In this article, SEBI registered fee-only advisor Akshay Nayak – the newest member of fee-only India* – explains why simple portfolios make sense and how to build them.
About the author: Akshay holds an MBA in Finance from Great Eastern Management School, Bangalore. His website is akshaynayakria.com. His articles on personal finance and investing can be accessed here: akshaynayakria.com/blog.
* Fee-only India is an informal association of pure fee-only financial advisors. Launched in Sep 2017, it helps connect investors with SEBI-registered investment advisors without conflict of interest. Dr M Pattabiraman is a founder-patron of fee-only India.
Investors often load their portfolios with every attractive product they come across. This increases the number of products in the portfolio, making it difficult to manage them. It makes investors prone to mistakes, leading to below-par investment performance.
The key to success in investing for retail investors is to avoid mistakes and wrong decisions. A simple portfolio constructed with fewer products reduces the number of decisions an investor has to make, reducing the number of mistakes they commit. This automatically improves portfolio performance.
Join 32,000+ readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email! (Link takes you to our email sign-up form)
🔥Enjoy massive discounts on our robo-advisory tool & courses! 🔥
The cognitive abilities of most people deteriorate as they age, making it difficult to handle complex portfolios with time. In the event of the early demise of an investor, their families may also be unable to handle complex portfolios. Considering all this, investors are better off keeping portfolios simple. Let us see how investors can build simple portfolios.
Most investors lack the time and knowledge required to manage portfolios. The passive approach to portfolio construction avoids excessive portfolio management. To construct passive portfolios, we use index funds for equity and index-like products for debt and periodically manage the portfolio’s asset allocation. The portfolio’s asset allocation can be decided based on the investor’s goals and risk profile. Passive portfolios aim to earn market returns.
A single Nifty 50 index fund can suffice the equity allocation. It gives investors exposure to two-thirds of the free float market capitalization of the Indian stock markets at a minimal cost. Direct plans of Nifty 50 index funds are available at an expense ratio of around 0.2% with almost all major mutual fund houses. The competition between fund houses in this category keeps costs low. Investors with a low-cost broking account may consider a Nifty 50 ETF which has robust daily trading volumes, no history of paying dividends and costs 5 to 6 basis points.
Investors willing to take on greater risk can use a combination of Nifty 50 and Nifty Next 50 index funds. Long-term rolling returns and standard deviation of the Nifty Next 50 index are comparable to that of the Nifty Midcap 150 index. This makes Nifty Next 50 an effective substitute for a midcap index fund. Nifty Next 50 Index Funds cost around 0.3%. A portfolio with a 50-50 blend between Nifty 50 and Nifty Next 50 costs around 0.25%.
For the debt component of long term portfolios, Employee Provident Fund (EPF), Public Provident Fund (PPF) and Sukanya Samriddhi Yojana (SSY) are automatic choices. There is no credit risk or interest rate risk in these products. It is very hard for other debt products in India to beat the post-tax returns of these three products.
To maintain liquidity in the portfolio, debt mutual funds can be used. Average portfolio maturity is an important criterion when picking debt funds. The average portfolio maturity of a debt fund is the weighted average maturity of the securities held within the fund. The average portfolio maturity of a debt fund must be significantly lower than the tenure of the goal it is chosen for. A simple choice within debt funds is Liquid funds. They invest in debt securities of the highest credit quality with a maturity of up to 91 days. A direct plan, the growth option of a liquid fund with extremely low credit risk, can be considered at a cost of 0.15% to 0.2%.
Indexation benefits are now unavailable on debt funds, but they may still be preferred over bank fixed deposits because they offer more flexibility. The tax liability in debt funds is deferred until redemption. This facilitates uninterrupted compounding until redemption. Interest income from bank fixed deposits is subject to tax at slab rates every year. Debt funds allow systematic investments and withdrawals without penalties, unlike fixed deposits.
Simple portfolios built with a few low-cost products are easy for investors to understand and manage. They can be as effective at helping investors achieve their goals as a complex portfolio. Therefore investors would benefit from embracing simplicity and avoiding complexity when constructing portfolios.
“When there are multiple solutions to a problem, choose the simplest one.” – John C. Bogle.
To work with Akshay, you can contact him via his website akshaynayakria.com.
🔥Enjoy massive discounts on our courses, robo-advisory tool and exclusive investor circle! 🔥& join our community of 7000+ users!
Use our Robo-advisory Tool for a start-to-finish financial plan! ⇐ More than 2,500 investors and advisors use this!
Track your mutual funds and stock investments with this Google Sheet!
We also publish monthly equity mutual funds, debt and hybrid mutual funds, index funds and ETF screeners and momentum, low-volatility stock screeners.
- Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
- Have a question? Subscribe to our newsletter using the form below.
- Hit 'reply' to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.
Join 32,000+ readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email! (Link takes you to our email sign-up form)
About The Author
Dr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter(X), Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! ⇐ More than 3,000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter the market condition is!! Watch the first lecture for free! One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course! Increase your income by getting people to pay for your skills! ⇐ More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!
Our new book for kids: “Chinchu Gets a Superpower!” is now available!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook is for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Do you want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or get the Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low-volatility stock screeners.
About freefincal & its content policy. Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified with credible and knowledgeable sources before publication. Freefincal does not publish paid articles, promotions, PR, satire or opinions without data. All opinions will be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
- Twitter @freefincal
- Subscribe to our YouTube Videos
- Posts feed via Feedburner.
Our publications
You Can Be Rich Too with Goal-Based Investing
Published by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want
This book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.Your Ultimate Guide to Travel
This is an in-depth dive into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and how travelling slowly is better financially and psychologically, with links to the web pages and hand-holding at every step. Get the pdf for Rs 300 (instant download)