Getting the right funds for your portfolio

By Morningstar |  30-10-18 | 

The Morningstar Investment Management team provides some guidelines, but recommends that all individuals consult their investment/tax adviser before making any investment decision.

I am 60 years of age. Retired. I would like to invest around Rs 1 crore. I receive a monthly pension of Rs 22,500 and interest on Rs 15 lakhs SCSS. This covers my monthly expenses. Kindly suggest the best way to deploy this with capital security. I need part of capital only after 3-5 years.


Given that your regular requirement is met on a monthly basis from pension and interest income, and considering you need part of money after 3-5 years; we would recommend investing 15% - 20% in large or multi-cap funds, 70% in short duration funds and rest in ultra-short duration funds. Short and ultra-short duration mutual funds typically invests in short maturity debt instruments where return is majorly in the form of coupon payment on those instruments, thus limiting the interest rate risk of the fund. The overall portfolio volatility would also be limited provided investments are predominantly made in debt mutual funds.

However, if capital security is a primary concern, then you may consider investing only in debt mutual funds. You may consider investing 70% in short duration income funds and balance in ultra-short duration funds. You should consider evaluating your risk profile / investment horizon based on which suitable asset allocation could be recommended. When selecting funds, it is advisable to consider their performance over at least the previous three years to five years. Additionally, you could consider the fund’s AUM (AUM should be greater than Rs 500 crore.) and period of existence (longer the better).

Which category is better for a retired individual: Equity Arbitrage or Debt funds?


Arbitrage fund is a type of equity fund where the fund manager tries to generate returns by identifying price differential in the cash and derivative market. These funds do not take a naked exposure in stocks as each buy transaction has a corresponding sell transaction. The fund manager creates a market neutral position by buying in cash market and selling in futures, thus arbitrage funds are less volatile and carry very low risk. Due to their return characteristics, market neutral nature and liquidity provisions, arbitrage funds are considered debt-like, acting as substitutes for savings accounts, liquid and ultra-short-term debt funds.

However, there is no assurance that the fund manager would be able to identify price differential on a consistent basis and generate return equivalent to that of liquid fund.

Debt funds on the other hand generate returns via interest income or coupon payment and capital appreciation / depreciation in the value of the underlying security due to changes in market dynamics.

The two primary sources of risk in debt funds are interest-rate risk and credit risk. Important aspects that one should consider before investing in debt or arbitrage funds could be investment horizon, willingness to take risk, taxation and liquidity requirement.

I am 57 years old. I want to invest a lump sum of Rs 2 lakhs in a mutual fund scheme. My time frame is up to 3 years.


Based on your age and short investment horizon of 2-3 years, we would recommend investing in ultra-short duration, short duration funds and a small portion in large cap equity fund. You may consider 90% allocation to debt funds and 10% to equity fund. Within debt space, you may consider allocating 60% to short duration funds and 30% to ultra-short duration funds. This could be deployed in 3-4 debt funds along with a large cap equity fund. However, we would recommend you consult investment/tax adviser before taking any investment decision. When selecting funds, it is advisable to consider their performance over at least the previous three years to five years. Additionally, you could consider the fund’s AUM (AUM should be greater than Rs 500 crore.) and period of existence (longer the better). To evaluate mutual funds across categories, one can look at Morningstar’s star ratings and analyst ratings for funds. This tool should help.

What are the right ETF Investment strategies for retail investors? When to invest in index ETFs? Should one opt for lump-sum investment or adopt an rupee averaging SIP style?


Exchange Traded Funds (ETFs) are essentially index funds following passive investment strategy that are listed and traded on exchanges. It’s a basket of stocks that reflects the composition of an index (benchmark) that it tracks. In India, available ETFs predominantly track large cap indexes, which could be considered as a substitute to investing in an actively managed large cap equity fund. There are other ETFs available on exchange such as gold ETF, government security ETF and liquid ETF. ETFs typically have low expense ratio; however, it also comes along with low liquidity on the exchange as the trading volumes are low for most of them. ETFs can be evaluated based on its tracking error (difference between ETF’s performance and index performance) to the index and expense ratio. Investor should ideally look out for ETFs which has got low expense ratio, low tracking error and reasonable liquidity on the stock exchange. One must consider investing in to equity or debt ETF after assessing his risk profile and investment horizon.

Given the strong performance of the equity markets over the last couple of years and the resulting rise in valuations, prospective returns seem to be slighter lower than previous years. In such a scenario, it might be advisable to invest through Systematic Investment Plans (SIPs) vis-à-vis lumpsum. In fact, SIPs allow an investor to deploy the principle of rupee cost averaging to take advantage of market volatility. When the net asset value (NAV) of a fund is high (typically when markets have risen) fewer units of a fund would be purchased from the investment amount and when the NAV is lower more units of a fund would be purchased with the same investment amount. Thereby, reducing the average cost of units purchased over a period of time.

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