Edelweiss MD and CEO Radhika Gupta recently shared valuable advice on social media for safely investing in mutual funds. She emphasized the importance of having 80% of one’s portfolio in “dal-chawal” funds, which are broad-based and all-weather investments.

Gupta shared an example of an investor who had a monthly SIP of Rs 27,000 spread across 31 funds, 15 of which were narrow sectoral ones. She warned that such a strategy poses a significant risk, especially in volatile times. “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!” she advised.

When asked to define ‘dal-chawal’ funds, Gupta explained that these are broad-based mutual funds that span a range of sectors. Examples include balanced advantage and aggressive hybrid funds, such as flexi, multi, large and mid-cap, and broad-based 250-500 index funds. She referred to these as “forever funds” that can weather various market conditions.

Gupta stressed that the key is to avoid narrow theme-based funds that perform well in one cycle but may not in the next. Instead, investing in broad-based funds ensures coverage through different market cycles, preventing significant losses due to over-allocation in one or two sectors. This aligns with the old adage: don’t put all your eggs in one basket. A diversified portfolio balances gains and losses across investments.

In another series of posts on X, Gupta discussed sector rotation, highlighting that while sector funds are currently popular, their returns typically align with the overall market and rarely outperform it. She noted that predicting the cycles of specific sector funds is challenging and often counterintuitive.

Gupta shared several key points:

• Long-term returns of most sectors align with market returns, making it unlikely for a buy-and-hold approach in a sector fund to outperform the market.
• Medium-term sectors exhibit cycles, but timing the entry and exit is difficult as funds are often launched at the peak of cycles.
• Traditional flexicap and multicap funds do not engage in aggressive sector rotation due to the complexity of predicting cycles. For instance, banks haven’t performed well recently despite rising rates, and tech did well during the COVID recession, defying traditional expectations.