Four products are all you need in your portfolio

With markets see-sawing, investors are not sure about which investment products to choose. The typical questions I get are:

1. Should I exit my equity mutual fund as it is giving negative returns?

2. Are debt funds really an alternative?

3. How do we invest in the current situation?

4. There are products giving guaranteed returns and better than bank fixed deposits, should one invest in them?

Generally, I find that investors tend to choose funds based on near term returns without realizing the risks involved. Most queries I receive are about midcap funds or if one should invest in gilt funds or international funds as these have been the best performing funds recently.

Thus, they find it difficult to live with volatility.

There are many portals that give a basket portfolio of mutual funds with the past five years’ returns mentioned. Investors invest blindly believing that these are the returns they will get in the future.

Then there are capital guaranteed products from insurance companies. They too show the last five years’ returns but forget to mention that these are the fund returns and not investor returns.

Investor returns will have the expenses deducted and would be much lower. On checking the illustration provided in the capital guaranteed insurance product, for a fund return of 8%, the investor return (XIRR) is 6.3% per annum for a 15 year period. A big price to pay for the capital guarantee is sub-optimal returns which do not beat inflation.

If you are confused about what to choose, firstly, choose based on your financial goals and investment horizon.

Here are four products that work for everybody in the good and the bad times:

1. Public Provident Fund – instead of choosing investment-linked insurance products that have high charges, you should invest in PPF, which gives a tax-free and risk-free return. Furthermore, there is no ambiguity in the returns.

2. National Pension Scheme (NPS) - One of the reasons, investors seldom track insurance returns is because they know they can access their funds only at maturity and hence they do not surrender policies at volatile times. NPS is a good product to bring in financial discipline and being a low-cost product with equity exposure, has the ability to help you build a good retirement corpus. NPS has many investment options, but if you are confused about what to choose, go with the auto option (aggressive choice) which allocates between debt and equity-based on age.

3. Short duration debt funds - Investors have been burned by credit risk funds and are shying away from other types of debt funds too. A short-duration debt fund provides a good mix of good quality medium-term bonds and comes with lesser risk as compared to gilt funds, dynamic bond funds, or credit risk funds.

4. Multicap Funds - Investors tend to churn equity investments between funds based on recent performance. Considering the volatility ( as measured by standard deviation), one would be better off in a multi-cap fund, which provides a diversified portfolio. You do not need to worry if midcaps or large caps are going to do better. This fund has a good balance of stocks of different market capitalizations.

For the investment horizon of the above 10 years, midcap funds should also be considered. A combination of two multi-cap funds and a midcap fund works well.

While it is easy to only consider returns while making the investment, the ability of the investor to stay invested is influenced by the volatility. Hence lower volatility investments should be preferred.

As George Soros Says “ Good investing is boring”.