Question: My dad and I both invest with Scripbox. We both are offered the same set of four funds which seems odd because our investment goals are fundamentally different. He is probably looking to boost his retirement fund with something safe while I am more open to risk. Why do we both have to go with the same set of options?
Answer: We believe that, before you start to look at specific funds, you need to determine which category (asset class) you should be putting your money in. That determination is based on your needs.
Here are the three primary categories of funds that we provide and that we believe most individuals will need.
1. Equity Funds are for long term investment of more than 5 years. Historically, equity mutual funds have provided annualised returns of 14% to 16% in the long term.
2. Debt funds are for short term investment with low risk - best suited if you are investing for less than 5 years. Historically debt funds have provided annualised returns of 8% to 9% in the long term. More information here.
3. Tax saving funds provide income tax savings under sec 80C. They have the dual advantage of Tax benefit and investing in Equity Mutual funds. Any investment done in Tax saving funds will have a lock-in period of 3 years.
Please note that while the income tax department may define your lock in as 3 years, these are still equity funds and your money invested here should have the same horizon. More information here
All your money doesn’t have to be (and should not be) in the same category.
The portion of your money you need in the next few years should go in debt funds, whereas your long term wealth should go into equity funds.
The money allocated to different categories by you and your father would be different. We believe that the risk you have to take is dependent on the financial goals you have.
The risk your father might want to take is not about his age as much as it is about his goals. If his goal is security of capital, or generating an income flow, then Debt Funds make more sense as his investment horizon is likely to be shorter than yours.
If, however, the money is really meant for creating an inheritance, it could be in equity funds.
Similarly for you. You too may need debt funds, if you have financial goals with a shorter timeline and can’t be exposed to volatility then debt funds are your tool of choice.
You and your father, therefore, should choose that combination of fund categories which fulfill your specific needs. The portfolios of funds within those categories are designed to replicate the characteristics of those categories.
What about the fact that you are willing to ‘take more risk’?
It is our belief that investors should focus on category (asset class) return and category (asset class) risk rather than specific products.
Risk here has to be understood as applicable to a portfolio. When you invest in a single stock, you run the risk of losing 100% of capital but when you invest in a mutual fund, you are investing in a diversified portfolio and you are likely to experience the same ups and downs as the broader market.
So when investing in Equity, you should be looking at the return you can obtain from a diversified portfolio relative to the broader market. This is the objective of Scripbox’ equity funds portfolio selection. The objective of the debt fund portfolio selection is to obtain fixed income return with a portfolio that has low credit risk.