"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.
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:
- the portfolio has to be monitored wrt the requirements of the goal. "Is it growing at the right pace?", "Am I on track?"
- 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.
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.