Mutual Fund Strategy: Planning mutual fund investments is not just about choosing one category and expecting it to meet every financial need. Different funds can serve different purposes in a portfolio and may help investors balance growth, stability and diversification.
In a conversation on Zee Business, Pankaj Mathpal, Managing Director at Optima, and Kalpesh Ashar, Founder of Full Circle Financial Planners, explained the role of five key categories—equity, debt, hybrid, gold and index funds.
1) Equity funds: For long-term growth
Mathpal said equity funds have the potential to help investors achieve long-term growth.
However, he stressed that investors also need to stay committed to their investments.
“All funds can help you, but you will also have to stay with them. If you leave midway, then even if they want to help, they will not be able to,” Mathpal said.
He said equity funds can become important for long-term financial goals because expenses can rise with inflation and investors may need more money to meet their future requirements.
“Equity funds have the potential to provide good growth,” he said.
Mathpal added that among equity categories, mid-cap and small-cap funds may offer greater growth potential than large-cap funds because smaller companies can grow, expand their businesses and become larger over time.
“If you want such a category that stands by you in the long term when you need money, then mid-cap and small-cap categories can be considered among the best categories,” he said.
2) Debt funds: For stability and discipline
If equity is the growth-oriented part of a portfolio, debt funds can play the role of providing stability, according to the experts.
Ashar compared debt funds to the disciplined and protective member of a family.
“The role of debt, the role of fixed income, is to give you security and regular stability,” Ashar said.
He explained that debt funds are not meant to provide the same kind of adventure or aggressive growth as equity investments.
According to Ashar, debt fund returns generally remain within a limited range depending on the category and duration of the fund.
“If we talk technically, the average range of returns in debt funds moves around 4 per cent to 8–8.5 per cent, depending on the different funds and different durations,” he told Zee Business.
“The job of debt is not to take you on an adventure. Its role is very important because this is where discipline comes into your portfolio,” Ashar added.
Mathpal said investors looking for debt exposure for stability should also pay attention to risk. He said taking additional risk in categories such as credit risk funds in pursuit of higher returns may not match the purpose of the stability-oriented part of a portfolio.
“For security, I would look at funds where the risk remains relatively low and you also get decent returns,” he said.
3) Hybrid funds: A balance between equity and debt
Hybrid funds were said that they can combine growth and stability.
Ashar explained that hybrid funds can have different combinations of equity and debt.
For example, a fund with a higher equity allocation and a lower debt allocation may focus more on growth while still having some debt exposure. On the other hand, another category may have a higher debt allocation and a smaller equity component.
“This is somewhere in between,” Ashar said while explaining the position of hybrid funds between pure equity and pure debt investments.
He added that hybrid funds may not offer the same potential returns as pure equity investments, nor are they meant to work exactly like conservative debt investments.
The experts’ insights also included multi-asset allocation funds, which can bring additional asset classes into the portfolio.
Mathpal listed categories such as conservative hybrid funds, aggressive hybrid funds, balanced advantage or dynamic asset allocation funds, balanced hybrid funds and multi-asset allocation funds.
4) Gold funds: A diversification-focused role
Gold was described as a category that may not always perform in the same way or at the same time as other investments.
Ashar said gold can sometimes remain inactive for long periods and can then perform strongly during other phases.
“Gold is the kind of investment that can sleep for 10 years and then wake up for the next 10 years,” he said.
This, he explained, is why investors should not put their entire investment into gold.
“This is not an all-season fund. We cannot put our entire investment into it,” Ashar said.
However, he said gold can still have a place in a portfolio.
“As an adviser, we always say that you should keep gold as a part of your portfolio,” Ashar said.
He suggested that investors could consider an allocation of 10 per cent to 15 per cent, adding that “in the current situation, you can even go up to 20 per cent,” while cautioning against taking excessive exposure.
He described gold as an investment that can potentially come into focus during difficult situations, while also highlighting its liquidity.
Mathpal also said investors can get gold exposure through gold fund products.
Mathpal agreed that investors should not automatically ignore gold in their portfolios.
“No matter how much you like it or do not like it, you cannot ignore it,” he said.
5) Index funds: The simple benchmark followers
The final category discussed was index funds.
Ashar said index funds are relatively straightforward because they are based on a benchmark.
“The entire structure of an index fund depends on a benchmark,” he said.
“Index funds offer a very simple way of investing because you are simply mimicking the benchmark.”
He explained that the objective is to follow the benchmark rather than actively move away from it.
However, Mathpal added an important distinction: investors should not assume that every index fund is equally simple.
“Index funds exist in equity as well as debt,” he said.
He mentioned broad-market indices such as Nifty 50, Nifty 100 and Nifty Midcap 150 as examples of indices that investors may track.
However, he said there are also sectoral and thematic indices focused on areas such as manufacturing, consumption, pharmaceuticals and IT.
Such indices can involve higher risk because of their specific sector or theme exposure, he said.
Mathpal also pointed to momentum and value-based indices.
“When we talk about index funds, understanding them may appear very simple, but do not consider all of them simple,” he said.
For investors looking for a relatively straightforward index approach, he suggested looking at broad-market options such as Nifty 50, Nifty 100 and broad mid-cap indices rather than automatically treating all index categories as the same.
Key takeaway: Different fund categories can perform different roles
The key message from the experts was that different mutual fund categories can perform different roles in an investor’s portfolio.
Equity can be used for growth, debt can provide stability and discipline, hybrid funds can combine different components, gold can add another layer to diversification, while index funds can offer a benchmark-following investment approach.
The experts’ overall message was that investors should understand what role a fund is expected to play in their portfolio instead of expecting one category to provide everything.