Complexity is the enemy of execution. While financial media pushes exotic products, data shows that a simple, low-cost structure often beats complex strategies over decades. This is the philosophy of the “3-Fund Portfolio”—popularized in the US by Bogleheads, but requiring significant adaptation for the Indian context.
A true Indian 3-Fund Portfolio isn’t just about Asset Allocation; it is about Tax Efficiency and Currency Hedging.
Fund 1: The Growth Engine (Domestic Equity) – 50-60%
The Goal: Capture India’s Nominal GDP Growth.
The mistake most investors make is over-fragmenting this bucket into Large, Mid, Small, and Sector funds. This creates overlap and monitoring headaches.
- The Insightful Strategy: Instead of buying three separate equity funds, use a Nifty 500 Index Fund or a Flexi-Cap Fund with a passive lean.
- Why? The Nifty 500 covers 95% of India’s listed market cap. It automatically adjusts: if Small Caps are rallying, they gain weight in the index; if Large Caps dominate, the index tilts that way. You don’t need to predict the cycle; the index does it for you.
- The Cost Advantage: An active Large Cap fund charges ~1.5%. A Nifty 500 Index fund charges ~0.3%. Over 20 years, that 1.2% gap is the difference between retiring in comfort or compromise.
Fund 2: The Stability Engine (Debt/Arbitrage) – 30-40%
The Goal: Stability and Liquidity (Not high returns).
The Critical Update (Post-April 2023): Previously, Debt Mutual Funds were the default choice. However, the removal of indexation benefits means Debt Funds are now taxed at your marginal slab rate. For a simplistic 3-Fund portfolio, this is a drag.
The Insightful Strategy:
- For Tax Efficiency (High Bracket Investors): Replace the standard Debt Fund with an Arbitrage Fund. These funds use hedging strategies to generate debt-like returns (6-7%) but are taxed as Equity (12.5% LTCG). This is a massive tax arbitrage.
- For Pure Safety: Stick to a Liquid Fund or Short Duration Fund. Do not chase returns in Credit Risk funds. This bucket is your airbag; if it doesn’t pop when you crash, it’s useless.
Fund 3: The Hedge (International Equity) – 10-20%
The Goal: Geographical Diversification & Currency Protection.
India creates only 3% of global wealth. Ignoring the other 97% is a risk, not a safety measure. But the real insight here is not just “tech stocks”—it is the USD-INR Correlation.
Historically, when Indian markets crash (2008, 2020), the Indian Rupee depreciates against the US Dollar. Your US investments gain value in Rupee terms right when your Indian portfolio is bleeding, acting as a perfect shock absorber.
- The Execution Challenge: RBI limits have paused many Indian Feeder funds.
- The Workaround: Use ETFs (Exchange Traded Funds) listed on NSE/BSE that track the Nasdaq 100 or S&P 500 (e.g., Motilal Oswal Nasdaq 100 ETF). These are currently open for investment and bypass the feeder fund restrictions.
The Rebalancing Act: The “5/25” Rule
Don’t rebalance by the calendar. Rebalance by thresholds. If your International allocation target is 20%, only rebalance if it drifts by absolute 5% (hits 25% or 15%) or relative 25%.
Tax Tip: When rebalancing, try to rebalance with inflows (new SIP money) rather than selling. Selling triggers capital gains tax; buying does not. Direct your next month’s SIP entirely into the lagging asset class to restore balance tax-free.
Summary: The Modern Indian 3-Fund Portfolio
| Bucket | Instrument Choice | The “Why” |
| Growth | Nifty 500 Index Fund | Captures the entire Indian economy; low cost; auto-adjusting. |
| Stability | Arbitrage Fund | Debt-like stability with Equity taxation (saves ~15-20% tax for high earners). |
| Hedge | US Equity ETF (Nasdaq/S&P) | Protects against Rupee depreciation and accesses global innovation. |