It seems hard to beat the index, and even if we did, we would only gain marginal alpha. Is all the research for active investing necessary with index funds offering competitive returns? What’s your perspective?

Answer: This year, we have seen the market breadth improving, and the rally has been broad-based. In this environment of increasing market breadth, it’s all about bottom-up stock picking. So, it becomes relatively easier for fund managers to pick potential winners and generate alpha. This is true, especially in the mid-and-small-cap space. In general, Indian equity markets are not as efficient as other large markets such as the USA, and active funds would likely continue to do well in the mid-and-small-cap space.

Index funds have gained more traction in the large-cap space, but even there, we have seen that active funds have beaten index funds by a reasonable margin this year. However, typically, we have seen that performance is cyclical. So, going forward, it is likely that investors may have a mix of index funds and active funds as part of their large-cap allocation.

I’m 40 and want to retire at 60 with a passive income of Rs 50,000/month. Can you suggest a mutual fund portfolio and investment amount for the next 20 years?

Answer: Let’s assume that for a retired person at 60, the portfolio will predominantly be allocated to fixed income, which, on average, conservatively delivers a 6 to 6.5 per cent return. So, a passive income of Rs 6 lakh/year would require a portfolio of at least Rs 1 crore after 20 years. Let’s also assume that the investor follows a balanced asset allocation, which conservatively delivers a 10-12 per cent Compound annual growth rate (CAGR). In this case, a simple calculation shows that the investor would need to start a Systematic Investment Plan (SIP) of around Rs 12,000 per month, totalling Rs 1.44 lakh/year, to reach the target portfolio value after 20 years.

To have a balanced asset allocation, investors can just invest in a Multi-Asset Allocation Fund or Asset Allocator FOF (Fund-of-fund), which gives exposure to multiple asset classes such as equity, fixed income, and gold/silver, and the allocation between these asset classes is rebalanced dynamically. Otherwise, they can construct a portfolio themselves, wherein they can be more aggressive initially with a median equity allocation of 70-75 per cent and gradually reduce it to 50-55 per cent, then to 25-30 per cent, and finally shift predominantly to fixed income at retirement.

In terms of the funds, on the equity side, investors can have an allocation of 35-40 per cent to diversified funds (flexi-cap, multi-cap, and large-and-midcap), 25-30 per cent allocation to large-cap, 10-20 per cent allocation to midcap and small-cap funds, and 10-20 per cent allocation to sectoral/thematic funds. Investors can allocate more to short-term and low-duration funds on the fixed-income side. Investors can have some allocation to gold as a hedge in the form of Gold ETFs or Sovereign Gold Bonds (SGBs).

The author is the portfolio manager and head of knowledge management at Aditya Birla Sun Life AMC.

(Disclaimer: Views expressed are the author’s own, and Outlook Money does not necessarily subscribe to them. Outlook Money shall not be responsible for any damage caused to any person/organisation directly or indirectly.)