Minimalist Portfolio Ideas for Young Earners

Investing for long-term goals is governed by the following tenets.
1) Beat inflation either by investing more and/or with adequate exposure to volatile but productive assets. Preferably 'and', not 'or'.
2) Understand the importance of containing volatility and that trying to maximise returns by being more aggressive is like trying to run a marathon like Usain Bolt.
3) Knowing how to contain volatility.
a) never ignoring debt. Not more than 50-60% equity exposure is needed for any long-term goal.
b) having the maturity to diversify the folio among productive asset classes and within each asset class
c) having the maturity to periodically shift gains from a performing asset class to a meek if not underperforming asset class. Also known as rebalancing.

I am convinced that investors, especially the young earners, must keep things as simple as possible and avoid portfolio clutter like the plague.

For most people, the best way to diversify a portfolio within an asset class is by not trying!  If they don't know what they are doing, this is what happens:

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Here are a few long-term (15 Y plus) portfolio ideas that are minimalist in nature. All of them are likely to produce a real-return to the disciplined and un-wavering investor.

Be warned that, none of them will work

  • if you expect anything more than 12% CAGR (I prefer 10%) from the equity or equity-oriented component.
  • if you jump up and down each time other funds do better than yours.
  • if you think having more mid and small-cap funds will fetch you more returns because your goal is far away.

Minimalist Portfolio 1

  • Single Large Cap mutual fund (60%) + PPF (40% only!)

Core and satellite principle be damned.  Solid large caps will be relatively less volatile. Size of the fund does not matter as large caps are liquid stocks.

Minimalist Portfolio 2

  • Single Equity-oriented balanced mutual fund

My favourite for the following reasons
1) Tax-free debt component.
2) Automatic rebalancing
3) Fund return = portfolio return. Goal tracking is the easiest.
4) Most liquid portfolio of them all.
5) The equity component could be diversified too

Minimalist Portfolio 3(a)

  • Single Large and Mid-cap fund (60%) +PPF (40% only!)

For those worried souls who long for mid-caps. Some have a touch of small-caps too!

Fund size could be an issue. Larger the fund, the more large cap it becomes in nature.

Minimalist Portfolio 3(b)

  • Single Large Cap mutual fund (60%) + PPF (40% only!)

or

  • Single Large and Mid-cap fund (60%) +PPF (40% only!)

The fund in this case has exposure to international stocks.

Robust diversification. Solid long-term returns but with the short-term impression of being a laggard (diversification requires maturity)

~~~~~~~~~

Down the line, a debt mutual fund can be added to the above portfolio to aid rebalancing.  Initially, one-way rebalancing, that is shifting excess equity allocation (say 5% or more) to PPF is more than enough.

If you are starting to invest for all your long-term goals at the same time, a unified minimalist folio will do the trick. If there is a gap of a few years between the investment for each goals, you can construct separate minimalist portfolios for ease of tracking and rebalancing. A unified folio could also work, but tracking the corpus of each goal can be a pain.

Individual minimalist folios allow independent risk management. A 25 year goal is not the same as a 15 year goal. I would prefer to rebalance more often for a 15 year goal.

That is it. Don't chase after that hot mid/small/micro cap fund.

Keep it simple.

Avoid portfolio clutter like the plague

Consider a minimalist portfolio:

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34 thoughts on “Minimalist Portfolio Ideas for Young Earners

  1. Rakesh

    This one of the best articles sir, simple and void of any financial ot technical jargons and yet delivers high on intellect quotient.

    Reply
  2. Rakesh

    This one of the best articles sir, simple and void of any financial ot technical jargons and yet delivers high on intellect quotient.

    Reply
  3. Shaji Unni

    Superb sir. Wish you had written this few years back. Anyway i have 5 funds in my portfolio.
    1) sons education- lclcl focussed bluechip + hdfc midcap opp.+ Nri fixed
    2) Retirement - Uti opp fund + franklin prime plus + mirae assest emerging bluechip fund + ppf.
    do you think this combination is o.k or i need to consolidate more.
    Thanks
    Shaji unni

    Reply
  4. Shaji Unni

    Superb sir. Wish you had written this few years back. Anyway i have 5 funds in my portfolio.
    1) sons education- lclcl focussed bluechip + hdfc midcap opp.+ Nri fixed
    2) Retirement - Uti opp fund + franklin prime plus + mirae assest emerging bluechip fund + ppf.
    do you think this combination is o.k or i need to consolidate more.
    Thanks
    Shaji unni

    Reply
  5. Nithin R

    I think as long as we :
    1. Do not exceed the 60% limit for equity as considered above
    2. Do not invest in funds that have high medium/overlap
    3. Do not take knee jerk reactions to market sentiment
    4. Do not keep comparing fund performance too often
    5. Do not ignore periodic re-balancing

    We should be OK.

    But then, wouldn't it be prudent to split the capital on two large cap funds which have low overlap instead of one as mentioned in the examples above ? Perhaps you suggested only one fund to keep things simple for young earners but I don't think it would be difficult to manage more funds(say 2-3) as long as they are clearly mapped to a goal(s) and are well distinct with respect to one another.

    Keeping just one large cap fund can have limitations like :
    1. What if the fund manager exits ?
    2. What if the AMC in question has other problems ?

    Let me know your views...

    Thanks !

    Reply
    1. pattu

      Fund manager exit does not always spell trouble. Depends on the process the fund follows. Both fund manager exiting and other problems can happen if you have 2 funds or ten funds. If you can have multiple funds and manage to track then fine, but not many can manage that.

      Reply
  6. Nithin R

    I think as long as we :
    1. Do not exceed the 60% limit for equity as considered above
    2. Do not invest in funds that have high medium/overlap
    3. Do not take knee jerk reactions to market sentiment
    4. Do not keep comparing fund performance too often
    5. Do not ignore periodic re-balancing

    We should be OK.

    But then, wouldn't it be prudent to split the capital on two large cap funds which have low overlap instead of one as mentioned in the examples above ? Perhaps you suggested only one fund to keep things simple for young earners but I don't think it would be difficult to manage more funds(say 2-3) as long as they are clearly mapped to a goal(s) and are well distinct with respect to one another.

    Keeping just one large cap fund can have limitations like :
    1. What if the fund manager exits ?
    2. What if the AMC in question has other problems ?

    Let me know your views...

    Thanks !

    Reply
    1. pattu

      Fund manager exit does not always spell trouble. Depends on the process the fund follows. Both fund manager exiting and other problems can happen if you have 2 funds or ten funds. If you can have multiple funds and manage to track then fine, but not many can manage that.

      Reply
  7. jaimin

    Be warned that, none of them will work
    •if you expect anything more than 12% CAGR (I prefer 10%) from the equity or equity-oriented component.

    what is the main intension behind this ?

    Reply
  8. Reva

    Can you please name a few sample "Equity-oriented balanced mutual funds"? Also, you mention about "Tax-free debt component", How does it work?(Considering above 65% exposure to equity)

    Thank you.

    Reply
    1. freefincal

      HDFC Balanced, HDFC Prudence, ICICI, Balanced, Franklin Balanced etc. Check at Value Research. Since the fund holds above 65% equity, the gains are tax free regardless of what the rest is.

      Reply
  9. Venkataraman

    Thanks sir. I have been investing in index funds for past 3+ years and it is a good minimalist way of investing. Expense ratio is very less and my returns are around 11.5%year on hear. I invest in idfc nifty fund. I was trying few debt funds. Now I have found bond index funds. I have found DWS bond index fund. I hope to get good returns in long term. Index fund are diversified and we get average returns for minimalist portfolio.

    Reply
  10. Anjan

    One of my friend's equity MF portfolio (undisturbed) has returned only 4% in last 10 years.

    With such kinds of returns, any of our financial plans may go for a toss. How to address such situations?

    Reply
  11. Jatin Doshi

    Just a query sir...since I put it into a single large cap fund + single mid cap fund...how often should I review it to check that my fund is not underperforming and shift it to some other scheme...For a 15 yr goal...if my fund underperforms for 2 yrs, won't it considerably reduce my net CAGR...also one more query...should the money accumulated in the underperforming fund be redeemed and put into a better fund or let that as it is? Thanks..

    Reply
  12. Aditya

    Sir,

    Don't you think that for re-balancing, we should also keep in mind the taxes. Re-balancing while incurring short term gain taxes may not be ideal. Your suggestion please

    Reply
  13. Ashok

    Wow Nice article. Last week i started doing this Portfolio 2. I stopped investing in all funds and decided to concentrate on only one Equity based balanced fund (Birla Balanced 95).

    Reply

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