How many funds are "too many" in a mutual fund portfolio? 

Less is good but there is NO magic number.

There is no such number at all. Some people say 3 or 4 funds are enough. Some others say 8 or 9 funds are sufficient. But for me, there should not be any hard numbers in mind while constructing an investment portfolio. One should remember, the more mutual funds one adds to the portfolio, the harder it becomes to manage, difficult to rebalance, and cumbersome to maintain the desired asset allocation.

Every fund should have a purpose in the portfolio

Important to remember that each fund should have a purpose in the portfolio and there should not be more than two funds from each mutual fund category. For example, please avoid having 5 Flexi Cap funds as you are unsure which one will perform in the coming years. You are most likely going to witness 2 among them over-performing, 2 underperforming, and 1 giving a “par” performance at a given time. It is rather better to keep an Index Fund from that category. E.g. For Flexi Caps (NIFTY500), For Large Caps (NIFTY50/100), etc. If you could not show conviction on your selection at bad times then actively managed mutual funds are not for you.

How much diversification is good enough?

As we become adolescents in our investment life, we realize the benefit of diversification across geographies and economies. In today’s day and age, as information is democratized and opportunities are easily available, we tend to start collecting overseas funds. And, it is good to have international exposure for the health of the portfolio, but one should keep a check on the number of funds.

Debt exposure to minimize the risk of volatility

We learn about the Efficient Frontier and rush to the plethora of Debt Fund Categories in an attempt to find a few debt funds to complement our Equity portfolio. After investing in Gilt funds, Credit Risk Funds, and Banking and PSU funds, we finally realize that Short Duration Funds are possibly the best match with Equity. While Debt Funds are a must for any matured investment portfolio as they provide us scope for periodic rebalancing from Equity by periodic profit booking when markets are high and investing when markets are low. However, too many debt funds kept as the vestiges of past innocence make the rebalancing process a nightmare.

Commodity investment as insurance against macroeconomic uncertainty

As we become even more mature and start grasping the dangers of rampant inflation due to the Fed’s money printing spree, and as by now we learned, owning gold can act as a hedge against inflation, we start investing in Gold which is good for the completeness of any portfolio. However, we start investing in Gold in 2 to 3 different ways. E.g. Sovereign Gold Bonds, ETFs, Mutual Funds, etc. Good in spirit but bad for maintenance.

Ideal Portfolio is a Myth

When we start getting familiarized with various investment styles and portfolio construction techniques, we eventually fall into the trap of eternally seeking a better portfolio. Every portfolio will have its day if we are patient. It is meaningless to endlessly chase a mythical ideal portfolio. Smart investors pick a portfolio and stick with it for ages.

Some portfolios are good, some are bad, and some are ugly but the number of funds has nothing to do with it

If an investor owns only 4 mutual funds but they are – two Midcap Funds, one Aggressive Hybrid Fund, and one Balanced Hybrid Fund for an undefined goal say, “Wealth Accumulation”, then it is a sorry state of affair although only 4 funds are there. Because the asset allocation of this portfolio could be hardly determined, it would be impossible to rebalance such a portfolio, and the time horizon is unknown for this investment so difficult to risk profile.

Another investor has a 10-fund portfolio for retirement with 70:30 asset allocation with 2 Large Caps (1 index, 1 active), 2 Multi Caps (1 Index, 1 active), 2 International (1 US Index, 1 China), 3 Debt Funds (2 Short Terms, 1 Gilt) and 1 Gold ETF. This could be a boringly diversified with 10 Fund portfolio but still it is a well-thought-out portfolio construction with some clarity of mind.

It could well happen that the first portfolio with 4 funds could give a better return. But that would not make that hotchpotch first portfolio that no asset allocation or diversification or risk management - a better portfolio. The point is, some portfolios are good, some are bad, and some are ugly but there is no "one size fits all portfolio" that is “Ideal.” and the number of funds has little to do with the quality of a portfolio.

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To summarize, there is no such universal “Ideal” portfolio. The more we get to know about asset classes and understand equity markets, debt markets, international markets, costs, index funds, etc., the more we tend to implement our newly learned skills into our portfolios. Some of these changes are good but overdoing anything is inevitably bad. Having a magical number of funds as a sign of an ideal healthy portfolio is a myth. It is better to look at the portfolio at the overall level and it is useless to have an imaginary magical number of funds in mind and try to comply with that number.

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Which index would be better for investment - Nifty 50 or Nifty 500?

Which index would be better for long-term investment - Nifty 50, or Nifty 500?

For me, NIFTY 500 is the preferred index to invest in. But it entirely depends on an individual’s risk profile and investment horizon.

NIFTY 50: Flagship Indian stock market index that represents the weighted average of the top 50 largest Indian companies listed on the National Stock Exchange (NSE).

NIFTY 500: It represents the top 500 Indian companies from the universe of around 2000 companies listed on the NSE. This index intends to measure the performance of the broader Indian market.

✓ Per NSE data, among 2000 companies listed on NSE, The NIFTY 50 Index represents about 66.8% of the free-float market capitalization vis-à-vis NIFTY 500 Index represents about 96.1% of the free-float market capitalization.

✓ Per NSE data, the total traded value of NIFTY 50 index constituents for the last six months ending March 2019 is approximately 53.4% of the traded value of all stocks on the NSE vis-à-vis 96.5% for NIFTY 500.

Before you choose which index funds to invest in let us ask ourselves which category of active funds you feel most comfortable investing in - Large Cap MFs or Flexi Cap MFs?

➢ If you are risk-averse and have traditionally invested in Large Cap Funds then NIFTY 50 or NIFTY 100 are good options for you in the passive space.

➢ However, if you like to take a slight risk in want of generating a slightly better return, or wish to invest beyond Blue chips, in emerging companies where growth opportunities are higher or if you have traditionally invested into Flexi Caps/ Multi Funds, etc., then NIFTY 500 index fund is a better option in passive space.

§ Comparison of constituents: NIFTY 50 vs NIFTY 100 vs NIFTY 500

	NIFTY 50	NIFTY 100	NIFTY 500
Giant (%)	87.93	77.20	59.15
Large (%)	12.07	21.40	19.52
Mid (%)	-	1.40	17.87
Small (%)	-	-	3.45
Tiny (%)	-	-	-

Source: As seen in Value Research Online on 09-Jun-2023 

So grossly speaking, NIFTY500 is 75% identical to what NIFTY 50 is. If invested into NIFTY 500, the extra 25% exposure into Next 50, Midcap, and Smallcap companies absent in NIFTY50 could generate a slight extra return at the expense of slightly higher volatility during the holding period.

Similar tactics of adding some mid-caps and small-Caps in the portfolio are often used by fund houses while constructing portfolios of diversified long-term equity portfolios e.g. Flexi-cap MFs vis-à-vis Large-cap MFs. To establish the analogy of investing in Large-cap Active MFs and Flexi-cap Active MFs, I would like to showcase the below table. Please notice the higher exposure in Mid-caps and Small-caps that the same fund house has taken in their Flexi-cap MFs in comparison with their Large-cap MFs presumably in the hope of slightly better return. 

	ABSL Frontline Equity (Large-cap)	ABSL Flexi-cap	Franklin Blue-chip (Large-cap)	Franklin Flexi-cap	SBI Blue-chip (Large-cap)	SBI Flexi-cap
Giant (%)	66.71	51.38	72.44	52.24	59.74	54.19
Large (%)	21.71	21.17	21.70	23.08	27.58	21.08
Mid (%)	11.58	23.31	5.86	16.89	12.68	21.81
Small (%)	-	4.13	-	7.78	-	2.93
Tiny (%)	-	0.01	-	-	-	-

Source: As seen in Value Research Online on 09-Jun-2023 

And indeed better return expectations were met by Flexi-caps in long time horizons (please see picture-A below). It is to be noticed, that for 3-year and 5-year trailing returns, the Flexi-cap MF of a respective fund house has not been able to consistently beat the Large-cap MF of that same house, but when invested for a decade, all three fund houses' Flexicaps have beaten Largecaps of the same fund house consistently.

I have randomly selected three old fund houses that have decade-long performance history. The point is, despite having the same equity research team inputs and market outlook of the same fund house, the Flexi-caps beat the Large-caps by taking slight Mid-cap and Small-cap exposures when invested for the long term.  

Picture A: Traling return comparison of 3 years, 5 years, and 10 years for Flexicaps vs Largecaps. 

Does it mean that NIFTY500 index funds will always outperform their peer of NIFTY50 index funds? 

Unfortunately, there is no such guarantee. 

§ Comparison of Returns: NIFTY 50 vs NIFTY 500

o If we take a long-term view like that of a decade, we find most of the time the NIFTY 500 is beating the NIFTY 50 fair and square. (please see picture B)

Picture B: Nifty 50 vs Nifty 500 Chart between 2013 and 2023 - 10 year performance comparison. (As seen in Yahoo Finance on 09-Jun-2023)

o However, if we check the rolling returns of time windows even 5 years long, we might find times when NIFTY 50 has produced better returns. (please see picture B)

Picture C: Nifty 50 vs Nifty 500 Chart between 2018 and 2023 - 5 year performance comparison. (As seen in Yahoo Finance on 09-Jun-2023)

The stock market is all about market cycles, so if we do a point-in-time analysis for a short period of time ( ~ 5 years), it is basically anybody’s game and it is impossible to predict which one will give a better return in the short term. Generally during Bull Runs, the broader market will outperform hence NIFTY 500 will do better. And during the period of consolidations, NIFTY 50 will do better.

👉 NOTE: We should not blindly equate volatility i.e. numeric std. deviation to Risk. NIFTY 500 is more diversified than NIFTY 50, hence less risky from a diversification point of view. But practically speaking, the risk is more or less similar for both. Please notice the pattern and close correlation of NIFTY 50 and NIFTY 500 charts so the emotional experience will be more or less identical.

If we try to think of 15/ 20 years ahead in the future and if we are ready to stomach some interim volatility, it makes sense to invest in NIFTY 500. Just like most Flexi-cap funds, investing in NIFTY 500 is mostly investing in Large-cap stocks with marginal exposure to Mid-cap stocks and Small-cap stocks in strict moderation.

The first and only NIFTY 500 index fund was launched by Motilal Oswal recently in Sep 2019. There are two BSE S&P 500 index funds as well but they were launched even after Sep 2019. With limited historical performance data available, there is no point in comparing returns of say UTI Nifty Index Fund vs these funds. We have to compare their performances after 10 years.

At the end of the day, index investing is nothing but investing in the future of the country’s economy (as we eliminate the selection risk of active funds). Many experts feel that the fifty biggest companies are a really narrow universe to represent the full vibrancy and churn in the Indian economy. A broad market-based index like the NIFTY 500 is a much better and closer reflection.

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Best Tax Saving Mutual Funds to Invest in 2023

Best Tax Saving Mutual Funds to Invest in 2023 

Every year I used to look at the 5-star ratings and study the best trailing-return generators for the last 3 years, and 5 years and select a tax-saving mutual funds to invest in for that year. But next year, to my horror, I used to discover a new set of tax-saving mutual funds at the top of the list and I used to invest there. And this exercise continued year after year. My search for the best ELSS became eternal and I ended up collecting a lot of mutual funds. Then I decided to dive deep into historical data and ponder - What is best? Why am I perpetually unhappy?

Jack Bogle, founder of Vanguard and credited for the introduction of Index investing, once said all performance should be measured in terms of a decade and nothing short of a decade. Hence 10 years of a comparative study of consistency vis-a-vis trailing returns.

For the analysis, I have used performance data for the last 10 complete years meaning starting 01-Jan-2013 to 31-Dec-2022. Data points are collected from Value Research and Money Control. Used regular plans as direct funds were introduced much later and 10 years of performance data were unavailable. Funds that don’t have 10 years of performance data are not considered.

👉 Am I among those who consider funds that gave stellar annualized returns in the last 10 years to be the best?

Here is a list of the funds that generated the most annualized return over a decade. Condition used is above 80 percentile of 10 years of Trailing Ret(%).

👉 Am I among those who consider funds that consistently performed year after year for the last 10 years to be the best?

Here is a list of funds that are found to be in the Top 2 quartiles in 8 years for the last 10 years.

💡 Shockingly I finally realized, there is no intersection. Those who gave stellar returns in the long term are not top-ranked in terms of consistency. And conversely, top-notch consistent performers are not top trailing return generators.

➢ Learning 1: We expect high-return generators to be consistent and perform consistently in all market cycles. Not going to happen. We invest in Mutual Funds lured by their Trailing Returns and start whining the year it gives a below-average performance. Consecutive two flat years, we sell invariably not realizing market cycles and we make sure that we get an underwhelming overall return.

➢ Learning 2: Those who have problems with frustration management could invest in consistent funds. They would not have the problem of premature selling. However, those who obsess about consistent returns/ rolling returns, invariably compromise on long-term superior return generation in the want of constant performance.

➢ Learning 3: If we agree to compromise a little on both trailing annualized return and consistency, we might strike an optimum balance and get decent consistent performers with above-average returns. However, there is no perfect balance, it depends on the personality trait of an individual.

$ Lowered Return expectation (avg. yearly return) from top 80 percentile to top 70 percentile- just a notch
$ Top 2 Quartile Return Generation for at least 7 discrete calendar Years (rather than 8 Years) out of a total of the last 10 Years.

Now, we have 4 funds to choose from. This is a sweet spot for most, the proverbial "Best of Both Worlds".

§ Quant Tax Plan, DSP Tax Saver, and Axis LT Equity are more into the superior long-term return and are decent but not superb in consistency.

§ JM Tax Gain is more consistency oriented however it provided above-average if not top-notch annualized returns.

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* Discrete yearly returns and 10-year trailing returns are as seen at Valuer Research Online and Money Control respectively.

* Used data for the last 10 complete years meaning starting 01-Jan-2013 to 31-Dec-2022

* Included NIFTY 500 TRI for benchmarking purposes only.

Not a perfect balance for you? How do I get all these tables? How can I get these stats for the ELSS where I invest?

Go to my Tableau Public dashboard page and play around with data to discover "Best for you ELSS" and NOT "Best ELSS". Go full screen on a monitor/ laptop for the best immersive experience. All the screenshots are from there. Built by “Yours Truly”.

https://public.tableau.com/app/profile/avishek.bhattacharya8170/viz/BestELSSMutualFunds2023India/MyBestELSS

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Please don’t complain saying why is no Parag Parikh Tax Saver, or Mirae Tax Saver? They don’t have 10 years of performance data available. Once upon a time, Motilal Oswal was also a new entrant instant super hit. Now time is different. Consistency and performance over the long term is a different ball game.

So much is my obsession with decade-long performance study, I used regular plans return numbers as direct funds were introduced much later in 2014. However, for investing one should always use Direct Plans.

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Why I avoided ET Money Genius for investment?

"ET Money Genius is a personalized intelligent investment service that creates and recommends an investing plan that is most suitable for investors. It allocates money in different asset classes that help you achieve high risk-adjusted returns. It keeps track of the market dynamics and rebalances your portfolio accordingly. As a result, it continuously manages your portfolio risk. It delivers market-beating returns consistently. And it also protects your portfolio downside. Therefore, ET Money Genius removes the need for investors to evaluate, review, allocate and rebalance their portfolios. And it does all this heavy lifting on behalf of an investor in an automated and disciplined manner."

Source: Everything You Should Know About ET Money Genius

However, I believe ET Money Genius would be pricy for 90% of retail investors although it invests through low-cost ETFs. It uses index ETFs for passive investing but takes active monthly buy/ sell calls. Go figure!!

Under the hood, the Mutual Fund option of ET Money Genius is nothing but a dynamic asset allocator fund that are around for years but invests in low-cost ETFs/ Index Funds behind the scene and rebalance them monthly based on ET Money’s market outlook.

However, with a flat rate of ₹250/month, it is more expensive than most available mutual funds (forget asset allocator funds) at least for most retail SIP investors. To get a 1% expense ratio, one has to invest at least ₹25,000/month. And, expense ratios of reputed AMCs who have a history of actually delivering returns are as follows:

• HDFC Asset Allocator Expense Ratio:0.05%
• ICICI Asset Allocator Expense Ratio: 0.07%
• Kotak Asset Allocator Expense Ratio: 0.20%

ET Money Genus merely claims return % based on backtesting on known historical data when it could be a result of overfitting. It needs stress testing when in practice in real-time market situations.

Coming back to the price point, for someone who is doing a minimum SIP of ₹5,000/month in Genius, let’s see the expense ratio of ET Money Genius:

Cost: ₹250*12 = ₹3000/-; Investment: ₹5000*12 = ₹60,000/-

Exp Ratio: Cost / (Actual + Possible Investment) => 3000/ 60000+3000 => 0.0476 => 4.76% + * 😵

*Not to mention, the underlying instruments ETFs/ Index Funds have expense ratios of their own and moreover there are transaction costs for frequent rebalancing i.e. monthly.

For someone who is doing a SIP of ₹15,000/month, let’s see the expense ratio of ET Money Genius. ₹3000/₹183000 = 1.63%. + ETF Exp Ratios + Transaction Charges

For someone who is doing SIP of ₹25,000/month, the tentative expense ratio of ET Money Genius is ₹3000/₹303000 = 0.99%. + ETF Exp Ratios + Transaction Charges

How you could bring down the expense ratio to 0.05% or less?

To bring down the De-facto Expense Ratio to the level of 0.05% similar to that of Asset Allocator Funds, how much to invest per year?

₹3000/ x = 0.0005 => x= ₹60,00,000 i.e. ₹60 L. Then SIP has to be ₹60L/ 12 = ₹5L per month. 😵

To be fair, if you have a portfolio of ₹60 L and you are willing to reinvest the complete amount through ET Money Genius by incurring LTCG/ STCG taxes, then in theory, you could get an expense ratio of 0.05% or less.

How many investors have 60L laying around to invest in ET Money Genius from Day 1? So, ET Money Genius is pricy for 90% of retail investors but it invests through low-cost ETFs for passive investing by taking active monthly buy/ sell calls. It is full of contradictions.

To be noted, ET money does risk profiling, personalizes asset allocation, and helps in periodic rebalancing. Undeniably, they are important for new investors but 4.76% expense ratio is unjustifiable when SEBI capped the expense ratio to 2.5% for any mutual fund.

I am a fan of Shankar Nath/ ET Money’s insightful video series on mutual funds, stock investments, NPS, etc. for spreading investor awareness but I am not paying that premium every month to buy their latest obsession rather I would invest that extra ₹250/- per month in a low-cost index fund.

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