Building a Solid Equity Mutual Fund Portfolio
When it comes to investing, I firmly believe in the power of mutual funds.They offer a practical way to grow wealth with minimal hassle, especially for those who prefer a structured, hands-off approach.
Every month, on the day my salary gets credited, I invest consistently. Here’s my approach:
- Stick to Index Funds (Passive): I only invest in passive funds, as they are low-cost and transparent.
- Direct and Growth Funds Only: This ensures that I avoid commission fees and focus on long-term capital appreciation.
- SOA Route (No Demat): I prefer the Statement of Account (SOA) route for its simplicity.
Why Index Funds Are the Best Choice
Index funds make investing simple and stress-free. Here’s why I believe they are the superior choice:- Ease of Selection: With index funds, you don't need to constantly search for the "best" mutual fund. They mirror a market index, eliminating the risk of underperformance by fund managers.
- Returns Aligned with the Market: Index funds guarantee returns in line with the index they track. This predictability offers peace of mind, as there’s no guesswork.
- Market Risk Only: The primary risk is market volatility, which can be balanced through proper asset allocation between debt and equity.
- No Worries About Underperformance: Active funds may shine for a few years but often fall behind over the long run. Index funds remove this uncertainty.
- Cost Advantage: Active funds usually have higher management fees, which can eat into returns. Index funds, on the other hand, are more cost-effective.
- Historical Evidence: Data consistently shows that few fund managers outperform their benchmark over the long term, further solidifying the case for index funds.
Key Factors for Choosing the Best Index Funds
When selecting an index fund, focus on these three key elements:- Expense Ratio: A lower expense ratio means you retain more of your returns.
- Tracking Error: This measures how closely the fund tracks its index. Lower tracking error is better.
- Assets Under Management (AUM): A higher AUM provides liquidity and stability.
Small Investors’ Guide: Start Simple
For small investors, one well-diversified equity mutual fund may be enough.Consider starting with the Nifty LargeMidcap 250 Index, which is a blend of Nifty 100 and Nifty Midcap 150 in a 50:50 ratio.
- Zerodha Nifty LargeMidcap 250 Index Fund (Direct Growth) is a solid choice.
- For tax-saving, the Zerodha ELSS Tax Saver Nifty LargeMidcap 250 Index Fund (Direct Growth) offers dual benefits of growth and tax efficiency.
Optimal Diversification: Maximum of Four Funds
You don’t need more than four funds to build a well-diversified, non-overlapping portfolio. Here's how you can structure it:Large Cap:
- Nifty 50 or Sensex:
- UTI Nifty 50 Index Fund (Direct Growth) (OR)
- HDFC Index Fund Sensex Plan (Direct Growth)
- Nifty Next 50:
- UTI Nifty Next 50 Index Fund (Direct Growth)
Mid Cap:
Choose one:- Motilal Oswal Nifty Midcap 150 Index Fund (Direct Growth)
- UTI Nifty Midcap 150 Quality 50 Index Fund (Direct Growth)
- Edelweiss Nifty Midcap 150 Momentum 50 Index Fund (Direct Growth)
Small Cap:
Pick one:- Nippon India Nifty Smallcap 250 Index Fund (Direct Growth)
- DSP Nifty Smallcap 250 Quality 50 Index Fund (Direct Growth)
- Mirae Asset Nifty Smallcap 250 Momentum Quality 100 ETF FoF (Direct Growth)
Portfolio Construction Strategy:
For a balanced portfolio, I suggest the following allocation:- Nifty 50 or Sensex (40%)
- Nifty Next 50 (30%)
- MidCap (20%)
- Small Cap (10%)
Preferred Investment Platforms
I primarily use Kuvera for investing and redeeming, and keep MF Central as a backup to cross-check investments.For a consolidated account statement across all platforms, you can use this link: CAMS + KFintech.
Important Note: Avoid New Fund Offers (NFOs).
