Turnkey mutual fund solutions to beat inflation

"I understand the need to beat inflation and the need for equity in a portfolio. I understand that the mutual fund route is a simple and convenient way to do it. However, I neither have the confidence, nor the time or inclination to create and manage a mutual fund portfolio. I also do not have the confidence or know-how to select a professional who will offer me unbiased advice".

It is not hard to find such people. In fact, I might have even described you, the reader. There are several turnkey or "fill it, shut it, forget it" ways to have equity in one's portfolio for long-term goals.

Mature content warning: The following is meant for mature investors who understand that to 'get', one must 'give'.  That both 'convenience' and 'optimization' come at a price.

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Care for a push button solution? Photo credit: Sean Hobson (flickr)

When it comes to goal-based investing, two types of maintenance or monitoring is required:

  1. the portfolio has to be monitored wrt the requirements of the goal. "Is it growing at the right pace?", "Am I on track?"
  2. the instruments that constitute folio has to be reviewed and suitable action taken.

The first activity is intrinsically personal and has to be done either by the individual or by a designated professional. The main reason why most investors get this wrong is because they are more worried about the second activity.

The second activity requires, above all else, the maturity to 'do nothing' and patiently wait ignoring the noise that surrounds us. For example, when folks in AIFW are arguing about why Quantum Long Term Equity holding cash, we need the maturity to understand what 'long-term investing really means and 'do nothing' ignoring the star rating of the fund. Very few people can do this effectively.

It also requires some understanding how to construct a minimalist portfolio and how to choose funds. It is not rocket science but does involve some reading and understanding. 

The point of this post is to (reiterate) the simple fact that for those who do not wish to worry about activity 2, simple solutions are available.

There is no escaping from activity 1.  However, I firmly believe if the second activity is well accounted for, the first becomes a breeze to handle.

Equity investing is all about faith and trust. Faith and trust that if the economy is to grow, and if the GDP is to grow, equity (or the underlying business) will have to be profitable. These profits trickle down to the shareholders in the form of an inflation-beating return.  One must typically wait 'long enough' to get such a return without alarming fluctuations.

To see what I mean by low fluctuations, play around with this Mutual Fund SIP XIRR Tracker

If you wish to know how returns in mutual fund SIP are calculated, you can consult this: What is XIRR?

It may so happen that that market movers nowhere for several years and this may coincide when the last phase of your financial goal. Therefore, activity 1 is essential to take suitable steps.

There two simple turnkey solutions:

(1) Your portfolio gets broad market returns by simply choosing an index fund like Goldman Sachs CNX 500 Fund.

Or you even choose any Nifty or Sensex index funds. Stay away from ETFs.

A monthly SIP started 10 years ago in Sensex of Nifty funds would have resulted in an XIRR of 11-12%. Considering that it is tax-free and the fact that one does not have to worry about fund manager performance, I think it is more than decent.

(2) Your portfolio gets returns higher than the index by investing in other (direct plan) equity funds. This is known as a fund of fund.  The fund manager uses a clearly defined process to invest in equity funds. The investor does not need to do anything except trust the underlying process.

There are many such fund-of-funds, but I am partial to one.

Mutual Fund Analysis: Quantum Equity Fund of Fund

Perhaps because the process is simple to understand. Mention about this fund and immediately someone will say,

  • "but there two expense ratios involved: for the funds in the folio, and the fund of fund"
  • "the gains are taxed like a debt fund"

If you want a turnkey solution with near-zero maintenance, you can safely ignore such comments.

A SIP in this fund since inception (Aug. 2009) has produced  18.8% XIRR before taxes.

If I were to redeem the investment today, considering exit load, short-term capital gain (at 30% slab), long term capital gain at 20% with indexation, the XIRR will be 16.1%.

For the same period, an index fund tracking the Sensex would have returned 12.8% (before taxes).

To me, Quantum fof seems like a pretty sweet deal, considering it is a professionally managed mutual fund portfolio and no monitoring is required on my part.

If you argue that excess returns above the index will reduce down the line, and therefore taxes matter, I would argue that long-term capital gains from equity would not remain tax free forever. The disparity between the tax treatments will then reduce considerably.

A person who wants a turnkey solution can invest 60% of monthly investible surplus in this fund and the rest in EPF, PPF.  Fill it, shut it, forget it.

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23 thoughts on “Turnkey mutual fund solutions to beat inflation

  1. MRHDK2012

    Pattu,

    Great post. You explained it such a way that us easy to understand. You are a true professor.

    Thanks for bringing this clarity.

    Reply
  2. MRHDK2012

    Pattu,

    Great post. You explained it such a way that us easy to understand. You are a true professor.

    Thanks for bringing this clarity.

    Reply
  3. vibhavshah

    really like the advice. however i am in favor of good actively managed diversified equity funds portfolio compared to etf or index funds , so my preference is fof (read quantum fof!). i think, there are two inherent limitation in etf/index fund design:1. as understand, the index is formed with the proportion of the constitutes depending upon their active market capitalisation, rather than profitability into consideration, and it takes some realistic time getting the drowning constitute/s by suitable other one, which results not so good performance. 2. they can't take advantage of the mr. market, as its constituents and proportions are fixed irrespective of market conditions, which are highly volatile, but the actively diversified fund can take its advantage. so on longer duration we can find, quite a no. of such funds outperfoms.

    Reply
  4. vibhavshah

    really like the advice. however i am in favor of good actively managed diversified equity funds portfolio compared to etf or index funds , so my preference is fof (read quantum fof!). i think, there are two inherent limitation in etf/index fund design:1. as understand, the index is formed with the proportion of the constitutes depending upon their active market capitalisation, rather than profitability into consideration, and it takes some realistic time getting the drowning constitute/s by suitable other one, which results not so good performance. 2. they can't take advantage of the mr. market, as its constituents and proportions are fixed irrespective of market conditions, which are highly volatile, but the actively diversified fund can take its advantage. so on longer duration we can find, quite a no. of such funds outperfoms.

    Reply
  5. vibhavshah

    i had a simple idea, to overcome the taxation disadvantage of fof: mimic your preferred fof , and buy the equity funds of that fof in its proportion, check the fof yearly and do change as per them.

    Reply
  6. vibhavshah

    i had a simple idea, to overcome the taxation disadvantage of fof: mimic your preferred fof , and buy the equity funds of that fof in its proportion, check the fof yearly and do change as per them.

    Reply
    1. freefincal

      Because 1) you need a demat account, 2) they are not liquid. If you want to redeem a hughe corpus, you need to wait for someone to buy your units or wait for AMC to buy it from you.

      Reply
    1. freefincal

      Because 1) you need a demat account, 2) they are not liquid. If you want to redeem a hughe corpus, you need to wait for someone to buy your units or wait for AMC to buy it from you.

      Reply
  7. rajan

    Pattu sir,
    The monthly archieves option has been removed by you.
    I didn't see the option.
    Can you help?
    How can i see the posts by monthwise?

    Reply
    1. lakshminarasimman

      sir i have 2.5 lakhs invested in goldman nifty etf index fund
      i am now worried because of your post

      please tell me what to do

      Reply
        1. lakshminarasimman

          thanks for your quick reply
          sir if amc is willing to give back the money then there is no worry except time taken for refund right?

          Reply
  8. rajan

    Pattu sir,
    The monthly archieves option has been removed by you.
    I didn't see the option.
    Can you help?
    How can i see the posts by monthwise?

    Reply
    1. lakshminarasimman

      sir i have 2.5 lakhs invested in goldman nifty etf index fund
      i am now worried because of your post

      please tell me what to do

      Reply
        1. lakshminarasimman

          thanks for your quick reply
          sir if amc is willing to give back the money then there is no worry except time taken for refund right?

          Reply

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