Last Updated on February 12, 2022 at 6:19 pm
PlumbLine is my list of handpicked mutual fund started in last Sep for beginners to accompany the freefincal robo advisory template. After a gap of four months, here is the September 2018 edition with three new additions. This marks one year of the robo template. If you are seeing this for the first time, please take a couple of minutes to understand what this list is, how it has been compiled and how you should use it.
What is plumbline and how should I use it?
A plumb line is used to fix the vertical and therefore the horizontal. This list hopes to help new investors do the same. Pic credit: Mr. atm
1: PlumbLine is a boring list of mutual funds. It will NOT change from month to month unless there is a significant change in the fund’s strategy (as in the present) or dip in performance or some other special situation. So please do not look forward to it. Also, 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 young earners and first-time investors after they have used the robo advisory template.
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3: If tomorrow the funds in the list change, you will have to take a call on what you need to do, based on the fund performance from the date in which you invested. I cannot help you here, other than talk about how to review.
4: This is a personalized 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 that in mind. Don’t waste your time and mine asking “why are biased towards Quantum and Franklin?”, “Why is X or Y fund not here?”, “Z is a better choice”. This list is meant for new mutual fund investors to get going.
Disclaimer
On its own, this list 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.
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 are injurious to peace of mind and plumbline is just plain bad.
3 Plumbline does not feature the top funds from your monthly screener —> Yeah because I did not consult it. Plumbline is a qualitative assessment of a funds investment strategy, mandate and performance.
4: I find your list biased and partial to certain funds and certain amcs –> Okay then, thank you for not using it.
Plumbline September 2018
Category 1: Overnight mutual funds
To understand the basics, read Worried about risk in debt mutual funds? Park your money in overnight mutual funds
- Investment Duration one day and above!
- Fund name L&T Cash Fund-Direct Plan Growth Option
- Nature ultra-conservative!
- interest rate risk: practically nil
- Credit risk non-zero but quite small
- Why? This is a new category and this fund has the highest AUM with the lowest expense ratio. Other than that nothing special
- Suitable for the super scared who want to park money for a short while
- Returns You invest in this for safety, not for returns
Category 2: Liquid Fund
- Investment Duration Few months and above
- Fund name Quantum Liquid fund Direct Plan Growth Option
- Nature Conservative
- interest rate risk: low (can give losses if RBI rate is suddenly increased by a huge amount, but will recover in days)
- Credit risk low
- Why? Does not chase after returns by taking on credit risk (after SEBI recategorization, the differences among liquid funds could have reduced. Need to check)
- Suitable for use for parking money
- Returns a bit more than SB account
- Con: There are funds with lower expense ratio. You can choose them, but be sure you understand where the fund will invest. See: How to Choose a Liquid Mutual Fund
Category 3: Equity Arbitrage
- Duration 1Y and above
- Fund name UTI Arbitrage fund direct plan growth or ICICI Equity Arbitrage Fund-Direct Plan Growth Option.
- Nature Low volatility by construction. Volatile for less than a year. Quarterly returns can be negative
- interest rate risk: low Applicable to bond part of the portfolio. This is largely an equity fund
- Credit risk low Applicable to bond part of the portfolio. This is largely an equity fund
- Other risks There are small but complex risks involved, but if you choose the investment duration right, the main risk will be fund delivering lower than expected return. So expect less!
- Why? Pure arbitrage funds with no direct (unhedged) equity
- Suitable for use for parking money and generating income. See: Generating tax-free income from arbitrage mutual funds
- Returns Expect about 6% ish pre-tax
- Con: You need to understand how the product work. Try this How Arbitrage Mutual Funds Work: A simple introduction
Category 4: Ultra short term (low risk)
- Duration 1Y and above
- Fund name Franklin India Savings Fund-Direct Plan Growth
- Nature Conservative but expect day to day NAV ups and downs.
- interest rate risk: low
- Credit risk low-medium
- Why? This is will now invest only in money market instruments with low to moderate credit risk
- Suitable for use for saving money and generating income
- Returns Expect FD-like returns (lower tax if you want for 3Y)
Category 5: Ultra short-term (moderate risk)
- Fund Type Debt: Ultra short-term (moderate risk)
- Duration 1Y and above
- Fund name Franklin India Ultra-Short Bond Fund – Super Institutional Plan – Direct Plan Growth Option
- Nature Neither conservative nor aggressive
- interest rate risk: low
- Credit risk medium-high
- Why? If you must take credit risk chasing after high returns, do it with Franklin. The Macaulay duration will only be about 6-7 months or lower. So low-interest rate risk and moderate credit risk. Read more: Why you need to worry about “duration” if your mutual funds invest in bonds
- Suitable for use for saving money and generating income.
- Returns Expect it to beat FD returns (assuming no major default issue)
Cons Min investment is Rs. 10,000
Category 6: Medium duration (medium risk)
- Duration Strictly long term: More than 5Y, preferably much longer
- Fund name Franklin India Income Opportunities Fund
- Nature fairly aggressive. Don’t expect a joy ride!
- interest rate risk: medium-high
- Credit risk medium-high
- Why? This can invest in all types of bonds with Macaulay duration of 3-4 years, with an option to tactically reduce to 1Y depending on rate movement. Will invest in high accrual bonds
- Suitable for Use as debt component for long-term goals
- Returns Expect it to beat FD returns (assuming no major default issue)
Category 7: Debt: Corporate Bond (medium risk)
- Duration: Strictly long term: More than 5Y, preferably much longer
- Fund name: Franklin India Corporate Debt Fund-Direct Plan Growth option
- Nature: Neither conservative nor aggressive
- interest rate risk: medium-high
- Credit risk: medium portfolio concentration risk: high
- Why? This will invest in long-term bonds of corporate and PSUs rated AA+ and above
- Suitable for: Use as debt component for long-term goals (with or without equity).
- Returns Expect it to beat FD returns (assuming no major default issue)
Category 8: Fund Type Debt: Credit risk (high risk)
- Duration Strictly long term: More than 5Y, preferably much longer
- Fund name Franklin India Credit Risk Fund Direct plan Growth option
- Nature Aggressive Invests in low credit quality bonds (AA and below). Not for the faint-hearted
- interest rate risk: medium-high
- Credit risk high; portfolio concentration risk: high
- Why? If you must take credit risk, take it with Franklin. They have the money to buy back junk bonds!
- Suitable for Use as debt component for long-term goals
- Returns Expect it to beat FD returns (assuming no major default issue)
Category 9: Equity Tax planning
- Duration There is no need for ELSS mutual funds., but if you must use, use only for long-term goals with a proper asset allocation.
- Fund name Franklin India Tax Shield Direct Plan Growth Option
- Nature large-cap tilt
- Why? Quiet, consistent performer. Need patience with this fund.
- Suitable for Use only if you have a proper asset allocation and if you cannot exhaust 80C with your expenses and fixed income instruments. Read more: Making the best use of section 80C for tax saving: an example
Category 10: Balanced fund (equity oriented) or Aggressive Hyrbid
- Duration Treat all such funds as pure equity funds, so strictly long-term. Use robo template for allocation
- Fund name HDFC Hybrid Equity fund Direct plan growth option formerly HDFC Balanced or Franklin India Equity Hybrid Fund formerly Franklin India Balanced Fund
- Nature Neither conservative nor aggressive
- Risk Only a bit lower than diversified equity funds
- Why? The HDFC fund is neither inconspicuous, nor a star, but a consistent performer with good downside protection. Franklin Balanced is an inconspicuous consistent performer but going forward will not have large cap tilt
- Author note: I invested in HDFC Hybrid Equity
Category 11: Equity multi-cap
- Duration Strictly long-term with proper asset allocation. Use robo template for allocation
- Fund name Quantum Long Term Equity Value Fund-Direct Plan Growth Option or Parag Parikh Long Term Equity Fund
Why? Very good downside protection resulting in consistent performance
Who should use? Only those with low expectations, patience. Not suitable for star rating fans and daily portfolio “trackers” PPFAS is a new entrant. - Author Note: I invest in both funds (& HDFC balanced for my retirement). Many asked me why is PPFAS not part of PlumbLine when I am invested in it. Well okay, why not.
Category 12: Index funds (large cap)
- Duration Strictly long-term with proper asset allocation. Use robo template for allocation
- Fund name UTI Nifty Index Fund-Direct Plan Growth Option or HDFC Sensex Index Fund-Direct Plan Growth Option
- Risks No downside protection
- Who should use? If you wish to adopt a passive investing strategy (eliminate fund manager risks), and wish to track a less volatile large-cap index
Category 13: Index Fund (large + midcap) – high risk
- Duration Strictly long-term with proper asset allocation. Use robo template for allocation
- Fund name UTI Nifty next 50 direct plan growth option or ICICI Nifty Next 50 Direct Pan Growth Option or Reliance Junior Bees. See: What is the best way to invest in Nifty Next 50 Index?
- Risks Can be extremely volatile, so tread with caution
- Who should use? 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
Category 14: Index Fund (large + midcap)- low risk
- Duration Strictly long-term with proper asset allocation. Use robo template for allocation
- Fund name Sundaram Smart NIFTY 100 Equal Weight Fund or Principal Nifty 100 Equal Weight Fund
- Risks These are new, low AUM funds. If there are not enough takers, the AMC may shut down the fund or merge it with another. The risk here is that you will have to pay tax (no exit load). As far as volatility is concerned, these are more volatile than Nifty 50 but less than Nifty Next 50.
- Who should use? Those who want a single-fund equity portfolio. If you prefer a volatile index fund (with unmanaged risk) that has a very good track record of beating actively managed large-cap funds. See: Will large-cap mutual funds struggle to beat Nifty 100 Equal Weight Index?
- Author note: Both categories 13 and 14 are quantitative compulsive picks.
Category 15: Equity Large Cap
- Duration Strictly long-term with proper asset allocation. Use robo template for allocation
- Fund name Franklin India Bluechip Fund-Direct Plan Growth Option
- Risks Can be extremely volatile, so tread with caution
- Who should use? If you prefer a volatile index fund (with managed risk) that has a very good track record in the past and has seen many market cycles
- Note: This fund has slipped in performance in the recent past both in terms of risk and reward wrt Nify 100 equal weight index. Therefore investors will have to keep an eye. If you are worried about holding on to such a fund or investing fresh in such a fund. choose a more aggressive large cap like Aditya Birla Sun Life Frontline Equity Fund
- Note 2: I have begun to wonder if actively managed large caps can be replaced with NIfty 100 Equal-weight.
Category 16 Equity Midcap
- Duration Strictly long-term with proper asset allocation. Use robo template for allocation. Do not exceed 40-50% within the equity portion.
- Fund name Franklin India Prima Fund-Direct Plan Growth Option; HDFC Mid-cap Opportunities
- Risks Aggressive
- Why Because in the mid-cap and small-cap segments, it is crucial to choose consistent performers which no one is talking about. The Franklin 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.
- Note: ICICI Prudential Midcap Select ETF is a promising index option in this space. However, its liquidity has to be verified by giving some more time. So far it has done well.
Category 17 Equity Smallcap
- Stay away from this segment. Most midcaps have all the small-cap exposure you need.
Closing Remarks
To understand the debt fund choices, you need to learn more about interest rate risk, credit rating risk, floating rate bonds, etc. You can download this free e-book if you are interested: Free E-book: A Beginner’s Guide To Investing in Debt Mutual Funds
I have a strong Franklin bias when it comes to debt funds for two reasons: they always make the product positioning clear to investors (who bother to read) – this is crucial. Interest rate risk is beyond their control as it is governed by market forces. They do take on quite a bit of credit risk and this does go bad often (we don’t always hear about it!), but if the bonds become junk, the AMC is wealthy enough to bail out the fund. I repeat that there is no point in questioning me about his bias. Unless we have biases, we will never get things done as an investor.
You would have a notice a tilt towards smart-beta or strategic index funds (Nifty Next 50 is an exception) in my writings. This is fact-based and hence PlumbLine will also reflect this.
It is not enough if you know how to choose a fund, it is important to review its performance. If you wish to know how to do this, see: How to review a mutual fund portfolio. You only need 1/2 funds to build a well-diversified equity portfolio.
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