Eight Mutual Fund Products That I wish existed! Are you listening AMCs?

Eight Mutual Fund Products That I wish existed

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Here are eight mutual fund products that I wish existed as they would make a big difference to investor choices and well-being (in my opinion of course).  Please free to add your own product in the comments below. If  AMCs paid more attention to what their investors want, they would not only collect higher AUM without having to push with too many embellished promises and it would stick with them better.

I have three debt fund products and five equity fund products in mind. Let me start with the debt category and with something I had already pointed out: Open Letter to AMCs: Why are you not pushing Risk-free Debt funds enough?

Debt funds have two major risk sources: Interest risk and credit risk. See Understanding Interest Rate Risk in Debt Mutual Funds and Understanding Credit Rating Risk in Debt Mutual Funds. If you are new to debt funds then get our free e-book on debt fund basic from  the ebook page(there are six other free ebooks to download too!)

1. Short-term gilt funds This should have been an exclusive category in the SEBI categorization rules but this unofficial category died after the rejig. Investors need a liquid fund that says it will only invest in gilts (gov bonds) + cash. Please do not say Parag Parikh has this. No, it has not. We need to learn to differentiate between what someone does and someone can do.

Investors also need a money market fund and ultra-short-term fund that can do this. With gilts, you can go all the way from overnight to decades in duration. With this setup, credit risk is out of the equation. Interest rate risk is minimized to a large extent. If AMFI wants to take money from FDs and transfer it to debt funds, then it must pay attention to the needs of risk-averse investors, especially after all these bond defaults.

2. Interval Funds that invest only in gilts An interval fund is a closed-ended fund that can open for subscriptions once a week, a month, a quarter or year. Read more: Introduction to Interval Income Mutual Fund Schemes

If such a fund can invest only in gilts and cash, it will practically eliminate both credit and interest rate risk in debt funds make them a perfect replacement for fixed deposits. In an open-ended fund, there could redemption pressure. This is eliminated for all practical purposes here. The fund manager will buy one week or one month or one-year gilts, hold them for the said period, convert to cash just before the fund opens up for buying and selling, rinse and repeat.

3 Arbitrage funds with no bonds (except cash), no direct equity and no imperfect hedging By this I mean, it will only buy and sell the same stock (or bond) in different markets (eg spot and futures). This is known as an absolute return strategy in hedging. UTI Arbitrage Fund does this. However, it should also not hold any kind of bonds except cash for handling redemptions.

4 An all-weather debt fund holding 25% of long-term gilts, 25% of long and medium-term AAA bonds, 25% short-term (1Y) gilts and 25% of money market instruments (bank deposits) + cash with monthly rebalancing. This can be used for long-term goals. No need to monitor interest rate cycles. Just buy all and rebalance.

5 Dynamic Asset Allocation Fund of funds tracking indices, For example, the PE-based strategy of  Franklin PE Fund is fantastic. See: Want to time the market with Nifty PE? Learn from Franklin Dynamic PE Fund. This is a debt fund from the point of taxation. If instead of investing in active equity and debt funds, such a fund were to invest in Nifty 50 ETF + hold arbitrage (as above) + 5% cash, it will be taxed like an equity fund. See: Equity fund of fund taxation rule changed: Can we invest in them now?

The advantage here is low cost (at least for the ETF part), reasonably time-tested quant strategy and no fund manager risk. This would be well suited for first-time investors, older investors and even retirees with the money to spare.

6 Full-invested equity funds with set allocation to large, mid and small cap stocks. Before SEBI rules, we had funds that had a mandate to stay in equity up to 95% at all times. Hence the name fully-invested funds. There are some funds like that today, but there do not need to by mandate. I would like to see such a fund with equal allocation to large mid and small caps at all times with monthly rebalancing. This can be one-portfolio fund.

7 A diversified but equal-weight sector fund Another way to diversify and lower risk is to hold all sectors in equal proportions. The choice of the market cap can be kept flexible.

8 Factor-based index funds.  Last not, least my favourite. We need a Nifty 100 Low Volatility 30 Index Fund (no need for an alpha, Value Quality etc funds). This is a lower than market risk, with potential higher than market reward option. See: Watch my talk on momentum and low volatility stock investing in India

A momentum index fund would be a higher than market-risk with potential higher than market reward option. See: Momentum Stock Investing in India: Does it work?

We two such funds from SBI (min variance fund and its balanced adv fund) and one from DSP but these are active funds.

Can you add to this wishlist? Do you agree/disagree with any of the items above? Your comments may take a few hours to show due to the CDN cache settings. Please do not add hyperlinks or they will not be published.

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About the Author M Pattabiraman author of freefincal.comM. Pattabiraman(PhD) is the author and owner of freefincal.com.  He is an associate professor at the Indian Institute of Technology, Madras since Aug 2006. Pattu” as he is popularly known, has co-authored two print-books, You can be rich too with goal based investing (CNBC TV18) and Gamechanger and seven other free e-books on various topics of money management.  He is a patron and co-founder of “Fee-only India” an organisation to promote unbiased, commission-free investment advice. Pattu publishes unbiased, promotion-free research, analysis and holistic money management advice. Freefincal serves more than one million readers a year (2.5 million page views) with numbers based analysis on topical issues and has more than a 100 free calculators on different aspects of insurance and investment analysis. He conducts free money management sessions for corporates  and associations(see details below). Previous engagements include World Bank, RBI, BHEL, Asian Paints, TamilNadu Investors Association etc. Contact information: freefincal {at} Gmail {dot} com (sponsored posts or paid collaborations will not be entertained)
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  1. Hello Pattu Sir,
    Thank you for all the knowledge you are sharing with us. I saw your article on the overview of smallcase investing and went through some of them in that platform.
    Can you please review All weather investing smallcase? This smallcase invests in equity, gold and debt ETfs with a quarterly rebalance schedule.
    The tax implications when the etf units are rebalanced? Things to look out for or any disadvantages in this?

  2. There are Fund of Funds run by many mutual funds. They have never in any period matched portfolios of funds selected independently. A study of Fund of Funds can open our eyes.

  3. Hate to be *that* guy, but as much as I like the content here, I’d love to see some changes in fonts for the images at least. In fact, any font that’s a bit more serious than Comic Sans would work 🙂

    A big fan of the work, hats off!

  4. A dynamic asset allocation fund, an all weather debt fund(optional) and a Mid cap. With proper Asset Allocation, a perfect portfolio for all times. KISS.

  5. Hi Pattu sir,

    Today i have received one mail from ppfas that they are changing ppfas long term equity fund strategy to invest in REIT and InvIT. They have also provided option to redeem without exit loaad.

    What should we do? Please suggest.I am a long term investor but as per my understanding ,suddenly changing the investment strategy is not a good option.

  6. Hi Pattu

    ICICI Already has low vol index ETF(NSE Symbol ICICILOVOL )and it also provides liquidity in market.

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