Quite often I come across portfolios laden with too many funds. The common investor’s psychology and the reason they provide is that they are trying to achieve DIVERSIFICATION. So let’s try to understand this concept through a simple village story today.

Once upon a time in a small village, there lived a wise old farmer named Suresh. Suresh had a large farm where he grew a variety of crops, raised chickens, and tended to a small orchard. Every year, he would tell the village children the same story as they gathered around him during the harvest season.

“Children,” Suresh would begin, “have you ever heard the saying, ‘Don’t put all your eggs in one basket’?” The children would nod eagerly, for it was a lesson they all knew well. “It’s a simple idea, isn’t it? If you put all your eggs in one basket and the basket falls, you lose everything. But if you spread your eggs across different baskets, even if one falls, you’ll still have some eggs left.”

The children understood this easily. It made sense. Then one day, a curious boy named Arjun asked, “But Grandpa Suresh, if spreading eggs across baskets is good, wouldn’t it be better to use more and more baskets? What if we use 10 baskets or even 50?”

Suresh chuckled and patted Arjun on the head. “Ah, Arjun, you’re thinking like a smart investor now! But let me tell you another story to explain why that might not be the best idea.”

He took a deep breath and began. “Imagine you have ten baskets, and you carefully place your eggs in each one. But what if you had so many baskets that you could only put one egg in each? Imagine having 50 or 100 baskets! It would be hard to keep track of all those baskets, wouldn’t it? You might forget where you placed some eggs, and in the end, the eggs wouldn’t be safe at all.”

Arjun frowned, trying to understand.

Suresh continued, “Now, think of these baskets as mutual funds. When you invest your money, spreading it across a few funds is like spreading your eggs across a few baskets. It’s smart and helps protect you if one investment doesn’t do well. But if you invest in too many funds, it becomes hard to manage. You won’t be able to keep track of what each fund is doing, and you might end up with many funds that are all holding the same types of stocks.”

The children leaned in closer, eager to learn more.

Suresh smiled at them. “The truth is, mutual funds are already diversified. Each fund is like a basket holding eggs from many different hens—stocks from many different companies. If you have too many funds, it’s like having too many baskets that are all the same. Instead of protecting your money, you’ll just create more work for yourself, and you won’t gain much in return.”

Arjun’s eyes lit up as he began to understand. “So, Grandpa Suresh, it’s better to have just a few baskets with enough eggs in each, right?”

“Exactly!” Suresh exclaimed. “For most people, having three or four well-chosen mutual funds is just the right number. Any more, and you’re just making things harder for yourself without getting any real benefit. Remember, the goal of diversification is to protect your money, not to make things more complicated. Keep it simple, and you’ll be able to watch over your investments carefully and make sure they’re growing well.”

The children all nodded, feeling wiser from the story. They knew that whether it was eggs in a basket or money in mutual funds, it was important to find the right balance. And with that, they ran off to play, leaving Suresh with a satisfied smile, knowing he had planted another seed of wisdom in their young minds.

With this short story I hope I was able to convey my ideas well. If yes, please share your comments on my page. Or in case you feel I should write on some specific topics please do so.

On Monday 5^th Aug 2024 the market (Sensex) crashed by a whopping 2.7%. The reasons are several like the fears of a US slowdown, Israel-Iran tensions, sharp appreciation in the yen, etc.

It’s been a while since I have narrated a story to my readers. So, I thought of changing the narrative a bit today. To make you understand how the recent market changes impact you let’s go through this small story today and understand about a type of fund that might suit your appetite.

Once upon a time, in the bustling world of finance, there was an investor named Raj. Raj was a seasoned investor, always on the lookout for opportunities that could offer both growth and stability. He understood that every investment portfolio needed a strong core, something that could anchor it in turbulent times and adapt seamlessly to changing market conditions. But finding the perfect balance between risk and reward was always a challenge.

One day, while sifting through various investment options, Raj stumbled upon a unique type of fund—an Aggressive Hybrid Fund. These funds, once known as balanced or equity-oriented hybrid funds, caught his attention. They seemed to possess the exact qualities he was looking for in a core portfolio investment.

As Raj delved deeper, he discovered the secret sauce behind these funds. The fund manager had the power to skillfully balance the fund’s equity and debt allocation based on market conditions. By law, the equity exposure in these funds had to stay between 65% and 80%, ensuring a robust growth potential while still offering a safety net. Raj realized that this kind of fund would require minimal maintenance on his part, freeing up his time and energy to focus on the more active elements of his portfolio.

But, as with any investment, there were a few things to consider. Raj noted that with an Aggressive Hybrid Fund, he couldn’t dictate the exact mix of equity and debt. This could be a drawback for more conservative investors who might prefer a lower allocation to equity. However, Raj was confident that the dynamic nature of the fund’s allocation would suit his goals perfectly.

These funds are designed to deliver capital growth through a carefully crafted blend of equity and debt—a combination of growth and safety. The higher equity allocation offered the promise of high returns, while the debt component acted as a cushion during market downturns. Yet, he also understood that during a bull run, the debt portion might temper the fund’s performance, pulling returns lower than a pure equity fund.

What truly intrigued Raj was the low downside risk associated with Aggressive Hybrid Funds. Compared to other equity funds, these funds exhibited the lowest downside standard deviation—a measure of volatility that focuses on downward risk. This meant that during turbulent times, his investment would be less exposed to severe losses.

This is the reason I have brought about this point in times such as these where the market is in a topsy-turvy situation. An aggressive Hybrid Fund is an ideal candidate to form the core of an investor’s portfolio. It’s an investment that could stand strong through the ups and downs of the market, giving Raj the peace of mind to explore other opportunities. And so, with a sense of confidence and excitement, Raj decided to make this fund the anchor of his financial journey, knowing that it would guide him steadily toward his long-term goals.

The recent changes by the Finance Minister on July 23, 2024, eliminated the indexation benefits that allowed sellers of property and gold to reduce their taxable gains.

How Indexation Worked:
Suppose you bought a property for ₹ 40 lakh in 2015-16 and sold it for ₹ 80 Lacs before the recent budget. You were allowed to adjust the cost price of the property for inflation (using indexation), which would increase the cost price to around ₹ 57.16 lacs, according to the cost inflation index. The taxable gain of approximately ₹ 22.84 lakh would then be taxed at 20 percent, resulting in a tax liability of about ₹ 4.56 lacs. Refer to the illustration below.

Under the New Rules: – Without indexation, the property’s cost price remains ₹ 40 lacs when selling it for ₹ 80 Lacs. Thus, you will pay a 12.5 percent tax on the ₹ 40 lakh gain, amounting to ₹ 5 Lacs which is more by ₹ 44,000 here.

In summary, while the LTCG tax rate for properties held over two years (and gold) has been reduced from 20 percent to 12.5 percent, the actual tax liability may increase since sellers can no longer adjust their purchase price for inflation. The impact will vary depending on the specific purchase/sale price and timing.

For decades, fixed deposit instruments were considered the most preferred financial instrument for savings purpose for our grandparents and the older generations. In the mid-90s era the FD rates were a whopping 12% while when we moved to 2008-09 it was 8.38% and now it has dipped down to 6.5%

This is the worst time to invest in FDs. Their interest rates are at a multi-year low. The nationalized banks and other private banks are offering FD rates in the range of 6% to 7.2% per annum, depending on your tenure, and a touch 0.5% higher for senior citizens.

On the other side, the CPI (a macroeconomic indicator of inflation) inflation for May’24 was at 4.8% approximately. This means that you are losing your purchasing power by investing in Fixed Deposits with the effect of inflation too.

Let us understand this through an example. Assume you invest ₹ 10,000 for a year at the rate of 6.8% with a nationalized bank it will yield ₹ 10,680. But with the inflation coming into picture your real rate of return would be ((1+r)/(1+i)) – 1 = 1.908% which when multiplied by ₹ 10,000 will give you only ₹ 10,190.80.

This means that inflation ate away your additional return i.e., 680 interest earned through the bank minus inflation of 4.8% resulting in a loss of (₹ 680 – ₹ 190.80) = ₹ 489.20.

You should also note that the interest earned on a fixed deposit investment is subject to tax deducted at the source. Now, tell me with such a low yield product would you still want to invest in the FD product, or should you move to some other financial products which offers you better returns?

Now the next time when you think about FD think what you are doing with your idle money.

A couple in their early 40s asked me this common and yet important question. They stated that I would always provide them with boring advice and would ask them not to fiddle too much with their already balanced portfolio.

So, the question is have you always wondered when you should add a new company to your existing portfolio or when should I sell an existing stock from the current holding? The more important question is how should one judge the overall portfolio performance. Some parameters that you may generally consider are is the share price the best way to judge your portfolio? 

Most people do not appreciate adding more units of shares you have already bought in your kitty. Why so? 

The answer is quite obvious: It does not excite us. We think that buying something new or an exotic stock will prove to be more fruitful for us. But wait, have you ever thought that you are more likely to be well aware of the companies you already own, it is often a great use of funds to add to them. A good time to add is when there has been an improvement in profits or prospects of the company but the market has not recognized it yet.

Adding a new company 

Remember, there will always be a buying opportunity that can come up when the overall market is on a downward spiral (the bearish phase); when some sectors see a drop /or when some companies become attractive either in valuation terms or prospects or both. What should you do?

You should judge the new company against what you have already bought earlier, as that is the benchmark to beat. Compare the future growth prospects of this new company with that of your overall portfolio. If the new company is not better than what you already own, then it is not going to improve the performance of your overall portfolio. So, you should not consider buying it.

But, just in case this new company will improve your portfolio, then don’t try to time the market. Remember that a great business at a fair price is superior to a fair business at a great price.

Selling an existing company

Now, let’s come to selling an existing company. If a company is becoming weaker and is weakening your overall portfolio, then you should get rid of it. However, it would be best if you did not sell at the very first sign of trouble. Every company goes through its tough times and economic cycle. On the other hand, if you spot a better investment opportunity, you can consider selling the existing one.

Nevertheless, the only way you will be able to make the right call is by keeping track of the company after you have bought it. These are subjective decisions and you may not have all the information.

Don’t fall for this as I have usually come across so many investors who say let’s wait for the price to recover at least my purchase price. Remember, it will only delay the inevitable. Don’t do that.

How to judge your portfolio’s performance?

Only considering the share price movement is not the right approach. It has its weaknesses. In the short term, several factors lead to the fluctuation in the share price. So, simply following the share price can prove to be a quite costly affair for you. You might end up making a poor bad decision.

Now, you will ask what should be your approach. Use the operating performance or check the fundamentals of the company in the portfolio. This would give you a better perspective of reality than short-term price movements. However, price is important in the long term. Good performance almost always gets reflected in the share price movement in the long-term perspective.

Also, see your portfolio’s overall performance rather than that of individual outperformers and underperformers. Any portfolio will have those but what matters more is the aggregate return and not only the outliers.

Equity market is overheated and sooner or later we are supposed to see the meltdown. Everyone is quite enthusiastic by the returns they have been able to generate in the last 2+ years. Those who gave up during the Covid-19 Crash booked heavy losses and now they want to invest and avoid missing out on an opportunity.

So what has changed now? Is it time to book your profits? I have been saying this time and again, your asset allocation is the key to meet your desired goals in a systematic manner. If you look carefully at the Mid Cap and Small Cap mutual fund segment and the overall returns generated by them in the past 2 plus year or so its been an incredible journey. 

Now, the key take away – “always ensure that you should not allocate more than 25 to 30% of your overall portfolio into mid and small cap funds”. However, if you look carefully the returns generated by these segment of funds would have spiked and your overall portfolio balance would have changed from 30% to 45% approximately. This shift in your overall portfolio calls for trimming your positions in this space and restoring them to no more than 25-30 per cent of your equity fund portfolio. After all no-one knows till how long will the market continue to boom but periodically restoring your asset allocation helps keep the risks in check without actively taking a call on the markets. 

Mid and small-cap funds can supplement a long-term growth portfolio well by acting as a booster. They are a valuable addition in a measured quantity of no more than 25-30%. But because these funds rise and fall more dramatically, your allocations to them can sometimes go out of the window, requiring you to restore them. Think again if you are a game for such funds and avoid them if you fall into one of the categories mentioned below :- 

• Your investment horizon is less than 10 years
• If a fall (10 to 25%) in their returns shocks you
• You started investing now because someone one made money from them

As you deal with the trauma of losing a loved one, applying for a life insurance claim may become even more daunting a task if you don’t know how to go about it? Usually, in the Indian family people refrain from sharing the life insurance details with their immediate family members which gets even a more complicated issue for the dependents. One of the most important aspects one should consider  is the difference between the nominee and heir when it comes to insurance claims.

Remember, when it comes to a life insurance policy, there is a concept which is known as the beneficiary / the nominee. This provision was introduced in the Insurance Laws (Amendment) Act, 2015. If an immediate family member (parents, or spouse, or children) is made the nominee, then the proceeds will go to the intended person. Legal heirs will not have any claim on the money. Just in case the nominee is no more then the proceeds will go to the legal heirs.Remember, in the absence of a nominee, the legal heir can claim the insurance proceeds. “Apart from the claim intimation letter and other requisite documentation like death certificate, ID proof of the beneficiary, policy papers, discharge form (if any), post mortem report and hospital records (in case of unnatural death), the legal heir needs to submit the succession certificate issued by a competent court which establishes the right of the legal heir over the assets of the deceased policyholder, including the insurance proceeds. Just in case there are multiple legal heirs and only one is claiming the proceeds, then all other legal heirs need to agree and express their consent to the insurer for that. “The affidavit-cum-indemnity signed by all the legal heirs protects the insurer from similar and separate claims under the policy.

The legal heir can make a claim when there is no nomination in a life insurance policy any time before the maturity of the policy, or if the insured has not requested a fresh nomination in case of the death of the nominee or in case of death of the nominee after the claim is filed but before its settlement.

In case the deceased has more than one child and has not nominated all of them, a claim can be lodged only by the nominated child and the insurer shall pay the proceeds to the nominee only. Other children can stake claim to their shares by moving a competent court of law. So the next time you think about buying an insurance policy, better nominate someone and also try to make them understand what all is required under a life insurance claim. You never know life is so unpredictable these days.

Recently, I met a couple in their mid-30s. They posed an interesting question to me.

What should they do to increase their medical cover without paying much of a premium over and above their already running medical floater plan?

A reason for them being so worried was quite obvious, their parents recently had to undergo a huge medical bill due to their prolonged illness and they were managing it somehow for themselves through their savings! Now, what about these couples as they were employed in Private sector jobs with a very low group medical insurance coverage of ₹ 2 Lakhs!

The second problem was they were not earning a handsome salary package – despite all odds they had still managed to take a separate ₹ 3 lacs floater plan for their family.

Now that’s where a where a Top Up or a Super Top Cover comes into picture. Today I shall discuss the same in detail.

Health top-up plan, it might be a new term for most of you but then knowing it well will really help you in multiple ways. Basically, a health top-up plan is a type of additional coverage for those people who already have a health insurance policy. It enhances sum insured amount at a very reasonable premium. It improves your existing health insurance policy by providing additional health coverage.

A Top-up cover gets triggered once the deductible in the existing policy is worn-out. It is not compulsory to have a health insurance plan to buy top-up plan, but it is advisable to take a health insurance plan before choosing any top-up plan.

Let us simplify this more through an example to understand this in a better way. Suppose you have a health cover of ₹ 3 lakh and you now realized that it’s not enough to meet the needs of a medical emergency. Buying an extra cover of let’s say another ₹ 5 Lakhs means you have to shell out a big amount as a premium. This is where a health top-up plan makes sense. With a health top up policy, you can get additional cover at a low premium and it can save you a lot of money.

Consider the example of Mr. A who has a health insurance policy of ₹ 3 lakh. He is paying an annual premium of   ₹ 8,000.

Unfortunately for Mr. A, he is hospitalized due to a heart attack, the treatment for which goes up to ₹ 7 lakh. Now under normal circumstances, his policy would pay only up to ₹ 3 lakh and he would have to pay the additional amount from his own savings or investments. Now, if Mr. A had opted for a Top-up policy of ₹ 20 lakhs with a deductible limit of ₹ 2 lakh, this additional amount of ₹ 5 lakhs would be paid by his new policy, ensuring that he stays financially protected.

In simple words, a Top-up health insurance policy provides protection after the basic threshold limit under a normal policy is breached or I should say it gets exhausted.

A Top-up insurance policy has certain drawbacks when it comes to its implementation, which can be resolved by opting for a Super Top-Up policy.Unlike a Top-up plan which pays only if the threshold limit on a regular policy is exceeded on a single hospitalization, a Super Top-up provides cover over the threshold limit in multiple cases.Let us take the example of Mr. A again. Post treatment for his disease he suffers another health issue after 6 months, with the bill coming up to ₹ 8 lakhs, which comes outside the ambit of his top-up plan since only one claim can be entertained under its provisions. Now, if Mr. A had opted for a Super Top-up plan with a cover of ₹ 20 lakhs and a threshold of ₹ 2 lakhs, this plan would pay the additional sum of ₹ 6 lakh.

In simple terms, a Super Top-up Health Insurance policy has provisions for multiple claims, which are not offered by a regular top-up plan.

So next time when you think of increasing your health cover why not think about such plans. I hope I was able to clarify on the same.

This is quite an arduous task for most of the investors for whom I am writing this blog. Reason, is quite simple we have been reading this, listening to it but most often we do not follow this.

Most people end up buying more funds in order to enhance their returns but one reason that stands out is many investors feel that the more the funds they have, the better the extent of diversification.

 Please understand that the major purpose of diversification is to reduce your risk and not to boost your returns!! Sadly, we still chase returns and end up complicating our overall investments. Reason: We are greedy, we chase returns and, in the end, we find it really difficult to manage our overall portfolio.

Don’t forget that each of the mutual fund that you buy is a cluster of several stocks, so you are actually investing in all of them. Recently, I evaluated one portfolio where the person had bought 48 mutual funds and the number of underlying stocks in those funds were 917!! So, think hard and don’t make this mistake.

Try to exit such funds which are the underperformers – First, find out the funds in your overall portfolio that have been underperforming for quite some time now and then exit them.

However, a mere blip or a short-term underperformance should not be the reason to sell your fund. Check if the fund manager who had been managing the fund for a long while has moved out which as resulted in the fund behaviour. Take in to consideration the long-term performance vis-à-vis the given category of the fund which you are assessing. Also check the fund’s performance across the different market cycles.

Try to sell thematic or a sectoral fund in your portfolio – Such funds are really risky in nature and may behave quite erratically. Like the recent corona virus pandemic has benefitted the health care sector a lot. As the consumption and overall euphoria towards immunity building products increased, this led to higher sales and the companies benefitted a lot. Resulting in the sky rocket share price and the sector’s performance. Remember as this enthusiasm fizzles out, so will the returns.

Cut down on duplicate funds – If you have similar nature funds, you may want to keep just one of each type. For instance, if you have several large cap funds in your portfolio, you may want to stick to just one by doing so you do not duplicate the funds and will get out of the mess of managing a many.

Remember to follow the core portfolio approach: For instance, you can have two-three diversified fund or a set of balances funds for those not willing to take too much risks as your core portfolio holdings. To it you can add any other funds, such as a mid/small-cap or even an international one, as a supplementary fund. Remember, your core portfolio will command most of the money invested, while the satellite holdings like an international fund or a small cap or a sectoral/thematic fund will help give your overall returns a boost.

Remember, your returns are driven by the quality of your fund selection, not the quantity. So, having a four-five funds are quite enough for you till you decide to complicate your overall investment portfolio. Till then happy investing