. Once the essentials are covered, I shall discuss how to evaluate a portfolio using different methods, how to choose tactical asset allocation method etc.
For step 1: How to quickly select equity mutual funds and build a diversified portfolio we shall utilize the List of mutual fund benchmarks (2018) with funds sorted by benchmark published yesterday.
I present four choices below and you can pick one. Each choice will result in a shortlist of funds to choose from you. You can either then pick funds with a good track record (even though they are different now) or go with a new fund. If you are a person who has trouble choosing then I suggest you get started with My Handpicked Mutual Funds May 2018 (PlumbLine): Revised and Updated and then start learning other aspects of investing.
Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email! 🔥Enjoy massive discounts on our robo-advisory tool & courses! 🔥
Please note: Selecting the right equity mutual fund scheme is not possible! Run away from anyone who claims otherwise! Once you have a portfolio construction method in place, you can use Inky Pinky Ponky for selecting Mutual Funds! It does not matter how you select mutual funds as long as you have a solid process in place to review them (this will be resolve-step:2). The focus in this post will be on the type of portfolio you wish to construct.
I doing this excercise with NSE indices. You can do the same BSE indices as well. What matters is the approach.Also ignore the regular plan from the fund names. Always choose direct plans.
The NSE broad market index classification
Starting from the top 500 companies based on full market capitalisation, NSE has derived the following indices. Source: broad market methodology. This will be the basis for the portfolio construction.
With the exception of NIfty Midcap 100 and NIfty smallcap 100 where the bottom 50 stocks are based on average daily turnover, the rest of the indices are based on market capitalization. A stock with a higher market cap will have higher weight. If you trace the lines from the top, it is easy to understand how the indices are different (related) from (to) each other.
Choice 1: I wish to choose index funds
As seen from a series of posts on Nifty Next 50 (another e-book perhaps?) it is a fantastic choice to beat many active funds in terms of return (but not risk). However, be warned Nifty Next 50 is NOT a large cap index! The Nifty 100 Equal weight fund is a good lower risk, comparable reward alternative, but the index funds have low AUM when I last checked. So if we sort by benchmark, we get:
The ICICI fund is fast becoming popular. Avoid all ETFs unless you wish to trade in Nifty 50, Bankbees, liquid bees, Goldbees and the CPSE ETF.
Low AUMs are not a danger for index funds with reg to redemptions but since commissions are low, no one will sell them and the AMC may shut down the fund. I think only the ICICI fund has moved past that danger.
Also see: Index Investing: advantages and disadvantages of being a passive investor There is more to it than cost.
Choice 2: Large +mid+ small cap funds
A well-diversified portfolio can be built with two/three active funds benchmarked to the above indices. You choose large cap + mid-cap or large+mid+small cap funds. The weights depend on how much risk you can stomach. But be warned that higher risk does not mean higher returns.
Sorting funds benchmarked to NIfty 100 we have
Pick one from Franklin Bluechip, ICICI Bluechip and Hdfc Top 100.
Now if we sort by the mid and smallcap indices:
Or you can also sort by
I had a quick look at some of the funds in the above two lists and I notice that it could be a tough time for many midcap and small-cap funds to consistently beat these new indices. In the absence of midcap and small cap index funds, there is not much choice available to investors. You can go with familiar names such as HDFC Mid-cap Opportunities and Franklin Smaller Companies fund.
Choice 3: Single multi-cap fund (A)
Nifty 200 is a multicap index with a bit of a large cap tilt. Sorting by this:
With the exception of Kotak Select Focus, not many familiar names (to me).
Choice 4: single multi cap fund (B)
This should have a bit more balance between large and mid-cap. I can see ICICI Top 100 here (that I like)
I hope the reasoning behind these choices is clear from the NSE flowchart. Sorting by benchmark offers a simple way to build diversified portfolios.
Choice 5: Equity oriented balanced funds
There is a 5th choice that I personally follow: Using Balanced Mutual Funds As The Core Equity Portfolio Holding
So for this sorting, we need to go a bit wider in terms of a benchmark.
This is a pretty mixed bag and it is better to stick to known players like HDFC Balanced, Prudence or Franklin Balanced.
Obviously, the benchmark that you choose will decide the shortlist here. If you are not familiar with any funds in the list, you can go ahead and pick the oldest one. If you wish to dig deeper, you can find out how it has changed recently. Whatever you do, however you choose, if you do not know how to review performance, do not use mutual funds. We will consider performance reviews in the second part.
What articles would you like to see as part of Resolve?
🔥Enjoy massive discounts on our courses, robo-advisory tool and exclusive investor circle! 🔥& join our community of 5000+ users!
Use our Robo-advisory Tool for a start-to-finish financial plan! ⇐ More than 1,000 investors and advisors use this!
New Tool! => Track your mutual funds and stock investments with this Google Sheet!
We also publish monthly equity mutual funds, debt and hybrid mutual funds, index funds and ETF screeners and momentum, low-volatility stock screeners.
- Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
- Have a question? Subscribe to our newsletter using the form below.
- Hit 'reply' to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.
Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email!
About The Author
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 ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter(X), Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! ⇐ More than 3,000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter the market condition is!! Watch the first lecture for free! One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course! Increase your income by getting people to pay for your skills! ⇐ More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!
Our new book for kids: “Chinchu Gets a Superpower!” is now available!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook is for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Do you want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or get the Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low-volatility stock screeners.
About freefincal & its content policy. Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified with credible and knowledgeable sources before publication. Freefincal does not publish paid articles, promotions, PR, satire or opinions without data. All opinions will be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
- Twitter @freefincal
- Subscribe to our YouTube Videos
- Posts feed via Feedburner.
Our publications
You Can Be Rich Too with Goal-Based Investing
Published by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want
This book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.Your Ultimate Guide to Travel
This is an in-depth dive into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and how travelling slowly is better financially and psychologically, with links to the web pages and hand-holding at every step. Get the pdf for Rs 300 (instant download)