A viewer on YouTube writes, “Hello sir, Firstly I just want to call out that your book “You can be rich too with goal-based investing” is just amazing. I have an investment portfolio for the next 15 yrs, for my retirement. My investment is 6 months old. Currently, my asset allocation is 70% equity and 30% debt.”
“In the equity section, I have a large cap index fund, one flexi cap and low volatility index fund, and also one elss for tax savings ( which again I believe is a flexi cap fund correct ?). For the debt section, my first choice was ppf, but since there would be an issue re-balancing, not now but definitely in future, could you please suggest a good debt fund? Are arbitrage funds good for the long term or shall I go ahead with gilt funds or dynamic bond funds? I am slightly confused here.”
Firstly ELSS mutual funds are not flexicap funds (although the finance ministry has no stipulation other than 80% Indian equity in the portfolio). Typically they tend to be large-cap oriented with some mid cap stocks and a dash of small cap stock in some funds.
Secondly, although it is true that one cannot freely use PPF for two-way rebalancing (equity to debt and debt to equity), it still has a place in the long-term portfolio. One should however not make the mistake of investing Rs. 1.5 lakhs in it each financial year.
Instead one should invest some amount in PPF to keep the account alive and according to the desired asset allocation. Whenever there is a bull run and the equity allocation in the portfolio has increased, shift some funds to PPF. Often this will hit the Rs. 1.5 lakh mark quite easily after a few years.
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I used this method to gradually build enough fixed-income assets to cover my child’s UG and PG expenses 6-7 years before the goal deadline. See: This useful feature of PPF deserves more attention!
So as long the goal is a full 15 financial years away, PPF can be part of the debt holdings. Yes a debt fund in addition to PPF may be necessary for rebalancing back from debt to equity if the goal is several years away.
Here is is a list of suitable candidates
- Liquid funds: These may be used for short-term (< 5Y) and intermediate-term (<10Y) goals and also when a long-term goal nears its deadline. If you wish to gradually accumulate the target corpus in debt, this will work well. Yes, it is a conservative choice but not all investors know how to navigate debt funds.
- Money market funds: A bit riskier than liquid funds but a good choice to gradually accumulate the target corpus in debt.
- Arbitrage funds: A tax-efficient choice (since it is considered an equity fund) but will be a bit more volatile than a money market fund. Can be used for the same purpose as above. So all three choices are well suited for one-way “rebalancing”: permanent shifting funds from equity to debt. The goal here is to safeguard the corpus and the rate of return is not a primary concern.
The fund mentioned below are better suited for two-way rebalancing (equity to debt and vice versa) but are significantly more volatile. They should only be used for long term goals (> 10Y). In addition, the three funds mentioned above may also be necessary as the goal deadline nears.
- Corporate Bond Funds: These would be a bit less volatile than gilt funds. They are also prone to credit risk. Also see: Can we use HDFC Corporate Bond Fund for long term goals?
- Gilt funds: Only investors who can go through years and years of poor performance followed by a sudden jump in returns (or vice versa can invest in these). Also, see: How to choose a gilt mutual fund
- Gilt funds investing in 10Y bonds: These would be even more volatile than gilt funds. Only suited for the experienced investor.
Dynamic bond funds are unnecessary. Almost all gilt funds are “dynamic” in nature. That is the fund manager changes the average portfolio maturity based on bond market supply vs demand for long term bonds (aka duration play). Also see: Gilt funds vs Dynamic Bond Funds vs Corporate Bond Funds: Which is the better choice?
Disclosure: I am investing in ICICI Arbitrage Fund, ICICI Gilt Fund and Parag Parikh Conservative Hybrid Fund for my goals. See: Why I partially switched from ICICI Multi-Asset Fund to ICICI Gilt Fund. And Why I started to invest in Parag Parikh Conservative Hybrid Fund.
In summary, for goals around 10 years or less, we recommend using money market funds or arbitrage funds for one-way rebalancing from equity to debt and systematic rebalancing. For much longer tenure goals, gilt funds or corporate bond funds can be considered for two-way rebalancing. For one-way rebalancing and de-risking, PPF (if there is enough time available) along with money market funds or arbitrage funds can be used.
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