Which are best mutual funds for 2020?

This is the question on many investors mind. Which are best Mutual Funds for year 2020. Covid-19 crisis is seen both as as biggest economical challenge as well as a great investment opportunity by investors. Corona virus not only threatening to take lives but also disrupting world economy. Small investors are most concerned and confused about their investment. They have seen value of portfolio erode almost by 30 – 40% and then some recovery in last month. Should they stick to original plan or do some changes. Some people have surplus to invest. They too are wondering what do you do. Where to invest in these uncertain times. Let us see today what are my views.

Before you think of investing

There are three things that you need to take care before even thinking of investment. These are not new things but current crisis has added more significance to these.

Take Sufficient Health Cover

1. Health Insurance

You may have seen amount of hospital bills floating on whatsapp groups. How unfair cost is a different discussion. Your best bet is to have a significant health insurance cover. I feel Health Insurance is more important that even life insurance. These expenses have potential to disrupt entire planning that you have done. If you haven’t taken sufficiently large mediclaim cover, this is the time to address that. Current lockdown is not making it easy to get new mediclaim policies. But many companies are still providing new policies. If you need additional coverage, do check with your agent and he or she will be able to help.

2. Sufficient Life Insurance cover

We knew all the way that life is uncertain. Covid-19 is just making us realize it more. If you are breadwinner of family, you should take a hard look at amount of insurance that you have. Many people depend on life insurance cover from company. At this stage job security is less than what it was few months back. So you should consider only your personal life insurance value and check if that is sufficient for your family. If not, please address that.

3. Contingency Fund

There was never more uncertain situation in our life than current one. Even our parents have not seen such situation. Contingency Fund has become even more critical now. Question is how much fund is sufficient? Looking at current situation, one should have keep aside around 8 – 9 months of total expenses in contingency fund. You should include all loan EMIs, maintenance and routine expenses. Also add around 30 – 35 % of mediclaim cover in this amount. Many of hospital expenses which are due to additional precautions due to covid-19 may or may not get paid as part of policy. So having additional money at hand is better.

Now that you have addressed these important things and if you still have surplus to invest, let us see which Mutual Funds are good for 2020.

Know your Risk Profile

Last 2-3 months we have seen unprecedented volatility in stock market. Volatility is here to stay for some more time till we are out of this New Normal. It is important to know oneself before taking any major investment decisions while selecting Mutual Funds for 2020. Knowing your risk profile was anyway important as any mutual fund investor. Now it has become even more important. You can read my earlier article on behavior of three investors when market crashed. This will give you glimpse of how people behave when they come face to face with financial crisis. You can check your risk profile by completing simple questionnaire on MoneyControl website . You will know from this assessment whether you are Aggressive , Balanced or Conservative investor. We need to align investment as per individual risk profile.

Know the time horizon of investment

Next thing to consider is how much time you can allow investment to stay put. Based on your goals and needs, take a hard look at likely duration. This factor along with risk profile can help you decide on fund category to go for. So be sure about it.

Decision Grid for deciding Mutual Fund in 2020

Based on Risk profile and time horizon for the investment, we can draw a grid like below. You should be placed in some block marked 1 to 9.

Risk Profile –>
Investment horizon (below)
Short term ~ 2 years123
Between 3 to 5 years456
More than 5 years789
Decision Grid

Reading above grid is simple. Chose the column as per your risk profile. First column is for aggressive, second for balanced and third column for Conservative. Then select the cell in that column based on time horizon of investment. So basically a cross product of risk profile and investment horizon.

Let us take an example. Let us say your risk profile is Aggressive and you need to invest money for couple of years then you are in block 1. If you are balanced investor and want to invest for say 4 years then you are in block 5. It is possible that you have 10 Lacs to invest. Out of this 6 Lac you want invest for 7 years and rest 4 Lac for say 4 years. If you are balanced investor, then your money should be invested as per block 5 ( 4 Lac ) & 8 ( 6 Lac ). So and so forth.

Rules for Selecting Best Mutual Funds for 2020

Rules for Selecting Best Mutual Fund for 2020

Due to unusual situation we are in, some of the rules that we should try to follow while selecting investment options are as under.

  • Liquidity – Since situation is evolving rapidly. It can go in either direction. So we need to have ability to adjust. Make sure selected investment is having good liquidity. For an example if you are going to invest in Equity Fund, then avoid ELSS or retirement funds which have lock in periods. If situation worsens, we should have ability to get out.
  • Safety over return – When you are choosing between two funds in same category, chose safety over return. Here I am not comparing say one fund in Equity category vs one fund in debt category. What I am trying to say is within same category say Multicap Fund, when you are deciding on Fund A v/s Fund B. Then chose fund that is little conservative of the two. You may end up getting may be 1 % less return. But since there is significant chance of down side in future, chose fund that is likely to protect capital better.
  • Leave decision with experts – This is not time to take your own call of large cap or mid cap or small cap funds to invest in. Let that decision be taken by Fund Manager. So my preference is to go for Multicap fund over managing Large cap, Mid Cap and Small Cap yourself.
  • Diversify – In normal situation, it is better to have just 1 fund from one category. This helps manage portfolio better. But this is bit unusual situation. So I feel it is better to spread money across say couple of funds even within same category. This will help us get collective wisdom of multiple fund manager.
  • Avoid temptation of making killing – Investment is not just about returns but it is about risk adjusted returns. Risk is very high at this stage. Of course returns can also be very rewarding if all goes as per your plan. But downside risk is very high at this stage. So invest in tranches. Even if market crashes further 20 – 25 %, don’t put all the spare money in one go. Divide it in say 6 to 8 tranches and invest over next 6 to 8 months. Say you have spare 8 Lac to invest then may be 1 Lac per month over next 8 months can be a good strategy.

Asset Allocation of Mutual Funds in 2020

By now we know which block we fit in. We also know if we are optimistic or pessimistic about current situation. Let us get down to business and decide on how should we go about it. Below table gives a summary of possible options

BlockWhat it meansInvestment Allocation
1Aggressive &
Short duration
Debt Oriented Hybrid Fund like Kotak Debt Hybrid Fund (Around 30 % )
Liquid or Overnight Debt Fund (Around 30 % )
Bank FDs, AAA rated corporate FDs (Around 25 % )
Gold Fund like HDFC Gold Fund ( Around 15 % )
2Balanced &
Short duration
Debt Oriented Hybrid Fund like Kotak Debt Hybrid Fund (Around 20 % )
Liquid or Overnight Debt Fund (Around 35 % )
FD from stable banks like SBI, HDFC banks ( Around 30 % )
Gold Fund like HDFC Gold Fund( Around 15 % )
3Conservative &
Short duration
Liquid Funds ( Around 45 % )
FD from stable banks like SBI, HDFC ( Around 40 % )
Gold Fund like HDFC Gold Fund ( Around 15 % )
4Aggressive &
Medium duration
Multicap Fund like Axis Focused 25 Fund (Around 30 % )
Dynamic Asset Allocation Fund like ICICI Pru Balanced Advantage Fund ( Around 30 % )
Debt Oriented Hybrid Fund like Kotak Debt Hybrid Fund ( Around 30 % )
Gold Fund like HDFC Gold Fund ( Around 10 % )
5Balanced &
Medium duration
Multicap Fund like Parag Parikh Long Term Equity Fund (Around 20 % )
Dynamic Asset Allocation Fund like DSP Dynamic Asset Allocation Fund ( Around 30 % )
Debt Oriented Hybrid Fund like Kotak Debt Hybrid Fund ( Around 35 % )
Gold Fund like HDFC Gold Fund ( Around 15 % )
6Conservative &
Medium duration
Multi-cap Fund like ,,Parag Parikh Long Term Equity Fund(Around 10 % )
Dynamic Asset Allocation Fund like DSP Dynamic Asset Allocation Fund ( Around 25 % )
Debt Oriented Hybrid Fund like Kotak Debt Hybrid Fund( Around 50 % )
Gold Fund like HDFC Gold Fund ( Around 15 % )
7Aggressive &
Long duration
Multi-cap Funds like Axis Focused 25 Fund ( Around 50 % )
Dynamic Asset Allocation Fund like ICICI Pru Balanced Advantage Fund ( Around 45 % )
Gold Fund like HDFC Gold Fund ( Around 5 % )
8Balanced &
Long duration
Multi-cap Funds like Parag Parikh Long Term Equity Fund ( Around 30 % )
Dynamic Asset Allocation Fund like DSP Dynamic Asset Allocation ( Around 30 % )
Debt Oriented Hybrid Fund like Kotak Debt Hybrid Fund ( Around 30 % )
Gold Fund like HDFC Gold Fund ( Around 10 % )
9Conservative &
Long duration
Multi-cap Funds like Parag Parikh Long Term Equity Fund ( Around 30 % )
Dynamic Asset Allocation Fund like DSP Dynamic Asset Allocation ( Around 30 % )
Debt Oriented Hybrid Fund like Kotak Debt Hybrid Fund ( Around 30 % )
Gold Fund like HDFC Gold Fund ( Around 10 % )
Asset Allocation Grid

Why dynamic asset allocation funds?

Whichever profile you may have, current situation warrants we provide flexibility of moving money between equity and debt class to fund manager. Let us say, we get a negative news like vaccine that was expected in September failed in human trial. News like this may be seen very negatively by market. On other hand, if we get a positive news, we may want to increase allocation to Equity. You may not get enough time to do adjustments to your portfolio before market reacts. Also redeeming from equity and moving to debt or vice versa may have tax implications as well as exit load issues. If on other hand money is invested in dynamic asset fund, then fund manager can take call of equity and debt allocation.

Why Gold Fund in current situation?

Gold Mutual Fund is good as Hedging Tool in 2020

My personal view on gold is that it is good hedging tool. I don’t see it from returns perspective. It should be part of your portfolio anyways but more so now. Normally allocation should vary between 5 to 10 %. Tactically we can do little more and can go upto 15 %.

Why Gold? There are few proven assets to invest money in. Major assets being Stock, Real Estate, Debt and Commodities. If there is crash in valuation of one asset and money starts moving out of that asset, then demand for other asset starts rising. Gold and debt are preferred options when stocks take a beating. Look at Gold more from hedging perspective. Sovereign Gold Bonds is good option strategically as it gives extra interest as well as tax benefit but since flexibility in liquidity is important in current situation, I feel Gold Fund should suit more now.

Why Multi-Cap Funds?

In strategic allocation, you could be well off managing money across three separate capitalization – Large Cap, Mid Cap and Small Cap to have more control on asset allocation. But in 2020, situation is too dynamic and better to let fund manager have flexibility for moving allocation from say Large Cap to Mid Cap stocks or vice versa. Within Multi-cap also, chose the fund based on your risk profile. Axis Focused 25 is concentrated fund suitable for aggressive profile. Parag Parikh Long Term Equity is also aggressive but has some stocks from out of India. This helps spread risk across regions and helps in diversification. So balanced or conservative can go for it. Kotak Standard Multicap fund is less concentrated and can be suitable for conservative style.

What to look for in a hybrid or debt funds now?

I think one should select funds with good credit quality in current situation. Kotak Debt Hybrid Fund is not a top performer in category and may be ICICI Pru Regular Savings Fund was my choice till last few months. But credit quality of debt part of DSP fund is better than ICICI fund. That is the reason, Kotak Debt Hybrid Fund makes more sense in current situation.

Similarly ICICI Pru Balanced Advantage Fund is taking some extra risk over DSP Dynamic Asset Allocation. Unless you are aggressive investor, better opt for later.

So that is all for now. These are my views. Do let me know your views about your choice of Best Mutual Funds for 2020.

Disclaimer – Please not above asset allocation and suggested funds are purely my personal view and don’t consider it as advice. You should consult your personal financial advisor before taking any decision. This article is just to give you some perspective from tactical allocation.

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