Mutual fund investment: The economic expansion of India is closely linked to the performance of its stock markets. When certain sectors start growing, this lead to  increased investor confidence, heightened market activity, and elevated asset prices. This optimistic outlook within the stock markets stimulates additional investments in these evolving sectors. India offers a varied investment landscape, ranging from well-established financial institutions to pioneering startups. However, comprehending and navigating this extensive landscape can be formidable. 

Diversification serves as a remedy to this challenge by spreading investments across various asset classes, industries, and company scales. Through diversification, the influence of a single company or sector facing a decline is mitigated. Hence, by gaining exposure to a broad index that represents the diverse Indian economy, investors position themselves to reap the rewards of its growth.

Radhika Gupta, Edelweiss MD and CEO, shared her advice for those investing in mutual funds. In a series of posts on X, she said that those investing should ensure “80 per cent” of their portfolios comprise “dal-chawal funds”. 

She mentioned that balanced advantage and aggressive hybrid mutual funds can be likened to dal-chawal as they are considered all-weather funds. She advised investors against investing in narrow theme-based funds that may perform well in one cycle but not in the next. A diversified investment portfolio contains a variety of assets to reduce the risk associated with any single investment. This strategy can help protect your finances from significant losses and potentially amplify gains through the balancing effect of different asset classes.

"What’s a dal chawal fund? Broad based funds that are all weather and span a range of sectors. Balanced advantage and aggressive hybrid types. Flexi, multi, large and mid, broad based 250-500 index types. Forever funds. Active or passive doesn’t matter - the point is not a narrow theme based fund that works in one cycle and not in the next," Gupta posted on X.

Explaining the investment pattern, Gupta elaborated on a portfolio in which a monthly SIP of Rs 27,000 was done with 31 funds. Of 31 funds, 15 funds were narrow sectoral ones.

She explained: “I recently saw a portfolio of an investor with a Rs 27,000 monthly SIP. Across 31 funds. 15 were narrow sectoral ones. A danger in these times is to fill your portfolio with narrow ideas that ideally are satellite allocation. Remember, 80% of the portfolio should be “dal-chawal” funds!”

Radhika Gupta said that broad-based mutual funds that are “all-weather” and “span a range of sectors” are ‘dal-chawal’ funds. Broad market index funds are investment vehicles that track a specific market index. These funds achieve their diversification by holding a basket of companies across various sectors and market capitalisations. By investing in a broad market index fund, investors can effectively spread their risk across a wide range of companies without the need to actively pick individual stocks. This passive investment approach reduces the risk associated with any single company's performance and provides a simple and cost-effective way to gain exposure to the broader market.

Highlights of Gupta's advice

1. In the long term, the returns of most sectors are in line with market returns. So, a buy-and-hold approach to a sector fund will rarely beat the market. 

2. In the medium term sectors do show cycles. So there is alpha to be made, if you can get the entry and exit right. 

3. Traditional flexicap and multicap funds do not do aggressive sector rotation. My suspicion - because prediction of cycles and sector outcomes is hard to do. Banks have not done well when rates have risen recently (counter to traditional wisdom). Tech did well in recessionary covid times (counter intuitive).

4. On sector rotation, narrow sector funds saw returns in line with the market and would "rarely" beat it. 

5. On specific sector funds, Gupta noted that these have cycles — case in point: broad funds aggressively move between down cycles and up cycles, but prediction of the down cycles is difficult, and sometimes counterintuitive.