What should be the core fund for your portfolio | Why does it matter? | How to pick it?

in school my favorite subjects were social studies Hindi and English I especially had trouble with maths and science but thanks to my core interest My overall results were good enough that time I realized that I didn't have to be outstanding in everything I did if my core areas are solid I will do well but why are we talking about all of this hello and welcome to the 80 Money Channel today we are going to talk about the core fund for your portfolio foreign [Music] fund is the main fundinger portfolio so its performance drives the overall performance of your portfolio a core fund need not be a single fund it can even be a couple of funds but why do you need that can't you have a few funds of various types say flexi cab mid cap small cap and just divide your money across them now well there is no single way of managing or building a portfolio the core satellite approach is among the most popular philosophies in the investment world now in this approach you have a couple of core funds which command a large part of your portfolio and then a couple of satellite funds the core funds take care of the returns and the stability and the satellite funds help boost the overall returns or help diversify better now in this video we will examine which categories of funds deserve to be your core fund this video is divided into three sections number one why does a core fund matter for a good portfolio number two what are the attributes of our core fund and what categories can qualify as core funds number three among the categories that qualify which is the best option so without much delay let's begin [Music] having a core fund or funds has many advantages first a core fund takes care of both the stability and returns of your overall portfolio these satellite funds can then help boost returns or diversify better second it keeps you focused you know exactly where to invest across Market phases if you don't have a core fund it's easier to get lost for instance from time to time many fats become popular and investors may want to chase them it could be an investment theme such as infra housing or Healthcare or it could be small and mid cap segment that has suddenly started to race if you have a core fund you know exactly where to invest and it can prevent you from getting lost you know the fund that lies at the center of your portfolio and you know that you need to primarily invest in it no matter what's hot in the market so you're not tempted to flip funds depending on the market conditions third it helps keep things simple if you can't spend much time tracking and tracing your portfolio investing just in core funds can help you achieve your goals in this case you can do without the satellite funds fourth if you are an adventurous investor it provides you the flexibility to experiment with your satellite portfolio with the core of your portfolio being taken care of even if some of your satellite funds don't deliver as expected you would still be largely fine so overall having core funds in your portfolio can ease portfolio management and help you achieve your goals more efficiently but which funds qualify as core funds let's see but before we begin a quick thing just like getting your funds right is important so is having the right term and health insurance please make sure your dreams and wealth are protected from life's uncertainties and that's why on 80 money we have hand-picked term and health plans from Top insurance companies you can easily compare and buy them on the app and if you need any help our insurance experts are Just One Call Away now let's continue foreign [Music] category has to act as your core fund which address should it have in our view our core fund should have two attributes number one it should be able to generate good returns as well as provide stability to your portfolio number two it should have minimal restrictions as to how it can invest Now by good returns we mean your returns must be similar to a broader index like nifty 50 or better than that by stability we mean limited volatility or ups and downs in your portfolio but why should a core fund have a greater freedom to invest which is our second requisite because skewed mandates can increase portfolio risk and limit the benefits of diversification if a fund must pick stocks of a certain kind only it will only do well when stocks of that can do well for instance our sectoral fund will do well only when the stocks of that particular sector do well if they don't and that to for an extended period your returns could suffer worse if those stocks perform poorly the fund will also do poorly thanks to its concentration in such stocks this is not something we would like to see in a core fund hence we chose to pick only those fun categories with considerable freedom to invest anywhere now the next question we have to answer was which category of fund should qualify as core funds should it be from Equity or debt or hybrid category now it's well known that Equity has the best return potential and if you are in the accumulation phase it has a crucial role in your portfolio so we decided to consider the Equity Fund category this is not to say that debt funds or hybrid funds can't be core funds a debt fund can be a core Fund in a retirees portfolio and if you're looking for automatic asset allocation even a hybrid fund can be a core fund however we will limit our discussion to Equity Funds as they are the Natural Choice in the accumulation phase now there are 11 Equity Fund categories so which should qualify as core funds recall the two criteria that we just discussed the fund should be able to generate good returns while ensuring sufficient stability and it should have considerable freedom to invest now when it comes to stability large cap stocks tend to be the most stable so we decided to pick only those categories that have a large cap allocation of at least 50 percent also we decided to exclude those categories that are mandated to invest only in a specific type of stocks such categories have limited freedom to invest now let's look at various Equity Fund categories and find out which ones qualify out of 11 categories six couldn't qualify these include mid cap small cap multi-cap dividend yield value or Contra and sectoral automatic these categories either had a large upper location of less than 50 percent or some sort of restriction on their investment mandate for instance value or Contra funds must invest primarily based on the value or contrarian theme sectoral and thematic funds must invest in a particular sector or a theme so the categories that qualify include large cap large and mid cap flexi cap alss and focused now these funds typically have a large cap bias and minimal restrictions on their investment philosophy elss or tax saving funds are sort of miscellaneous here these funds have a lock-in period of three years and are widely seen only as a tax saving solution that said for those who major Investments are Investments only alss can be an excellent option to build wealth save tax and act as the core fund of their portfolio and that's why we have included them in our study now let's compare these five categories across various risk and return metrics and try to see which is the best [Music] to measure returns let's use a parameter called rolling returns rolling returns measure performance across all specified time durations and ends indicate consistency of performance now since sebi's reclassification exercise happened only in 2017 after which many funds change their mandates and the funds within a category became comparable let's take three year Rolling returns between January 2018 and July 2023 this means all three year periods within these dates here is how the five categories compare in terms of three-year average rolling returns we have also included the nifty 50 index for comparison purposes now Focus funds are at the top followed by large and mid cap funds flexica funds and alss large cap funds are the worst performance they have done even worse than the nifty 50 index okay because we are talking about returns it would be worthwhile to see which category has delivered the highest three-year rolling returns here large and mid-care funds appear at the top elss fund secured the second spot Focus ones which had appeared at the top earlier are in the second last spot the nifty 50 Tri is ahead of three categories so this was the return picture of the five core fund categories now what about the volatility of these returns to measure that we use a parameter called as standard deviation the higher the standard deviation the higher the volatility we looked at the standard deviation of the three year Rolling returns as you can see focused ones have exhibited the lowest ups and downs with its standard deviation being the same as Nifty 50. next come large cap funds followed by flexic app funds large and mid cap funds and Els funds have proved to be most volatile now another parameter that we can use to check downset protection is the minimum three year Rolling returns Focus once I've done a decent job here too large and mid cap funds and flexicar funds come next large scale funds and the nifty 50 index have fed poorly across this metric so have elss funds now what does this data tell us well if we see both the average returns and the volatility Focus funds clearly Stand Out These funds have delivered higher returns at lower volatility this is quite interesting as Focus funds are likely riskier given that these funds are mandated to invest in no more than 30 stocks however in reality as of now this doesn't seem to be the case large cap funds have failed to outperform the nifty 50 index both in terms of average returns and volatility flexi cab funds lie right in the middle both in terms of risk and return and given their High mid cap exposure large and mid cap funds exhibit a higher risk return profile elss funds have exhibited higher ups and downs for comparatively lower average returns so which category should you pick let's find out [Music] well this is the risk and return picture of various core funds surely you can use it to pick the right funds however if you are building a portfolio you will need to move Beyond returns and focus on the broader picture let's see each of the core fund categories and assess for whom they are suitable let's start with large care funds large care funds have low risk low return profile they are suitable for someone who doesn't want too many ups and downs in their core funds however given that most active large scale funds are finding it difficult to beat the nifty 50 index it would be better to go with an index fund rather than active large scale fund index funds have another Advantage they take the burden of picking the right type of fun off your shoulders when you pick an index fund you know you will get the market like returns and if the market does well so will you and if it doesn't you won't either so in a way they relieve you from the anxiety of going wrong with your fun pick next come large and mid-care funds large and mid cap funds are the aggressive choice for core funds given their High mid cap allocation you can offer them when returns are your primary focus however if you have a separate allocation to Mid and small cap funds in your satellite portfolio you can do without them large and mid cap funds in the core portfolio and mid cap and small cap funds in the satellite portfolio can increase a portfolio's overall risk as mid and small cap funds tend to be more volatile let's not talk about flexi cap funds funds are classic go anywhere funds these funds have exhibited moderate risk and reward and hence can be a good complement to most portfolios if you're not sure which fund you should pick as your core fund you can simply pick up flexigraph fund or if you think that your fund manager must have complete freedom in picking stocks flexic app funds are the right choice however if returns are your primary consideration you have better options than forexica funds next comes alss or tax saving funds these funds can act as a core fund for anyone who is looking to save tax and build wealth however if you don't have tax saving as a requirement or you have opted for the new tax regime These funds could be of limited use that said their three-year lock-in could be beneficial for investors who tend to sell out prematurely and find it difficult to stay put and last but not the least focused funds Focus funds have emerged to be the best among all core funds they have managed to deliver good returns while containing volatility as such they are suitable for any portfolio however if the concentration of these funds can make you uncomfortable you can look at their more Diversified flexic appears so these are the broad guidelines that you can use to pick funds for your core portfolio these are summarized in the table on your screen of course you can have funds from more than one category depending upon your requirement for instance an alss fund for tax saving and a larger Medicare fund for its return potential could be a possible combination if you want a combination of active and passive you can invest in a nifty 50 Index Fund along with a flexi cap or a large and mid Cap Fund as we discussed earlier you can choose to focus just on the core portfolio and leave the satellite portfolio all together but before this video ends you must remember one important thing when you are holding more than one fund at the core of your portfolio ensure that they are from different fund houses it is critical to diversify across fund houses from the same fund house could hold similar stocks for example a focused fund and a flexica fund from the same fund house could have more than 80 overlap if this happens both skins will give you similar returns and there'll be no point investing in two different funds a 30 to 40 overlap is not that alarming but avoid if the overlap is higher we will leave a link in the description that will help you check portfolio overlap with this we have come to the end of this video we hope you found it useful and if you did please share with your friends and family and don't forget to subscribe to our Channel and press the Bell icon and I'll see you with a new video soon till then take care mutual fund Investments are subject to Market risks read all scheme related documents carefully

Channel: ET Money

Views: 41,024

Keywords: The core fund for your portfolio, main fund in your portfolio, single fund in your portfolio, core-satellite approach for fund in your portfolio, core satellite portfolio, core satellite strategy, core satellite investing, how to use a core-satellite approach to invest, couple of satellite funds in portfolio, core funds, core satellite funds, core fund for good portfolio, attributes of a core fund, core fund benefits, core fund advantage, best core fund category

Id: SGD5yjAykIU

Length: 14min 34sec (874 seconds)

Published: Thu Aug 31 2023