Investing secrets: Keep it simple

Sometimes attempts by the regulator to simplify life for investors ends up complicating it

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After giving some serious thought to what we have learnt from studying, analysing and writing on mutual funds over the last two decades, we found some insights on mutual fund investing that seem to hold good for all times. Here's the sixth one.

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Sometimes attempts by the regulator to simplify life for investors ends up complicating it. SEBI's October 2017 diktat asking all fund houses to sharply define their mandates and stick to 36 pre-specified categories is one such move. While the move has certainly ensured truth in labelling and established a level-playing field between funds in the same category, it has created rather a large number of choices for newbie investors.

But you needn't worry about featuring all those fund categories in your own portfolio. Here's a simple way to cut away the clutter. In equity funds, though there are 10 categories, you can construct a very sound equity portfolio with just two categories. For your equity allocation, consider only multi-cap funds and ELSS funds. If you can take on extra risk for higher return, you can go for mid/small-cap funds.

Debt funds are a bewildering asset class to start with but choosing them becomes easier once you recognise that SEBI has tried to distinguish funds on three key parameters - portfolio duration, the kind of debt securities held and credit risk taken. On duration, SEBI has divided debt funds into nine buckets in place of the existing four. There's now a debt category for every maturity profile, from parking overnight money to investing in seven-year plus securities. The existing dynamic-bond fund category has also been retained. But debt investors who are simply looking for a parking ground for their safe money should stick mainly to short-duration debt funds for low-volatility returns across the rate cycle. If you are looking for a bank FD or a corporate FD substitute, corporate-bond funds offer good alternatives, where you make limited compromises on credit quality. They are required to invest 80 per cent in highly rated corporate bonds.

There are six types of hybrid funds now on the menu. But if you are a more conservative investor looking to set up retirement income or invest towards a five-year goal, aggressive hybrid funds may still be your best bet. The minimum 65 per cent equity exposure also ensures that they get equity treatment for taxation of their short-term and long-term capital gains. Conservative and balanced hybrid funds may be suitable for more risk-averse investors, looking for a small equity kicker on top of their debt returns. But they do not enjoy equity tax benefits and are taxed on the lines of debt funds.

To read the other stories in this series, click on the links below.

Timing isn't that important

Four-year SIPs don't disappoint

Don't follow trends

Diversify right

Labels don't matter

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