The minimalist investor and focus on simplicity

The investment management industry has come a long way over the last three decades. The first mutual fund launched in the late 1980s and today there are not hundreds, but thousands of mutual funds in the industry today. In addition to mutual funds, there are Stocks, PMS, AIFs, ULIPS. All these acronyms have added choice but also complexity in decision making for investors today.

The mutual fund industry itself has over ten categories in equity and debt each and selecting the right category of a mutual fund can be more than difficult. If investors think equity is complicated - debt is even more cumbersome and hard to understand. A lot of investment professionals will have a hard time trying to differentiate between categories in the debt segment.

With the rising complexity - what should a minimalist investor do? How does one navigate the complex world of investment management if someone is looking for simplicity and efficiency?

Before that, let’s clear some important don’ts for any investor today.

How many equity mutual funds should I invest?

For the minimalist investor - less is more. There is no minimum number of funds an individual should own. Yes, one single fund is also sufficient. However, - investors should not hold too many equity funds. A maximum of 5-7 funds is advised. Anything beyond that - and your portfolio starts reflecting market average. Your portfolio will begin to mirror the index.

What about debt funds?

For a minimalist investor- liquid funds do the job. They do better than bank accounts and are protected from capital loss.

Investors mustn’t chase higher yields. That leads to two things 1) buying risky securities 2) buying long-dated debt products which are at times more volatile than equity products. It’s important to remember - debt funds are there to provide capital protection, not there to offer high returns. It’s an alternative to bank accounts.

What about other asset classes?

A minimalist investor is generally happy with debt and equity. Gold has certainly done well, but it’s hard to predict the performance of a non-performing asset such as gold. International equity is an excellent asset class, and investors should pick a global fund in their portfolio. It reduces portfolio volatility and gives good diversification.

Index funds make things easy.

A minimalist investor prefers Index funds for their simplicity in the fund selection process. They have become popular in more developed economies in the west but are starting to get traction in India too. With index funds - the investing horizon goes from thousands of funds to less than ten options. An investor can invest and forget as performance will never be poor and over the long periods - a low expense ratio will ensure more money in working for the investor.

A minimalist investor’s portfolio

A minimalist investor’s portfolio can potentially be a combination of three funds: a liquid fund, and two index funds (one domestic and one international). The S&P500 index is the world’s largest, most popular and simplest index fund out there. With over 40% of the sales coming from outside the US - the S&P500 can be seen as a global index fund. In India - the Nifty 500 is probably the best index in terms of coverage. It covers over 95% of India’s stock market - giving the investor equity as an asset class in one fund. The Nifty 50 is good but only covers half the large-cap index—the Nifty 500 covers large-cap, mid-cap, and small-cap stocks. Over long-periods - index funds tend to fare better than most other funds due to cost savings.

The unique combination of the S&P500 index and the Nifty 500 index takes out fund manager, geographical, size, and sector risk from the investing process - all at the low cost.

How much to allocate to both funds?

An 80% allocation to Indian equities and a 20% allocation to international investments is a favourable portfolio to have for an Indian investor. Yearly rebalancing ensures allocation is the same. Rolling returns are a slightly better metric than annual returns.

The debt portion is dependent on the investor risk profile. An aggressive investor can have 60-80% invested in equity, whereas a conservative investor should have a 30-40% allocation to equity.

In conclusion - three funds combined in the right mix is enough for the minimalist investor. The question is that will the minimalist investor do well in return terms? Good long-term returns come from 90% discipline and 10% fund selection. If discipline is maintained - then a resounding yes.